Egypt's SMEs: An ambitious growth strategy

Nesma Nowar , Thursday 19 Jul 2018

The government has set out an ambitious strategy to grow Egypt’s small and medium-sized enterprises, but its success will depend on implementation

(Photo: Al-Ahram archive)

The newly appointed government of Prime Minister Mustafa Madbouli presented its four-year policy programme to parliament last week, with a focus on the small- and medium-sized enterprises (SMEs) sector.

Targeting to create thousands of jobs by fiscal year 2021-2022, the government is determined to grow the SMEs sector to help it realise its targets.

In its policy programme, Madbouli announced several government initiatives designed to support SMEs and provide financing for them.

These include allocating at least 10 per cent of available land to young people and SMEs, providing LE10 billion to banks to give out as loans to SMEs in the coming four years, and expanding micro-financing for women in rural areas to create 100,000 jobs in agricultural, commercial and services.

This is in addition to generating 20,000 job opportunities in small and micro-enterprises through a local development fund for women and young people and increasing the funding allocated to these projects through the Central Bank of Egypt’s (CBE) SME-financing initiative.

In January 2016, the CBE launched a programme to finance 350,000 SMEs with LE200 billion through the banks over the course of four years at an interest rate of five per cent.

The CBE has also directed the banks to increase the rate of loans directed to the sector to 20 per cent of their total portfolios.

The government is trying to offer more financing to SMEs to address one of the sector’s most pressing problems: access to finance.

However, the sector’s problems were not only a matter of financing, said Yomn Al-Hamaki, a professor of economics at Ain Shams University in Cairo.

She said that there was a clear direction from the state to support SMEs, but that its efforts were not accompanied with a clear plan that would ensure successful implementation.

She added that a “big chunk” of the money allocated to SMEs had been misallocated, saying that the problem of such initiatives always lay in the “inefficiency of implementation”.

There was an absence of a dedicated body for SMEs that would ideally include professionals who would follow up on the performance of funded projects, Al-Hamaki said.

This body should have the necessary authority and a clear strategy in order to achieve the desired goals, she added.

At present there were multiple strategies for SMEs carried out by different ministries, and these needed to be harmonised to avoid duplication. “SMEs in Egypt have always lacked a central authority that would lead and direct initiatives and policies designed for them,” Al-Hamaki said.

She added that the development of SMEs could give Egypt the “quantum leap” it needed as they could create jobs, fight poverty, increase incomes and boost exports.

Professor of economics at the Al-Sadat Academy in Cairo Ihab Al-Dessouki agreed, stressing the need to set up a central authority for SMEs. He said that previous bodies dedicated to SMEs had lacked authority.

The development of SMEs required government support not only in terms of financing but also in terms of ideas, feasibility studies and follow-up, he said. However, this kind of support had not always been rendered, and financing for SMEs was often associated with conditions that are hard to meet.

“That was why the LE200 billion offered as part of the CBE initiative has not been fully disbursed,” Al-Dessouki said.

The government’s plan to establish incubators and offer land to SMEs could boost SME growth, he said.

It is part of a programme to support SMEs and an ongoing drive to grow the sector and encourage it to integrate into the formal economy through tax breaks and other incentives.

A new SMEs law is reportedly in the making. Under the new legislation, businesses earning more than LE1 million a year, and less than a ceiling that has yet to be decided, would pay a nominal one per cent tax on their revenues, sources from the finance ministry and Tax Authority told financial newsletter Enterprise last month.

Businesses with annual revenues of LE250,000 or less would face a fixed tax bill of LE2,000 per year.

Those with top lines between LE251,000 and LE500,000 would pay LE5,000 a year, while enterprises earning LE501,000 to LE1 million would be taxed at LE10,000, the newsletter said.

The brackets are designed to expand the tax base by giving incentives for small businesses to join the formal economy.

The new act will also reportedly include a new definition of SMEs, which will likely be based not only on revenues, but also on the size of the company’s paid-in capital.

The new act will also include other incentives for SMEs that decide to join the formal economy, including further tax exemptions for a period, lower prices for power consumption, the covering of social insurance costs, and issuing expedited temporary permits for the installation of utilities and infrastructure.

A World Bank study published in 2015 said that SMEs play a major role in most economies, particularly in developing countries.

Formal SMEs contribute up to 45 per cent of total employment and up to 33 per cent of national income in emerging economies, it said. These numbers are significantly higher when informal SMEs are included.

In Egypt, SMEs represent around 80 per cent of the economy, the majority of them operating in the informal sector.

*A version of this article appears in print in the 19 July 2018 edition of Al-Ahram Weekly under the headline: SMEs in focus

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