The role of Small and Medium Enterprises (SMEs) in making Egypt self-sufficient

According to Nicole Snow, Founder and CEO of Darn Good Yarn – “A small business is an amazing way to serve and leave an impact on the world you live in” (Economy). It is indeed mesmerizing to see how the upcoming small and medium scale businesses are bringing a transformation in this ever-evolving world. They provide employment and ensure self-sufficiency of the economy where they exist.

Introduction to SMEs (Small and Medium Enterprises)

Organisation for Economic Co-operation and Development (OECD) defines SMEs as non-subsidiary, independent firms that employ less than a given number of employees and this number varies across countries (OECD). Egypt, the second-largest economy in Africa with more than 390 billion USD nominal GDP, is expected to register 5% growth in 2023, as announced by International Monetary Fund (IMF) in April 2022 (IMF). In January 2022, IMF had expected Egypt’s GDP to go up by 5.6% in the financial year 2021-22 (Communications Department IMF). Nevertheless, in April, this figure was revised to 5.9% (IMF). Gita Gopinath, IMF’s Chief Economist, while commenting on the IMF’s January report, hailed Egypt for its good management of the COVID-19 pandemic and commented that Egypt was the only country among the oil-importing nations to record a positive growth rate.

These are positive news for Egypt and it does create a charming image of the country across the globe. The figure shows how the country has managed to pull itself through the pandemic. We also cannot deny the fact that every sector of the economy plays a pivotal role in building it. However, to make itself a “resilient” economy, Egypt has to realize the potential of SMEs. SMEs can create objectives for a country and even help fulfill them. They build the confidence of the people and facilitate them to think about “business” and “entrepreneurship”. It is a universally accepted fact that more enterprises generate more employment. More employment leads to a further increase in demand and more production of goods. This, in turn, generates even more employment. In addition, when people have the capital, they further build more industries which add more grace to this virtuous cycle of employment, demand, and production. Not to forget, when people generate incomes, their standard of living increases. They also are better able to fight hunger, poverty, malnutrition, and diseases.

In 2020, the total imports constituted 20 percent of the Egypt’s GDP, which is the lowest proportion since 1973 and is just over half of that of 2008. Yet despite the substantial decline in imports, a simultaneous drop in exports means that country’s trade balance has not improved. In 2020, it was $10 billion more in the red than in 2010 and $5 billion more than in 2016, when Egypt commenced IMF-required reform measures (Springborg).

The theory of interdependence in international relations by Keohane & Nye inclines us towards realizing the importance of each other for our country’s goods sufficiency and this fosters maintaining world peace. However, by taking a cue from the recent developments in international politics and the pandemic, it cannot be denied that it is imperative to have a resilient SMEs infrastructure in Egypt. Supply-side shocks due to pandemics, famines, wars, and modifications in the internal politics of the exporting countries often create deterrence for the survival of countries like Egypt, which import a major share of their goods and food items. In such situations when the government searches for new and secure import sources, small and medium scale enterprises can come out as great supporters and can help overcome the trade deficit.

Relevance of SMEs to Egypt’s economy

According to the United States Agency for International Development (USAID), agriculture is a major component of the Egyptian economy, contributing 11.3 percent of the country’s GDP. The agricultural sector accounts for 28 percent of all jobs, and over 55 percent of employment in Upper Egypt is agriculture-related (USAID).

Egypt produces only about one-third of the food it consumes and frequently imports more wheat than any other country in the world. In April 2022, Egypt finalized a deal to import 1 million tonnes of wheat from India by the end of this fiscal.Thus, by boosting agriculture and bringing up small and medium-scale food processing industries, the state of a dwindling economy can be averted. The restaurant industry, a part of SMEs, can also utilise its country’s own produce and encourage the domestic farmers to produce more as the farmers will now have a sector that can consume their products. Good food also improves health and nutrition levels in society. The primary (agriculture) and the secondary (industries or SMEs) sectors should work in tandem to ensure the supply of holistic nutrition to the working class, women, children, and the elderly.

According to the World Bank, the participation rate of Egypt’s labor force is below the global average of 59 percent, the Middle East and North Africa (MENA) average of 46 percent, and the low- and middle-income country average of 58 percent (Springborg). This lacuna can be overcome by the creation of more and more SMEs.

