Egyptian Lawmakers to Boost Small and Medium Enterprises
The business community is tracking the progress of a bill to help small and medium enterprises
[CAIRO] While observers of Egyptian politics remain absorbed by constitutional amendments that would entrench the military’s role in government and extend President Abdel al-Fattah al-Sisi’s term through 2030, the local business community and the country’s leading lenders are tracking the progress of a long-delayed bill to nurture small and medium enterprises [SMEs].
“In the Arab world, SMEs represent 96 percent of registered companies,” said International Monetary Fund Managing Director Christine Lagarde in a recent speech in Dubai. “Yet their access to finance is the lowest in the world – lending to SMEs in the region is only 7 percent of total bank lending.”
The IMF is in the final stages of distributing $12 billion to Cairo for debt-servicing and social-programming support, as the nation floats its currency and phases out subsidies for food and fuel.
While unemployment is down and exports are up, the IMF has continued to push for wider credit extension to non-governmental Egyptian companies with less than 250 employees, as state owned firms – many tied to the Defense Ministry – maintain priority access to loans.
In 2017, the IMF cautioned that Egypt’s private sector development “might be hindered by involvement of entities under the Ministry of Defense.” For example, military-owned companies that manufacture sugar, paint and kitchen utensils retain closer ties to state-owned retailers than small privately held firms.
“Supporting and enabling SMEs is a key component of any inclusive growth agenda and could boost annual economic growth by up to one percent, potentially leading to about 15 million new jobs by 2025 in the Arab world,” Lagarde said.
Egyptian lawmaker Mohammed Badrawi, the ranking member of parliament’s Economic Committee, agrees with Lagarde on the requirement for clear, consistent and coherent policies to promote entrepreneurship.
“We need one million new jobs a year and the new SME law is very important for Egypt for us to get to that level,” Badrawi told The Media Line. “The draft bill envisions making financing available through a bank dedicated to small and medium enterprises [that is] affiliated to the Central Bank.”
More than two-thirds of Egyptian adults do not maintain bank accounts, which creates a structural barrier to implementing previous initiatives aimed at extending credit to members of an economy mostly driven by workers in the services as well as micro-manufacturing and retail sectors.
Three years ago, Egypt’s Central Bank started a program to finance 350,000 SMEs with $11.5 billion made available through the commercial banking system at an interest rate of five percent. But a conservative approach to lending, coupled with a reluctance to assume risk, failed to increase the number of such loans to the intended target of 20 percent of the banks’ total portfolios.
“I got a $58,000 loan under the initiative in 2017,” Tamer Mahmoud, a manufacturer of spare parts for basic home appliances, told The Media Line. “It took the bank three months to approve the loan and I even lost [double that amount] because I had to decrease production as I waited for the money.”
Somewhat ironically, Egypt’s 2014 constitution is one of a few worldwide that enshrines promotion of SMEs into basic law. Article 28 commits the Egyptian state to giving “special attention to small and medium enterprises in all fields.” Yet decades of government dominance over the economy has resulted in complacency even among aspiring entrepreneurs.
“The promotion of small and medium industries requires the concerted effort of all bodies in the state to be an incubator and sponsor,” Neveen Ishaq, the CEO of local online shopping platform Egy Activ, told The Media Line.
Legislators such as Badrawi and fellow committee member Nadia Henry say their draft bill will mandate expanded lending and reduce bureaucracy for entrepreneurs trying to establish their businesses with local authorities that issue licenses. The bill also proposes an initial 1 percent VAT for SMEs as opposed to the standard business VAT rate of 14%.
“We all have the capabilities and talent that qualify us to be successful business owners,” parliamentarian Henry told The Media Line. “But these capabilities have been buried for many years and we have not established the right environment to cultivate them.
“We must change the economic and social culture of our young people who leave college and secondary technical schools wanting to join the public sector instead of creating their own jobs as entrepreneurs.”
The SME bill is expected to pass into law shortly after the house returns in June from its Ramadan holiday recess.