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Supporting SMEs in EgyptMinistry of Finance
Rabat 10-12 March 2008
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
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.
Private Sector Share of GDP
Private sector share of GDP
565860626466687072
1997
/98
1998
/99
1999
/200
0
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
Per
cent
age
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.
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
MSMEs in Egypt
71 %
19 %
10 %
Micro Small Medium
99.70%
0.30%
SMEs Large Enterprise
Figure 2: Distribution of Non-Agricultural Economic Activities Between SMEs and Large Enterprises
Figure 1: Distribution of Employment of SMEs in Private Non-Agriculture Economic Activities
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
Missing Middle
0% 20% 40% 60% 80% 100%
Egypt
MENA
Italy
Spain
Japan
UK
< 10
10 to 99
100 to 499
500+
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.
Sectoral Distribution
Sectoral Distribution of MSEs (CAPMAS, 2000-2001)
16%
69%
15%
Manufacture
Trade
Service
Other Structural Features
• Low Share of MSMEs in Value Added• High levels of informality• Women in the MSME sector
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
The Process
• 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
Distinctions
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.
Competitiveness
(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.
Global Trends
• 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
The Vision
The Process
Draft National Policy 1998
Priority Policies 2000
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)
Priority Policies
• Updating draft national policy (competitiveness)• Definition• Access to finance• Procurement• Legal and regulatory environment
Policy Process
Problem & Issues Identification
Stakeholders Mapping
& Involvement
Research & Assessment
Policy Formulation
Publicizing Results
&Proposals
Consultation with Stakeholders
Finalization of Recommendation
Formalization
Implementation
Monitoring & Evaluation
Revisions
Policy
Process
SME Focus GroupsIdentifying problems
Research committeeSynergy group
Sub-donor group
Discussion Paper
7 PoliciesMinister’s recom .
March 2003Workshop
Consultation onAction Plan
Finalization of Action Plan (Nov. 2004)
National Conference
Policy Committee
Monitoring & Evaluation
Revisions
CompetitivenessProcess
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
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
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
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
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.
Vision for the future
Market Access for SMEs through streamlining
government procurement procedures
Vision for the future
SME accounting standards in place
Vision for the future
Streamlining laws and regulations of the sales tax
Vision for the future
Access to finance for SMEs through creating a favorable
environment for non-traditional financial mechanisms
Vision for the future
More cooperation and collaboration between different
stakeholders
Vision for the future
Strategic interventions