Digital Solutions for Small Businesses in the Middle East and North Africa

IMF Blog, September 22, 2020

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Digital Solutions for Small Businesses in the Middle East and North Africa

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• Authors: Inutu Lukonga
• Published: September 22, 2020

Overview and key facts

• Small and medium-sized enterprises (SMEs) account for more than 90 percent of the region’s businesses.
• In some countries, SMEs contribute as much as 50 percent of employment and 70 percent of GDP.
• SMEs face limited access to credit, unfavorable business environments, and talent gaps that constrain growth and employment contributions.
• SMEs in the region have been slow to embrace digital technologies and e-commerce; businesses trail governments and consumers in internet usage.
• Consumers are rapidly shifting to online shopping and increasingly prefer rapid and convenient services, creating competitive pressure for SMEs to adopt digital solutions.

Potential benefits of digital technologies for SMEs

• Emerging technologies and broadband internet can facilitate:
  • operational efficiencies,
  • innovation,
  • access to markets and finance,
  • ability for firms to operate remotely during lockdowns.
• Remote working can help integrate women and youth in the labor market.

Supply-side constraints and recommended reforms

• Infrastructure and market structure:
  • While all countries have easy access to international fiber optic networks, many maintain barriers to entry such as government monopolies or restrictions on foreign participation and network peering.
  • High capital investment requirements have slowed deployment of advanced network technologies and internet exchange points.
  • Apart from the Gulf Cooperation Council states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (GCC), many countries have limited access to high speed broadband internet; internet services are often slow, unreliable, and unaffordable.
• Digital skills and labor market:
  • Digital skills are in short supply across the Middle East and North Africa region.
  • Some countries with high levels of digital expertise, such as Lebanon and Egypt, sometimes suffer brain drain to higher income countries, including the GCC.
  • Recommended actions: mandate science, technology, engineering and mathematics subjects; provide technical and vocational education and training through public-private partnerships; ease labor restrictions to facilitate expatriates in highly technical areas.
• Logistics and utilities:
  • Deficiencies in E-commerce logistics—unified address systems, area codes, postal service, land and customs clearance—delay delivery and increase costs for online trading.
  • Reliability of electricity is essential to internet functioning and requires improvement.
• Digital financial infrastructure:
  • Infrastructure and instruments for accepting electronic payments—such as point-of-sale terminals, credit and debit cards—have limited penetration.
  • Payment systems are mostly not interoperable.
  • Regulatory and other reforms are essential to facilitate development of digital financial infrastructures.
• Public sector digitalization:
  • Digitalization of government services and procurement can incentivize SMEs to digitalize, given the significant size of the public sector and prevalence of payments to and from governments.

Demand-side constraints and recommended reforms

• Digital usage gap:
  • The digital usage gap—the disparity between people who live in areas covered by broadband but who are not using internet—is several times the coverage gap, indicating demand constraints beyond availability.
• Measures to increase demand:
  • Develop digital literacy and awareness programs.
  • Foster consumer trust by strengthening frameworks for cybersecurity, digital identification, data privacy, and consumer protection.
• Specific demand-side issues:
  • Consumers reportedly do not trust websites to handle their information and are unaware of their consumer rights.
  • Large segments of populations in some countries are not connected to the internet and are unbanked.
  • In parts of the region, including North Africa and Iran, ownership of smartphones and other internet-enabled devices is below the global average.

Enabling reforms to realize digital benefits

• The digital strategy must be underpinned by financial sector and business environment reforms, including:
  • strengthening financial infrastructures—credit registries and bureaus, modernized bankruptcy laws, collateral registries;
  • business support measures to help SMEs access credit.

Source: Digital Solutions for Small Businesses in the Middle East and North Africa (Inutu Lukonga, September 22, 2020).