Given that the Covid-19 pandemic has hit the Egyptian economy harshly, the investment climate — including for small and medium-sized enterprises (SMEs) — has been affected as well.
In an exclusive interview, associate director and deputy head for Egypt at the European Bank for Reconstruction and Development Bank (EBRD) Khalid Hamza spoke to Ahram Online about how the bank is adjusting its plans to back the Egyptian market amid the pandemic, especially that the EBRD focuses mainly on supporting the private sector and SMEs in particular.
Ahram Online: How could you evaluate the impact of the ongoing Covid-19 crisis on Egypt’s investment climate?
Khaled Hamza: Covid-19 has had a profound negative impact on the world economy. Egypt was equally affected, bringing down its GDP growth from almost six percent to an expected level of around three percent. Nonetheless, the Egyptian economy has continued to grow and has shown great resilience, especially when compared to other regional economies.
This resilience was translated into a relatively stable exchange rate, relatively positive investor sentiment, and from what we see a possible v-shaped or u-shaped recovery. This was all assisted by the ongoing economic reform the government had been pursuing since 2016 and the extraordinary measures taken by the Egyptian central bank to ease the impact of the crisis earlier this year. EBRD’s response in supporting the Egyptian economy was complementary to the measures taken and entailed mainly the provision of vital liquidity to Egypt’s banking sector through a $850 million credit facility (including trading lines) to Egyptian banks to on-lend to the SME sector.
AO: For SMEs, how has the crisis affected business, particularly growth, revenues and expansion?
KH: The key challenge during the crisis is to keep businesses afloat. This entails ensuring funding is available to secure raw materials, retain staff (to the extent possible) and honour ongoing commitments. To many this required a transformation of their businesses to stock heavily on raw materials to minimise process disruption, accommodate remote working conditions and establish digital delivery platforms.
This is a huge task which was undertaken by many in a very short time. Funding would not solve these issues on its own and had to go hand in hand with technical assistance and policy dialogue. The EBRD, therefore, responded to the crisis caused by Covid-19 through the establishment of an emergency Solidarity Package that would provide the needed short-term to liquidity to the EBRD's existing clients. In addition, the EBRD intensified its technical assistance support and organised a series of online workshops on managing businesses during the crisis and enhancing the process of digitalisation. This is in addition to direct one-on-one interventions with SME clients.
AO: In its latest economic outlook for the region, the IMF has asked developing and emerging markets to intensify work to unleash the private sector to be a key player in the development process and the business scene. How does the EBRD see that this can be implemented in Egypt?
KH: The EBRD focuses mainly on supporting the private sector in any economy, as around 80 percent of the bank's investments are in the private sector. In Egypt, the bank has invested around 70 percent of its approximate $6 billion portfolio in the private sector. The potential to do more, however, is enormous. With the establishment of a level playing field and the introduction of more projects to the market through more competitive tendering, such as PPPs, the private sector in Egypt could leap in terms of growth.
The EBRD is actively involved in supporting this through its investments, policy dialogue and technical assistance. For example, the banks’s support of the General Authority for Land Transport and the PPP unit have led to the award of the 6th of October Dry Port project to a local/international consortium following a competitive tender.
AO: What about SMEs?
KH: SMEs face an even greater challenge to be able to develop themselves and in turn contribute effectively to economic growth. Access to finance is one of the key challenges that should be addressed to improve their situation. The EBRD is not only providing liquidity through domestic banks, but it is also helping raise the capacity in said banks to develop the appropriate products to be able to penetrate the SME market.
The bank is also working hand in hand with the Financial Regulatory Authority and the Egyptian Stock Exchange to restructure/rebrand the SME stock exchange to create a more effective platform to raise funding on that level. Diversifying funding options is one of the key factors in improving access to finance for SMEs and sustaining their growth.
AO: How can merging the informal into the formal sectors be achieved in Egypt? And what are the incentives government should provide to encourage such an outcome?
KH: Achieving financial inclusion is one of the key measures that can help attract businesses to operate in the formal sector, which leads to a level playing field for all players, attracting more investment overall and supporting sustainable growth.
Financial inclusion is not achieved through improving access to finance to SMEs alone, but also through the provision of sound business advice. The EBRD is supporting this effort in both ways. On the one hand, the bank’s credit lines to local banks are designed to be on-lent to SMEs, and on the other hand the bank is providing technical assistance through our skills in business lines or youth business lines, which support capacity building to build a sustainable corporate environment.
AO: What facilities does the EBRD expect to extend to Egypt through the end of 2020?
KH: The EBRD targets investments in 2020 exceeding 1 billion Euros in line with previous years. The financial sector will receive a bulk of these investments; however, other vital sectors in infrastructure, renewable energy, agribusiness and manufacturing are all expected to benefit from EBRD financing. Against all odds, 2020 is expected to see the EBRD’s first investment in the tourism sector. This reflects the importance of the sector for Egypt but also the bank’s belief in its potential and attestation to its resilience over recent decades.
AO: If a second wave of the pandemic arrives, what are the EBRD’s plans regarding supporting Egypt in this case?
KH: The EBRD’s Solidarity Package is expected to last until the end of 2021 and could be extended further if the situation continues. However, we wish that it does not come to this, as further lockdown and slowdown in economic activity could lead to long term negative effects that cannot be addressed with short term funding. The EBRD would still, of course, continue to support its clients, but would have to devise the right instruments at the time to help survive the shock.
AO: What are the EBRD's future plans in the Egyptian market?
KH: The bank is currently in the process of updating its strategy in Egypt, which is expected to be approved in 2021. It will further the bank’s mandate in tackling Egypt’s most pressing matters, whether in the water sector, upgrading its infrastructure or digitising its economy. At the core of this will be support for SMEs and the private sector, the reduction of negative environmental impacts, and the improved governance of its institutions.