The Role of the Private Sector as a Motor for Growth in MENA


Delivered by: 

 Sir Suma Chakrabarti, EBRD President

Venue: 

Dubai, United Arab Emirates

Event: 

World Government Summit

Read the press release

  1. Introduction and thanks

Good morning.

Thank you very much for the invitation to speak.

It is a pleasure to be here with you today, and to have the opportunity to talk to you about this very important topic.

Important, not least, because – I strongly believe – it is the private sector which is best placed to deliver the sustainable, inclusive growth that the Middle East and North Africa (MENA) region needs.

  1. The EBRD and the private sector

First, allow me to explain how and why the EBRD works with the private sector. 

We were founded 25 years ago to help the countries of Eastern Europe and the former Soviet Union navigate the transition from central planning to market economies.

Our record there was such that many other countries have asked our shareholders to allow us to invest in them, too.

For the last five years we have also been working in the Middle East and North Africa.

Since 2012, we have invested over €5 billion in more than 100 projects in Egypt, Jordan, Morocco and Tunisia.

It is no secret that we expect Lebanon to become a shareholder and country of operations very soon.

And I am certain that the list of countries in which the EBRD operates will continue to grow.

Central to our mandate is what our founding document, drafted 25 years ago, defined as ‘the promotion of private and entrepreneurial initiative’.

At least 60 per cent of our lending has to be to the private sector, although we also work closely with the governments of our countries of operations, especially in the field of public-private partnerships. 

 

  1. The private sector and MENA: two big challenges

Within the countries in the MENA region where we invest, and which we call the southern and eastern Mediterranean region, 75 per cent of our lending is to the private sector already.

Why this emphasis on private-sector-led development in MENA? There are many reasons for this focus. In particular, because the region faces two major challenges that are specific to it and cannot be solved without the private sector playing the leading role.

One challenge is demographic, in the shape of the region’s youth bulge.

A well-known World Bank study concludes that the region will need to create about six million new jobs each year to absorb new labour-market entrants and bring down unemployment, especially among young people.

The second challenge, and one twinned with the first, is the struggle by the region’s economies to create the number of jobs required to keep these young people in meaningful employment.

In Egypt, for example, these dual challenges have combined to create a situation in which youth unemployment currently stands at 37 per cent.

Who is going to create the sustainable, productive jobs which will provide work for the generations of tomorrow?

While they both have a role to play here, I fear that the state and informal private sectors are not the answer.

Neither has the potential to deliver the growth or the productivity gains required.

The state sector provides security to those who work in it, but rarely provides the dynamism or innovation that the wider economy needs.

Firms in the informal private sector are too small to achieve economies of scale and scope.

Instead, we need to look to the formal private sector to generate inclusive growth and enhanced productivity, and beyond that, to raise living standards for all, boost stability, and provide a credible alternative to economic migration.

  1. Barriers to private sector growth

The potential for growth from the private sector in MENA is certainly there. But it faces many barriers to further expansion.

However, together, we can dismantle these obstacles to progress.

In fact, we are already doing just that in the countries where we invest.  

As we review what those barriers are, I will be basing my remarks on the EBRD’s own experience, as well as on the excellent Enterprise Survey and report on ‘What’s holding back the private sector in MENA?’ on which we recently worked together with the European Investment Bank and the World Bank.

It drew on the responses to questions we asked of some 6,000 firms in the formal private sector and was therefore very comprehensive.   

Note that the Survey’s geographical reach was considerably broader than the EBRD’s own footprint in the region. 

It included Djibouti, Lebanon, the West Bank and Gaza, and Yemen, as well as the four countries – Egypt, Jordan, Morocco and Tunisia – where the EBRD is now active.

The comparative size of these barriers varies from year to year but the overall list stays pretty much the same. 

  • One is corruption, experienced directly by firms themselves or in the perception that the political system as a whole is corrupt.

In the survey, in some countries, more than 50 per cent of companies identified corruption as an impediment to their work.

Fear of corruption is probably a factor in explaining why firms from these countries interact with governments – and engage in public transactions – far less than those in peer economies.   

We have organised anti-money-laundering training in Tunisia to help fight this problem but we are keen to do more.

  • Another of the major obstacles to private sector development is political instability, although in some of our countries of operations this is less of a problem today than it was a few years back.  

Enhancing political stability and combating corruption sometimes go hand in hand.

We have made considerable progress in many of our regions in boosting transparency, improving governance and enhancing competition – and in securing a better balance between the state and the private sector.

