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Shedding their suits
Published in Al-Ahram Weekly on 31 - 03 - 2005

There is no panacea to upgrade the SMEs sector in Egypt as over-regulation turns entrepreneurs away from the formal sector. Sherine Nasr reports
"After my father's death, I got lost amid a maze of endless procedures to issue a new licence. I thought it was only appropriate to shift from the formal to the informal sector," said Mohamed Moneim, owner of a small workshop who was content to make the switch because for him it meant "no longer having to deal with governmental bureaucracy. No more tips or bribes to get things done," he added.
Studies on the Small and Medium-sized Enterprises (SMEs) sector in Egypt reveal that Moneim is far from the only businessman to hand over his licence, close his tax account and illicitly continue activity. But while some view those like Moneim as no more than tax evaders, others argue that the web of red tape force many entrepreneurs to resort to the informal sector to eke out a living.
For years now, the SMEs sector in Egypt has been the target of study, assistance and development by assorted parties, including the government and non-governmental organisations as well as international donors.
The sector has been well defined, as have the factors impeding its growth and the means to develop it. However, no long-term policies have yet been adopted to improve the sector or reduce the financial, economic and competitive hazards to which it has been subjected.
The fact that more formal enterprises are joining the informal sector to save time and money is a consequential one, particularly as studies reveal that the SME sector in Egypt represents at least 98 per cent of the total economic activity in the country and that only a small percentage of that estimate is registered as formal entities.
"This means that the government knows very little about the micro, small and medium enterprises which constitute the bulk of the private sector in Egypt. This is a very alarming fact," commented Ahmed Darwish, minister of state for administrative development, during a conference held this week to discuss a document proposed by the Ministry of Finance to develop the SMEs sector in Egypt.
Entitled Towards Enhancing Competitiveness for SMEs in Egypt, the document that has been prepared in collaboration with the Canadian International Development Agency (CIDA) and the International Development Research Centre (IDRC).
This document will constitute the broad parameters within which SME development policies and initiatives are to be implemented. "The document will help set a general policy framework and an action plan to enhance competitiveness for SMEs in Egypt," said Youssef Boutros-Ghali, the minister of finance, who added that the initiative is part of the government effort to establish a favourable economic, legal and financial environment that would ultimately help the SMEs sector in Egypt become more competitive.
"It is important to understand that the rules governing big enterprises are completely different from those influencing SMEs. It is within this respect that the government is trying to figure out the factors hindering the growth of SMEs in an attempt to provide efficient solutions," said Boutros-Ghali.
Enhancing the SMEs sector in Egypt has become a must amidst fierce international competition and challenges imposed by globalisation. Excluding the publicly-owned enterprises, the SMEs sector provides about 80 per cent of the value- added to the Egyptian economy. The jobs created by this vital sector make up to two-thirds of Egypt's entire work force.
According to the proposed document, Egypt is one of the developing countries characterised by "missing middle syndrome" -- in other words, there are relative few enterprises employing from 10 to 499 employees. "Seventy-five per cent of employment is generated by enterprises with either less than 10 workers or more than 500," the document says.
"The lack of a dynamic medium sector results in an unduly high import content of products, lack of local competition and above all, high susceptibility to economic downturns that threatens to negatively affect national employment levels and production capabilities."
Economy experts underlined that the constraints hindering SMEs competitiveness in Egypt are numerous and can be seen in different levels.
According to Amr Abouesh, adviser to the chairman of the board of directors of Banque de Caire, the lack of access to financial services is one of the most important constraints facing SMEs.
"With regards to short-term credit, the finance gap in Egypt is estimated at 90 per cent," said Abouesh, who clarified that the SMEs market is in need of around LE13 billion to bridge this financial gap.
In the area of compliance where the legal and regulatory framework is concerned, there are problematic hindrances. Legal establishment costs, for example, are prohibitively high. "But the extra payment is not all. The time wasted to issue different documents in government departments is ridiculous," commented Darwish, who added that reports indicated that average entrepreneur would spend some 222 days navigating the bureaucracy before obtaining his licence and establishing the permit.
"The problems begin when activity starts. Almost all entrepreneurs agreed that they suffer from over-evaluated taxes," commented Khaled Abu Ismail, the head of the Federation of Chambres of Commerce.
Enterprises working in the field of trade and food processing often complain of the unjust and arbitrary practices by inspectors from various government departments.
Social insurance regulations and inspectors are another big source of complaints, particularly among manufacturers.
"It would be difficult to assume that a small enterprise would hire a lawyer, a tax expert, and an accountant to handle all these issues," said Darwish who added that the government should facilitate the process to allow higher production rather than wasting time and effort in meaningless regulatory matters.
One suggestion is to establish more one-stop shops where the concerned government departments are present to quickly issue a licence.
"A one-stop shop has recently been open in Cairo, another in Mansoura. Other shops will be soon inaugurated in 10 other governorates to facilitate procedures," said Yehia El-Agami, of the Social Fund for Development.
The executive director of the Egyptian Centre for Economic Studies, Ahmed Galal, believes however that constraints have long been defined and the solutions proposed. "In short, we need to improve the investment environment in Egypt at large in order for SMEs to become stronger and more competitive."

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