Report: Political instability, poor access to finance hold back Egypt’s private sector

Political instability, poor access to finance and unreliable electricity are the top obstacles to Egyptian private sector companies in a new report by the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), and the World Bank Group (WBG).

The report, titled “What’s holding back the private sector in MENA?” is based on a survey of 6,000 private sector companies in the Middle East and North Africa, including almost 3,000 Egyptian firms.

Conducted in 2013 and 2014, the MENA Enterprise Survey found that firms in Dijbouti, Egypt, Jordan, Lebanon, Morocco, Tunisia and the West Bank and Gaza consistently cited political instability, corruption, electricity and access to finance as the key factors holding back their companies.

In Egypt, nearly half of the firms surveyed pointed to political instability as their top obstacle. “The uncertain business environment that followed the 2011 uprising and developments in the summer of 2013 was reflected in firms’ economic performance: between 2009 and 2012, the typical firm in Egypt saw revenues decline by 6.4 percent per year and employment by more than one percent per year,” the report notes.

Some 10 percent of firms citied access to financing as their top obstacle. Banks account for only 2 percent of company financing in Egypt, the report found, compared to an average of 12 percent in the eight countries surveyed. In fact, the survey found that many firms have almost no interaction with banks, with only 60 percent of formal private sector firms having a checking or savings account.

Electricity came third, with firms reporting an average of 16.3 electricity cuts per month, though the report notes that the situation may have improved in the two years since the survey was completed.

Corruption was also cited as a major issue, with 17 percent of firms reporting at least one bribe request from officials.

Labor productivity was found to be about average for similar economies, but Egypt lags behind when it comes to total factor productivity, which measures how efficiently companies make use of labor, intermediate inputs and capital. The study found that Egypt is more capital-intensive than peer economies. “This can partly be explained by the presence of energy subsidies, which distort production structures by promoting energy- and capital-intensive industries,” the report notes.

Egypt is also suffering from a mismatch between labor supply and demand, the report found — particularly when it comes to vocational and technical skills.  The general level of post-secondary vocational training was found to be poor, and companies were not stepping in to fill the gap. Just 5 percent of firms in Egypt reported offering formal training, compared to the survey average of 17 percent.

The concerns reported by firms were consistent across the region, the report notes, although the order of priority varied by country.

“Almost all firms in the region are severely affected by issues of political instability, corruption, and unreliable electricity supply,” the report notes. “Firm innovation and growth are also constrained by barriers to trade and a scarcity of appropriately trained workers. In many places, there is a striking disconnect between firms and formal financing channels, with the result that firms are not seeking external finance, inevitably reducing their growth potential.”

The study includes several policy recommendations, including subsidy reform, anti-corruption measure and regulations and training to support bank loans to small and medium enterprises.

“The formal private sector in the MENA ES economies is relatively small, but its size belies its significance for economic development,” the report concludes. “It is possible to see the potential of the private sector in the region to grow and meet the aspirations of the growing workforce for rewarding employment.”