What’s holding back the private sector in MENA? Lessons from the Enterprise Survey The MENA region is in search of a more inclusive pattern of growth: Post Arab upspring in search for inclusiveness Local market development as a response to economic migration The formal private sector in the region is small, but can be a seed for a more effective and inclusive growth path

EBRD-EIB-WBG MENA Enterprise Survey and Report MENA ES: Around 6,000 firms in the formal private sector Topics covered: Firm productivity & business environment Access to finance Jobs and skills Competitiveness A unique project, result of a close cooperation among the EBRD, EIB and the WBG Data collected in 2013-2014 with financial information referenced to 2012 According to Schneider, Buehn and Montenegro (2010), in 2007, informal economy accounted for 31.0% of GDP in lower-middle-income MENA ES (Egypt, Morocco and Yemen), compared with 37.9% of GDP in lower-middle-income economies excluding MENA ES. In upper-middle-income MENA ES (Jordan, Lebanon and Tunisia), informal economy accounted for 28.2% of GDP in 2007, compared with 33.4% of GDP in upper-middle-income economies excluding MENA ES. All the estimates are calculated using the same approach: a Multiple Indicators Multiple Causes (MIMIC) model. Figures for 2012 for Egypt indicate that informal economy shrank to 29.9% of GDP. Comparable figures are not available for other countries.

Firm productivity and the business environment The formal private sector as a seed for more inclusive growth Can the formal private sector be a seed for more inclusive growth?

Political instability, electricity, corruption, access to finance are the main perceived obstacles to operations GDP per capita growth was more steady in economies with politically stability Political instability seems to have negatively affected firms’ sales, employment, and labor productivity growth; though governments cannot do much with respect to political instability in the short term High perceived corruption is associated with lower sales and employment growth, and lower labor productivity There is also evidence that corruption may deter interactions with public authorities, preventing firms from making full use of the opportunities available to them There is a significant negative relationship between poor supply of electricity and labor productivity Informality is among the top three obstacles in Tunisia, Morocco and West Bank and Gaza. It is in general an issue in MENA ES, but does not necessarily show up among the top three obstacles, as the firms are even more concerned about other aspects of business environment.

Small firms suffer more from political instability and issues related to electricity and access to finance In addition, SMEs are: More likely to experience a power outage and less likely to use a generator More likely to be credit constrained

Access to finance Banks and firms happily apart

Banking sectors are large, but lending is concentrated and firms tend to disconnect from the financial sector 73% of firms are not credit constrained: they had loans approved in full or did not apply for a loan as they have enough capital 58% of firms are disconnected: did not apply for a loan because of sufficient funds Loan concentration (share of top 20 exposures in bank equity), is the highest in the world

Disconnected firms lose growth opportunities Disconnected firms resemble credit constrained firms Low propensity to invest Low likelihood of having expansion plans – even when capacity utilization is high However, they are not complaining about this situation, while credit constrained firms are

What explains firms’ disconnect Collateral requirements are stringent in MENA, in terms of incidence of collateral requirement and assets accepted as collateral Firms are more likely to disconnect when collateral demands are stringent, particularly when they are young Firms – both young and old - are less likely to disconnect from the banking system when banks accept movable assets as collateral Firms grow faster when collateral requirements are less demanding Unregistered firms less likely to become connected (informality) Firms are less likely to connect when banks are not competitive (competitiveness) Collateral policies: results from research project that uses data on the location of firms and bank branches to examine how collateral policies affect credit demand and employment growth Two measures of collateral: average ratio collateral to loan value and average incidence of movable assets. “high collateral ratio” scenario: collateral index in at most the 25th percentile of the country-specific distribution [higher value of the collateral index indicates looser collateral policies] “low collateral ratio” scenario: collateral index in at least the 75th percentile of the country-specific distribution Results for movable collateral similar, main difference: both young and old firms differ from movable collateral

Policy implications Dealing with political instability, corruption, electricity and access to finance is key to support the growth of the formal private sector, especially for smaller firms Distortions matter: carefully assess distortions, such as privileges, subsidies, transfers and, more generally, competition policies Build a bridge between firms and banks: Reduce the net costs of formalisation and increase firms transparency Better risk assessment capabilities for banks More competition Credit guarantee schemes can facilitate lending to borrowers that otherwise would be too risky Reform of the secured transactions framework can alleviate collateral constraints (movable collateral)

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