Less Red Tape, More Credit: How the Private Sector Can Flourish in the Middle East

IMF Blog, January 6, 2014

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Canonical URL: Less Red Tape, More Credit: How the Private Sector Can Flourish in the Middle East

Author: Min Zhu
Date: January 6, 2014
Conference: Joint IMF, Council of Saudi Chambers, and International Finance Corporation conference in Riyadh, Saudi Arabia, December 2013.
Registrations at the conference "skyrocketed to more than 800".
Objective: Shed light on how to facilitate strong job creation and growth by the private sector in the Middle East and North Africa.

Private sector investment in the region averages about 15 percent of GDP over the past three decades.
Regional comparisons:
- South Asia: nearly 20 percent
- East Asia: 30 percent
Business startup and regulatory delays (World Bank examples):
- 74 days to start a business in Iraq
- 75 days to register a property in Morocco
- 159 days to get electricity in Algeria
- 218 days to get a construction permit in Egypt
- Korea for the same procedures: 7, 11, 28, and 29 days, respectively
Access to finance and banking:
- Only 10 percent of firms in the region finance their investment through banks (World Bank Enterprise Surveys)
- 36 percent of firms identify access to finance as a major constraint
- Bank credit to the private sector is "quite low" and concentrated with a privileged group of borrowers, mainly large companies
Macroeconomic volatility:
- A decade’s worth of data show economic volatility has been high in many parts of the Middle East and North Africa
- Low inflation and limited year-to-year variability in economic growth are cited as necessary conditions for private sector growth
Consequences of a weak business environment:
- Large informal economy characterized by low-pay, low-productivity jobs
- Firms in the informal sector have limited access to finance and limited growth prospects
- Economic growth benefits become less inclusive

Core reforms governments need to pursue:
- Simple, transparent, and evenhanded treatment of companies
- Public institutions that are more transparent and accountable
- Equal access for all to government services
- Adequate skill-building and incentives for employment
- Better access to finance to help spur entrepreneurship and private investment
- Better infrastructure
Additional priorities:
- Clarity and security about rules and their enforcement
- Inclusion of business people as partners in reform rather than obstacles
- Overcoming vested interests that block broad-based opportunity
Macroeconomic policy recommendations:
- Improve macroeconomic policies to create an enabling environment (low inflation and less volatile economic growth)
- Sound monetary policy and prudent fiscal policy to ensure a stable environment that encourages investment and job creation

The Middle East needs a more dynamic private sector to meet popular aspirations.
Reform challenges:
- Reforms are often complex, politically difficult, and take time to pay off.
- Beginning the reform process is described as vital for restoring confidence, propelling private sector activity, and creating much-needed jobs.

Source: Less Red Tape, More Credit: How the Private Sector Can Flourish in the Middle East — Min Zhu, January 6, 2014 (IMF web page).