Supporting SMEs in Egypt

1. Supporting SMEs in Egypt Ministry of Finance Rabat 10-12 March 2008

2. Outline • MSMEs in Egypt • Macro-economic outlook • Structural characteristics • Constraints • Making a Distinction (The focus) • MSMEs and Competitiveness • Policy Formulation Process • Policies Adopted • Vision for the future

3. Macro-Economic Outlook • The government has announced very aggressive growth targets for its 2007-2012 economic development plan. (an annual GDP growth of 8 percent and the creation of 2.8 million job opportunities-an average of 750,000 job opportunities per year). • Most of the macro economic indicators have shown great improvements over the past nine years (e.g., GDP, GDP per capita, exports…etc.). However, much remains to be done with regards to income inequality, poverty and unemployment.

4. Private Sector Share of GDP

5. Unemployment and the Role of PSD • Between 1999 and 2005, the absolute number of the unemployed has actually witnessed an average annual increase of approximately 4%, climbing from 1.6 million to almost 2.2 million. So far, the private sector has been unable to absorb the country’s growing labor force. • In order for the private sector to expand, which is a necessary component of Egypt’s future growth, several improvements are needed in the business environment, including in the system of laws, property rights, competition frameworks, public services and infrastructure, the depth of financial markets, trade liberalization regime, and so on.

6. MSMEs • The SME sector has effectively rarely been considered as part of the private sector, even though it accounts for 99.7 percent of the private sector enterprises, about 75 percent of private sector non-agricultural employment. • From a political economy viewpoint, reforms aimed at fostering entrepreneurship and MSE development are particularly desirable because they create clear winners from reform and a broad social coalition in support of change. • From a social viewpoint, MSEs secure livelihood for a large and ever expanding sector of the population. Almost three-quarters of Egypt’s labor force are employed in the MSE sector

7. MSMEs in Egypt 10 % 0 . 30 % 19 % 71 % 99 . 70 % Micro Small Medium SMEs Large Enterprise Figure 1: Distribution of Employment of SMEs in Private Non-Agriculture Economic Activities Figure 2: Distribution of Non-Agricultural Economic Activities Between SMEs and Large Enterprises

8. Structural Features • The markedly skewed size-based distribution of businesses in Egypt towards micro enterprises. • MSMEs tend to have very small amounts of capital. Fifty-nine percent of MSEs with 1-4 workers have capital of less than 5,000 LE (defined as microenterprises) and only 6 percent of enterprises have invested capital of more than 50,000 LE (defined as small enterprises

9. Missing Middle

10. Structural Features • Skewed Geographical Distribution, almost half of the private sector in the country is concentrated in the five governorates of Cairo, Giza, Dakahliya, Alexandria and Sharqiya. • Skewed Activity Distribution, MSEs are predominantly concentrated in the trade sector, owing to the low entry barriers in terms of capital, skill and technology characteristic of the trade sector. Within the manufacturing sector, more than eighty percent of enterprises are concentrated in five activities.

11. Sectoral Distribution

12. Other Structural Features • Low Share of MSMEs in Value Added • High levels of informality • Women in the MSME sector

13. Constraints • Demand Related Constraints • Weak Effective Demand • Exports • Lack of Linkages with Larger Firms • Limited, Non-structured, and Uncoordinated Marketing Channels • Input Constraints • Technology • Lack of Access to Finance • Limited Access to Adequately Priced Inputs • Lack of Access to Information • Lack of Access to Business Development Services • Process Constraints • Legal and Regulatory Constraints • Entrepreneurship Constraints

14. The Process Distinctions • Socio-Economic focus Vs. only Social • PSD Vs. MSME Development • Micro Vs. Small and Medium • High Road Vs. Low Road • Income Generation Activities Vs. Growth Generation Activities • Necessity Entrepreneurs Vs. Opportunity Entrepreneurs • Existing Enterprises Vs. Start-ups

15. Competitiveness Competitiveness, is demonstrated by "the ability to meet the test of free international markets while expanding real income." It is based on generating more value through improved productivity, quality, service and innovation.

16. Global Trends (Characteristics) • Fracturing value chain among several countries. • Quality management. • Standardization. • Just-in-time (JIT) production. • Networking of firms and suppliers. • Highly and multi-skills workforce.

17. The Vision • Developing a competitive SME sector able to compete in local and global markets and deliver its socio-economic and developmental benefits in the years to come, and thus improving the country’s trade balance. • Separation in targeting policies Income generation Vs. Growth generation

18. The Process Done by the Ministry of Economy Listed and divided constraints into Financial and Non-Financial Proposed general Policy Actions Accepted by Stakeholders in a National Conference Prioritized Policies that were recommended in the 1998 Draft Was done through a consultative process Five policy areas were tackled (Update of Policy Framework, Definition, Access to Finance, Procurement, and Legal and Regulatory) Draft National Policy 1998 Priority Policies 2000

19. Priority Policies • Updating draft national policy (competitiveness) • Definition • Access to finance • Procurement • Legal and regulatory environment

20. Policy Process Policy Formulation 7 Policies Minister’s recom. Publicizing Results & Proposals March 2003 Workshop Consultation with Stakeholders Consultation on Action Plan Research & Assessment Discussion Paper Finalization of Recommendation Finalization of Action Plan (Nov. 2004) Policy Process Competitiveness Process Stakeholders Mapping & Involvement Research committee Synergy group Sub-donor group Formalization National Conference Implementation Policy Committee Problem & Issues Identification SME Focus Groups Identifying problems Revisions Revisions Monitoring & Evaluation Monitoring & Evaluation

21. Competitiveness Strategy • Policies: • Export Promotion • Innovation and Technology • Access to finance • Organic Clusters • Legal and regulatory environment • FDI and inter-firm linkages • Business Development Services • Implementation mechanism: • SME Policy Committees

22. Government Procurement • The 10% in the MSE Law • Inter-Ministerial committee on Procurement was established between the MoF and SFD to discuss methods of implementing the 10% • Country Procurement Assessment Review • M/SME procurement allocation system

23. Tax Law/Real state registration • Special Accounting Standards for M/SMEs • Tax exemption for M/SMEs acquiring loans from the SFD • Review of the current real state registration, which will affect the use of assets as collateral for SMEs

24. Venture Capital • Establishment of committee that includes key governmental stakeholders on the decision making level • The purpose of the committee is to streamline regulations governing VC establishment in addition to creating a VC fund • Recommendations to establish Private Equity, and Turnaround funds

25. Leasing • Leasing roundtable that brought together US Expert Volunteers and the leasing companies currently active in Egypt to prioritize and agree on reform measures needed to activate the leasing industry.

26. Vision for the future Market Access for SMEs through streamlining government procurement procedures

27. Vision for the future SME accounting standards in place

28. Vision for the future Streamlining laws and regulations of the sales tax

29. Vision for the future Access to finance for SMEs through creating a favorable environment for non-traditional financial mechanisms

30. Vision for the future More cooperation and collaboration between different stakeholders

31. Vision for the future Strategic interventions