Economic Transition in the Southern and Eastern Mediterranean

Economic Transition in the Southern and Eastern Mediterranean: Challenges and Opportunities

Delivered by: 

Sir Suma Chakrabarti, EBRD President

Venue: 

Nile Ritz Carlton, Cairo, Egypt

Event: 

Organised by the American Chamber of Commerce

Introduction

Good morning

Thank you very much for inviting me to make what will be my first speech as EBRD President delivered here in Egypt.

I couldn’t wish to make my Cairo debut in front of a better informed audience.

My subject today is the main development challenges faced by the region that the EBRD calls the Southern and Eastern Mediterranean – and how we can support it.

It’s a region that, for us, for now, consists of Egypt, Jordan, Morocco and Tunisia.

We hope that Lebanon will become one of our countries of operations in the near future too.

I’ll be citing examples and lessons learnt from all four countries where we work. But as I am in Cairo, there will be more from Egypt than the others.

Some of the problems the four countries face are country specific. Others are region wide.

But before I do that, you would probably appreciate some context about who we are, what the European Bank for Reconstruction and Development actually does.

And how it can help transform the countries where it works.

The EBRD

We have, in fact, just been celebrating our 25th birthday. The celebrations were somewhat low key because our focus needs to be on the future, rather than the past.

But that doesn’t change the fact that the EBRD has much to be proud of
in its first quarter of a century.

We were set up at the end of the Cold War to develop open and sustainable market economies in countries committed to, and applying, democratic principles.

At that time our geographical reach extended from Central and Eastern Europe across what was then still the USSR.

We are a development bank. We invest in projects, engage in high level policy dialogue and provide technical advice that fosters skills transfers, innovation and higher standards.

It’s also important to bear in mind that, unlike most other international financial institutions, we work mainly and directly with the private sector.

And that intense and wide ranging involvement with and support for the private sector is one of the signal achievements of our first 25 years.

We understand what the private sector needs.

We’ve been very influential in enhancing the role of the private sector within the economies where we invest.

As well as in encouraging entrepreneurship in general, boosting market competition and integrating our recipient countries into global supply chains.

One important conclusion we have drawn from the last quarter of a century is the need to adopt a long-term perspective on change.

Our engagement with the private sector brings with it immediate returns.

More direct investment, faster cash flow cycles, knowledge enhancement and transfer and world class standards in designing and executing projects.

But our objectives and mandate are much more ambitious.

The cumulative effect of our work, over years and decades, strongly supports the growth of an even larger private sector.

That, in its turn, is a necessary cause for the rise of a secure, self-confident
middle class.

And, as you know, the middle classes are the foundation on which are built genuine political representation and economic development.

The EBRD moves into SEMED

While the EBRD’s mandate is still the same as when we were established, we now operate well beyond our original boundaries.

And in countries such as Turkey, Greece and Cyprus – and Egypt, Jordan, Morocco and Tunisia – which had established market economies long before we arrived, unlike the former Communist bloc.

Such expansion has been driven by our shareholders, presently 65 national governments, including Egypt, which was a founding member, and the EU and the European Investment Bank.

Our move into the Arab world was, of course, determined by the dramatic political events of 2010 and 2011.

Our shareholders felt that our expertise in strengthening the private sector, working with small businesses and investing in sustainable energy, amongst the many areas where we excel, was just too valuable not to be tapped in these ‘new’ countries as well.

But those events of five years ago coincided with two very important trends that make our presence in this region particularly significant – and, we hope, effective.

The beginning of this decade marked the first time in generations that the Arab private sector had become a major (if not the largest) provider of domestic investment capital and employment opportunities.

And it is also the case that the demographic revolution the Arab world is currently undergoing offers immense potential for development and growth.

Which is where we came in.

I have to say, we really hit the ground running.

From a standing start in 2012, our investment in the four countries of the Southern and Eastern Mediterranean now stands at more than €3.5 billion.

In Egypt alone our investments in 37 projects are worth €1.7 billion.

It’s been a great test of our ability to mobilise quickly, one we have passed with flying colours, with help from our partners and strong support from our host governments, including here in Egypt.

Some of you may have been at our first ever Business Forum for the region in Skhirat in Morocco last November.

In my speech at its opening I remarked on how, when we survey the challenges the four countries face – the need to boost growth and create more jobs and do so in a sustainable and resilient way – we see problems, yes. But we also see many, many opportunities.

There was a palpable sense of excitement at the region’s potential for investment at that event. I feel it myself whenever I visit.

Even more so when we are gathered today not far from Tahrir Square.

Challenges

So we are vocal champions for the four Arab countries where we are now working. But we don’t look at them and their problems through rose tinted glasses.

Nor do we believe in a one-size-fits-all approach for all our countries of operations.

Thanks to our strong local presence, we understand the challenges our Arab countries face both in the here and now and in the longer term.