For example, the EBRD has set up investment councils, platforms for dialogue between businesses and the authorities about policy reform, in many countries and will look at doing this in the MENA region as well.

  • Unreliable supplies of electricity are another phenomenon which stifles the growth of the private sector but an area too where we have seen improvement in recent times.

What made this such an acute problem in the past was the rapid expansion of demand for power, as well as distorting subsidies,  inefficiencies due to state control of the power sector and a lack of adequate investment.

We have been a pioneer in the financing of renewable energy in this region, most recently in supporting a solar plant in Jordan.

I would also mention our stake in the privately owned Khalladi wind farm in Morocco, boosting the country’s renewable energy output and reducing its greenhouse gas emissions.

In general, we can see the way that the private sector is acting as a catalyst for one of the great transformations of our times: increased investment in renewables and energy efficiency.   

The MENA region already produces some of the cheapest renewable energy in the world.

The potential to do more is enormous.

  • Another obstacle undermining private sector growth is poor access to finance, and especially the difficulties that small and medium-sized enterprises (SMEs), as opposed to larger firms, encounter in trying to raise loans.

Indeed, the evidence suggests that many private sector firms have already reconciled themselves to this state of affairs, not even bothering to open checking or savings accounts.

Banks themselves dominate the financial sector and seem to have adopted a very cautious approach to credit, based on traditional lending technologies and conservative practices.

All over the EBRD regions we have been active in supporting SMEs in their efforts to grow – and raise the finance they need.   

Women’s economic participation in the region is particularly low and, as elsewhere, we need to work on helping to boost the economic power of female entrepreneurs.

In Egypt, our Women in Business programme provides a comprehensive package of financial and technical support for women who are starting up or expanding their companies.

On-lending to SMEs through local banks is a major theme of our work in this area.

Last year, we unveiled a US$ 140 million package for Egypt’s QNB ALAHLI bank for on-lending to SMEs and energy efficiency projects, another way in which we are supporting the development of the private sector.

  • Another obstacle to private sector growth is the skills gap that we see in the workforce

The education systems are turning out young people without the skills the market needs.

The focus within higher education seems to be on passing exams so as to land jobs in the public sector.

Technical and vocational education and training suitable for private sector jobs are less of a priority.

At the same time, in the workplace, on-the-job training is poor, if it exists at all. 

According to the survey, skill shortages seem to be a particular concern for those firms with the highest potential for growth – and the highest share of university-educated employees.

We have been involved in training and job-matching young people in the retail and hospitality sectors in Jordan and are eager to do more of the same elsewhere.  

  • Lastly, we are working hard to remove the obstacles that the private sector faces in expanding trade and exports – and to ease restrictions on the way companies can enter and exit markets and on foreign investment.

We can do this through our work on promoting the cause of economic integration, supporting trade and covering the risks associated with it, and by investing in infrastructure which brings our countries of operations and their regions closer together. 

The more trade, and the higher the level of imports and exports, the more we see productivity and competitiveness grow.

Excessive red tape, meanwhile, prevents firms from realising the full potential of export markets and makes it harder to import crucial production inputs.

As a result, firms stay less productive than they could have been with better access to international markets. 

Foreign direct investment brings not only more funds and better technology but also more effective management techniques.

  1. Conclusion

Taken together, those obstacles to private sector growth in the MENA region may sound daunting.

But I am optimistic about the chances of dismantling them, bit by bit, including through the EBRD’s investments and policy work on the ground.

I base that optimism on the readiness with which national governments and entrepreneurs are moving to remedy these problems themselves, although there is a long way to go and they could still do more.

And I base it on the EBRD’s track record in achieving similar goals in other countries.

After all, we have had a bit of a head start elsewhere.

Many of our other countries of operations are now converging with the levels and standards of the advanced economies.

Ladies and gentlemen, I hope I have conveyed to you today the strength of my belief in the private sector in the MENA region.

The formal private sector is the region’s main engine for growth – and for job creation.

We see its potential already.

Our optimism about our own role in its development rests on sound foundations – our own record and expertise in this area over the 25 years of our existence.

But we have not been able to do this all on our own.

We needed help.

And we will need your support in this region in the years ahead.

We need ideas, entrepreneurs and bankable projects to invest in, the active engagement of reforming governments, and co-investors and donors to help make things happen.

We look forward to working together with you on this most exciting of ventures.

Thank you.