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Wednesday, 21 October 2020

The CBE and the industrial sector: A ray of hope

A look at recent initiatives by the government and the Central Bank of Egypt to support the industrial sector

Dahlia El-Hawary, Friday 20 Dec 2019
CBE
Central Bank of Egypt (Photo: Reuters)
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In close coordination with the government, the Central Bank of Egypt (CBE) has recently announced a new initiative for stimulating both the industrial and the real-estate sectors.

Specifically, the CBE has announced the allocation of what amounts to LE181 billion, out of which LE100 billion will be targeting around 100,000 industrial enterprises to finance their working capital and investment goods with the purpose of export promotion as well as import substitution.

Another LE31 billion will be used to rescue over 5,000 indebted industrial establishments under certain conditions, including the payment of 50 per cent of their loan’s principal. And LE51 billion will be directed to financing the middle-income segment of housing.

This initiative has been very much welcomed and has been long awaited as it comes in strong recognition of the importance of the industrial sector and its role as one of the main growth engines in Egypt. The Egyptian economy is blessed in its diversification, which is a true source of its strength. According to the Ministry of Trade and Industry’s strategy for 2016-2020, the industrial sector is expected to grow annually by eight per cent and to increase its contribution to GDP from 18 per cent to 21 per cent, to establish 22 new industrial complexes, and to provide three million decent employment opportunities by 2020.

To that end, the government and CBE have undertaken several important initiatives to support the industrial sector over the past few years addressing two of the main challenges to doing business in Egypt: access to credit and access to land.

Specifically, the CBE and the Ministry of Trade and Industry have developed a number of funding protocols to encourage the banks to extend credit to support industrial enterprises, especially micro, small and medium-sized enterprises (MSMEs), by providing them with funds at reduced rates of interest of five to seven per cent to finance their working capital as well as the purchase of units. The CBE has also mandated the banks to allocate what amounts to 20 per cent of their loan portfolios to MSME lending. Indeed, most of Egypt’s banks currently have specialised units to cater to MSME needs, providing them with technical support as well as finance.

To ease access to land, the government has generously offered land free of charge to support the establishment of new industrial MSMEs in Upper Egypt, according to certain rules and conditions and based on a prime ministerial decree. This is in addition to the establishment of 13 industrial complexes mostly in Upper Egypt, based on a presidential endorsement of LE5.4 billion, to provide MSMEs with working units at low rental value over a long time period reaching over 15 years.

There was also the enactment of the new industrial licensing law in 2017 to simplify the licensing process and to reduce the period needed for a firm to start operations. The Ministry of Trade and Industry has also worked on the preparation of the National Industrial Map, launched in 2018, to guide existing and potential entrepreneurs to industrial opportunities across Egypt and provide them with both technical and financial data.

The government’s efforts to support the industrial sector and the CBE’s various initiatives to promote access to credit are timely and very much needed to encourage the domestic banking sector to lend to finance new ventures and to fund the expansion of existing ones. In fact, The financial intermediation indicators in Egypt have remained at less than hoped for levels, as the loan-to-deposit ratio went down from an average of about 50 per cent over the past decade to slightly over 40 per cent in 2015-2016, whereas the ratio of private-sector credit to GDP decreased from an average of 40 per cent to only 34 per cent in 2015-2016. These indicators lag behind those of comparable developing economies such as those of Morocco, Turkey and South Africa.

It should be noted that these modest indicators had long persisted even before the political turmoil that Egypt experienced in 2011. It could be argued that the banks may be reluctant to lend to the private sector due to a number of reasons, including, but not limited to, their preference to invest in low-risk and high-return assets such as government treasury bills, hence crowding out the private sector. Having said that, however, it may be noted that borrowers may also lack the basic financial management skills necessary to make their business cases bankable, hence limiting their access to bank credit.

Deeper reforms at the ground level to change the credit culture of both lenders and borrowers are needed to reduce the former’s risk aversion and to develop the latter’s business skills in Egypt. This is very important in order to maximise the benefits from the ongoing reform efforts and to enable the financial sector to deliver its expected role of mobilising savings, efficiently allocating resources to their most productive uses, and, more importantly, supporting the economy in generating new employment opportunities and hence alleviating poverty.

While the CBE’s current initiative to bail out indebted firms is a move in the right direction, one would expect that special attention would also be paid to establishing well-defined criteria to carefully screen those worthy of being financially rescued. This is very important, not only to minimise issues of moral hazard whereby ailing companies do not have the right incentives to efficiently operate according to business rules, but also to make sure that scarce public resources are efficiently used.

Given the scarcity of its resources, the state’s support for the industrial sector should be selective and based on a well-developed national industrial strategy. This strategy should aim at identifying the best allocation of a few targeted industries across Egypt, while taking into consideration comparative advantages in terms of the availability of natural resources from a geographical point of view.

This is in addition to the importance of establishing cluster-based approach with backward and forward linkages between existing and targeted new industries, on the one hand, and between large and smaller firms, on the other. The Ministry of Trade and Industry has already made a lot of efforts in that direction, and it should continue to work on such a dynamic strategy, updating it in order to cope swiftly with fast global market changes.

*The writer is a former adviser at the Ministry of Investment and is currently an independent consultant.

*A version of this article appears in print in the 19 December, 2019 edition of Al-Ahram Weekly. 

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