The role of the private sector in MENA

Sunday 31/07/2016

A recent report from the European Bank for Recon­struction and Development, the European Invest­ment Bank and the World Bank tries to answer the question: What is holding back the private sector in MENA?

The work of the three institutions was based on a survey of more than 6,000 private firms in Dji­bouti, Egypt, Jordan, Lebanon, Morocco, Tunisia, Yemen, the West Bank and Gaza.

Four main impediments to the growth of private sector activity were identified: Political instability, corruption, unreliable electricity supply and inadequate access to finance. Companies in Egypt, Lebanon, Tunisia and the West Bank and Gaza, in particu­lar, complained of political instability as “the top obstacle to business”.

This is hardly surprising considering the turmoil that has engulfed the region in recent years. The economic systems of countries that experienced “Arab spring” changes are still await­ing greater stability to attain levels of growth sufficient to meet the demands of restless young populations. The economic situa­tion in Lebanon and Jordan has been affected by the war in Syria and the inflow of refugees.

The report also points out a “notable disconnect between firms and banks in the region”. Only a limited segment of private companies has access to bank financing. In Egypt, banks account for only 2% of firm finance and 40% of private sector firms do not have a cheque or savings account.

According to European Investment Bank Director Debora Revoltella: “Finding a way to reconnect banks and firms is crucial to enhance growth opportunities in the region.”

“There is an overwhelming consensus among economists that the development of a vibrant private sector is essential for deliv­ering that growth,” stressed the report.

The private sector alone cannot meet the socio-economic challenges of MENA, however. Collaboration between the public and private sectors is needed to absorb the hundreds of thousands of unemployed young people.

There needs to be educational reform. The report pleads for “a reorientation of the region’s education systems towards learning skills that are relevant for private sector employment”. This means giving more importance to vocational training and over­coming the mismatch between educational sector and the job market to create more quality jobs.

The Arab private sector is constrained by the low ratio of women it employs. Only 8% of the private sector workforce are women, below the already low 17% MENA workforce average.

Many in the formal private sector complain of the unfair compe­tition of the informal economic sector, which does not pay taxes or worker benefits but it is the lack of employment and bloated bureaucratic red tape that encourages the growth of the informal economy and the spread of corruption.

Nearly all — 97% — surveyed firms in Yemen and 61% in Lebanon identify corruption as a major obstacle to business even if the incidence of bribery is in fact much lower.

The private sector needs a better business climate to be a real engine of economic growth and assume its wider social responsi­bility in the current age of turmoil.