Our role is to help Egypt, Jordan, Morocco and Tunisia challenges by unlocking the investments, mobilising capital and promoting the policies that can help them address those challenges.

So, let me outline those challenges.

First, growth

At a time when the economies of most EBRD countries are showing modest signs of an upturn after years of slowdown growth in this region is heading in the opposite direction.

Egypt and Tunisia have suffered terribly from terrorist attacks targeted at the tourist industry.
Our hearts go out to the victims of this violence, whatever their nationality.

Meanwhile, exports have weakened throughout the region. The exception is Morocco, which is reaping the benefits of successful policies to promote higher value-added exports.

Over and above the global slowdown in growth and international trade, here country specific
factors have also contributed to the weak performance.

They range from the challenge of competitiveness to border closures in Jordan and labour strikes in Tunisia.

On the upside, countries across the region have pushed through significant reforms to the way they subsidise energy.

In Egypt the government took the bold decision in mid-2014 to reform its subsidy framework. An important step towards fiscal consolidation and the reallocation of public funds.

But reform momentum seems to have slowed down across the board, undermined by a challenging economic environment, socioeconomic considerations, politics and vested interests.

At an even more fundamental level, the process underway in the region has posed some very tough questions.

These concern everything from the role of the state as an economic agent or referee, governance standards, the tenets of the social contract and the economic trajectory, to name just a few.

And all these questions are being raised against the backdrop of the acute economic problems I have just mentioned.

1) Lack of competitiveness in the global economy.
2) The need to re-energise sustainable growth and create more jobs
3) The vulnerability to shocks of such key sectors of the economy as tourism.

Finally, the demographic revolution offers many positive opportunities for development and growth, as I remarked earlier.

But in today’s socioeconomic circumstances, that same revolution can make some problems more acute.

Even if, in the longer term, it also offers hope of solving them.

We understand that there are many factors that can make reforms harder to push through.

But there are also many ways that we can help your countries better adapt to our ever faster changing world.

I am going to highlight five key areas where we can make a difference.

They are consistent with what we are doing in our other regions.

But today, with you, my focus is on Egypt, Jordan, Morocco and Tunisia.

The five areas, five development gaps which need to be closed, if you will, are: Competitiveness, Inclusion, Governance, Integration and Sustainability

1. Competitiveness
 If the region is to benefit from the inclusive growth it needs, it will have to be more competitive, not just regionally, but globally.

Through our work in the private sector, particularly with small businesses, we can make a major contribution to the region’s overall competitiveness.

We do that by boosting the quality of entrepreneurship within these businesses, as well as the quality of knowledge and information they have at their disposal.

We are aware of previous efforts and initiatives in this area. But our approach is different.

We do not follow centrally planned programmes with preconceived socioeconomic objectives.

We work bottom up, with the companies themselves, drawing on our sectoral expertise in the domestic private sector.

So through our Advice for Small Business programme we help SMEs:

To improve their business models to become part of local supply chains;

To suit new market conditions;

To unleash their creativity and talent for innovation by developing new products and services.

We research with them new opportunities in the local and export markets and then facilitate access to them.

We support them in designing better business processes and advise them on using effective management tools and information systems.

We help them comply with international accounting and financial reporting standards, improve their corporate governance.

We assist them in building efficient organisational structures and creating job opportunities.

And we back their efforts to implement international quality standards as well as projects enhancing energy efficiency.

One of the many companies we have helped to develop its product range and expand its business, this time with a loan, is the Tunisian software developer, Vermeg.

In Egypt, the Small Business Support programme has reached well over 300 Egyptian SMEs and has the happy consequence of diversifying the economy and strengthening its knowledge sector.

I would add, by the way, that our advice programme is not confined to capital cities.

This year we are expecting to open an office in Alexandria and we’re also opening in Tangiers and Sfax.

2. Inclusion

We see economic inclusion, the opening up of economic opportunities to groups such as women and young people as central to development.

If such groups are given a chance to succeed, they are more likely to become a part of the workforce, pursue education and generally contribute to growth. They need to move from the economic margin to the economic centre.

They then have a stake in transition themselves and strengthen the broader cause of economic reforms.

You shouldn’t need me to spell out how urgent the need for more inclusion is in this part of the world.

I am pleased to see that it is a major objective for many governments, including here in Egypt, as well.

Our Women in Business programme in Egypt is boosting gender equality and has already supported more than 120 women entrepreneurs by providing business advice and better access to finance.

We are also doing our bit to maximise access to employment and training for young people, and especially women, in Jordan’s retail and hospitality sector, at the Abdali Centre and the Ayla Oasis Regeneration Project on the Red Sea.

Here in Egypt we are promoting inclusive procurement processes at Cairo Metro, among them for bidders to provide on the job training to 80 young people selected through vocational schools and local agencies.

3. Governance

The EBRD has always been in the business of policy dialogue. But we’ve recently significantly upped our efforts to improve the investment climate and standards of governance, political, economic and corporate, in the countries where we work.

The investment climate and governance have a direct effect on economic growth, the sustainability and resilience of transition and its inclusiveness and on countries’ ability to cope with global challenges.

Once again, I’m sure you can see the potential to make real progress here.

I’m sure as well that many of you are familiar with Egyptian National Railways. It’s the world’s second oldest national railway, I am told.

It employs 50,000 people. And 1.4 million passengers use it every day.

As part of our first €126 million financing project with Egyptian Railways, we are funding new rolling stock.

But the soft component of the project is just as important. We’re supporting a transformational initiative to help ENR reform by developing and implementing its new Corporate Governance plan.

This will cover compliance, procurement, internal auditing and general governance.

Improving corporate governance in such a huge company used by so many people will deliver real impact on the ground.

Moreover, we will work with ENR to guarantee an open and transparent public procurement process for the rolling stock and have promoted private sector maintenance for the trains, extending their natural life.

4. Integration

We believe integration promotes efficient markets and reform by boosting competition and broadening access to services and sources of financing. It also enhances inclusion.

We’ve seen integration in action in Morocco where we’ve helped its Office National de l’Eau et de l’Eléctricité connect remote villages to electricity and water supplies.

Connection to the national grid has ensured better living standards for local people but also driven creation of more sustainable jobs.

Reliable access to running water had a direct impact on local women and children who were shouldering most of the burden of fetching and transporting water.

This was really about integrating these far off settlements into the national economy.

But, through infrastructure projects, we can also better integrate the southern and eastern Mediterranean into the regional and global economic and trading networks.

5. Sustainability

I’ve left sustainability to the end but that is in no way a reflection of its importance to us.

If anything, investing in sustainable energy and sustainable resources is one of our calling cards that we are most proud of.

We launched what we call a new Green Economy Transition approach at the end of last year to put climate finance even more at the heart of our business.

We want to move from around 30 percent today, to 40 percent of our annual investment to be in this field by 2020.

And I’m confident that Egypt, Jordan, Morocco and Tunisia can do a lot to help us hit that target.

We are a transition bank and this region is on the cusp of a major shift from hydrocarbon dependence to widespread use of wind and solar power.

Wind, and especially solar, have fallen in price far faster than expected.

Both forms of energy are now genuinely competitive with gas.

For a region blessed with extraordinary supplies of such resources, such a shift suggests a future that is radically different from the status quo.

A future in which a major part of a country's energy supply comes from a source that emits nothing, uses no water, and whose fuel costs nothing and is always available.

Stable, low energy prices will also enhance the region’s competitiveness.

As you may know, Egypt plans to generate more than 20% of its electricity from renewables by 2020 and half by 2050.

Mobilising the huge amounts of capital and spurring the innovation required of the private sector – to do this will be a major challenge.

But it sits perfectly with our mandate to support the private sector and sustainability.

And our track record of doing the same in many other regions.

We’ve worked closely for more than a year with the Egyptian authorities to help them develop a framework for private sector solar and wind renewables.

And we hope to see the first investments in this field later this year.

We did the same two years ago in Jordan. And this spring Jordan's first solar plants connected to the grid and began generating power.

We have launched the same process policy dialogue and technical cooperation to lay the foundations for investment in Tunisia.

But, for a vision of the long-term future, look to Morocco.

There, last year, we financed a ‘private to private’ wind farm, the award-winning Khalladi project.

Its main consumers are three cement companies for whom renewable power now makes economic, as well as environmental, sense.

With these projects and many others in the pipeline for sustainable development in the water sector, we hope to be an inspiring example of sustainable change at COP22 in Marrakesh later this year.

Conclusion

Those are the five main development gaps that we see in the southern and eastern Mediterranean.

As I hope I made clear, there is considerable cause for optimism amidst the challenges.

Closing those gaps will do much to reenergise growth sustainable and inclusive growth which benefits all sections of the population.

Fortunately, they are all areas in which the EBRD has expertise.

And, internally, we are working hard to ensure that we can deliver even more impact where it matters most.

To push through change, the region will need substantial sums of investment.

We stand ready to mobilise that capital through our projects.

The region should be aware that, of course, the rest of the world is also actively seeking more investment. Which is itself scarce.

Hence the importance of bold structural reforms to make the business and investment climate here more attractive.

We recognise that our investment capacity, while relatively large and growing, can only satisfy a modest amount of the region’s needs.

But we believe – and have demonstrated many times that our Bank brings to the region more than just project finance.

It brings to bear arguably the world’s richest experience of socioeconomic transitions, gained through “hands-on” involvement in them in many different parts of the world, often in adverse circumstances.

It brings with it a strong focus on policy, knowledge, competitiveness and the local private sector.

And a proven record of working with partners and clients, such as yourselves, to invest in changing lives.

Thank you very much.