More so, SMEs also play a crucial role in lifting up the status of women in society. Generated incomes make them financially independent and give them better bargaining power in the family as well in society. The work opportunities for them also grow as they can now involve in skill-based jobs or can have their own small or medium scale industry, which will give employment to more women.

Challenges in SMEs operation in Egypt

The biggest challenge that we experienced in recent times for the development of businesses globally was the pandemic. The pandemic shook our supply chains. The whole world went into intermittent lockdowns and it was nearly impossible to get the supplies from the other countries. In situations like these, we feel the need to have our own industries running so that our population does not suffer. However, while most of the businesses in Egypt are small-sized, with 97% employing fewer than 10 workers, the medium-sized enterprises with 10 to 50 employees account for only 2.7% of the total businesses. This data shows that Egypt is lacking greatly in medium-sized businesses and there is a lot of work to do here (Hussein).

The SMEs, which are mostly informal business sectors, serve as a vital labor sponge but they offer little in terms of salaries, benefits like health insurance and pension, and job security (Springborg). The population is growing annually by 2 million in Egypt and the poverty rate nearly doubled between 2000 and 2018, from 16.7 to 32.5 percent (Springborg). To tackle the menace of poverty and hunger, it is essential to have a resilient economic structure that can face such a debilitating food state in the country.

The initial investment is another significant challenge for any SME in Egypt. The Egyptian economy is reliant mostly on foreign support, loans being the major part of it. Furthermore, there is still a dearth of basic goods. Due to this, the state’s financial revenues are eaten up in providing these essential items to the public. In addition, Egypt’s total national debt, now $370 billion, has quadrupled since 2010. Repayment of domestic and foreign debt consumes over one-third of Egypt’s budget, more than double the amount in 2009. This leaves less in the hands of the government to invest in SMEs and steals away their chance to grow (Springborg).

Egypt can become self-resilient with the help of SMEs only if it has gargantuan exports but its exports of all goods and services are chronically insufficient to generate a balance of trade surplus (Springborg).

Positives for Egypt

1. Geographical advantage

Egyptian GDP is the second largest in Africa and the largest in North Africa worth more than $390 billion. Egypt having the Suez Canal is the biggest geographical advantage than possibly any other country in the world. Suez Canal is a man-made waterway that connects Asia with Europe and is controlled by Egypt. Suez Canal carries 12% of global trade, representing 30% of all global container traffic over USD 1 trillion worth of goods per annum. In 2020, approximately 19,000 ships utilised the route. This shows that trade has a lot of scope for Egypt’s SMEs. Moreover, The Suez Canal is a significant route for the transfer of energy, commodities, consumer goods, and componentry from Asia and the Middle East to Europe (New Zealand Embassy in Cairo). Therefore, if the trade is so easily accessible by the people and SMEs of Egypt with the help of the Mediterranean Sea, the Suez Canal, and the Red Sea trade route, it opens up the arena for the SMEs to grow because now they have a market to serve, the world.

• Scope of producing arms within the country

Egypt is also one of the world’s top five arms purchasers. Thus, allowing SMEs to produce small and less sophisticated products for developing arms in the country will make Egypt less dependent on countries like Russia, France, and Germany. This will give a participatory leeway to SMEs in arms development.

• Competition to foreign industries

Another advantage that the homegrown SMEs have is that they create competition for the foreign industries set up in Egypt. This will reduce cartelization by foreign companies and make the price of the products affordable for the public in the local market.

Way forward

Education: Engineering and management colleges can play a pivotal role in building up the business mindset in the students. This grows better and refined human resources.

Government Policy: Government can take some vital steps such as; providing subsidies, low-interest or interest-free loans, and eliminating mediators between the government and the producers. Again, ensuring smooth registration for any new business and convenient operation of the ongoing enterprises, and encouraging women to participate in nation-building will help in boosting the SME sector. Lastly, ensuring proper procurement of goods produced by industries by giving sufficient remuneration, increasing capital expenditure and building resilient supply chains, supplying SMEs with raw material, easing tax reforms, building strong road, storage, and communication network to ease out the process of supplying goods by the government will be an added advantage to SMEs operations.

Conclusion

A resilient economy brings more investors and gives confidence to the lenders such as World Bank and IMF that the economy can repay the loan. More choices of products make the goods affordable and give better purchasing power to the public. This, in turn, motivates other SMEs to improve the quality of their products through creativity and innovation. Good quality products, when exported, give competition to the domestic products of the importing countries.

We cannot also deny the fact that a self-sufficient economy not only gears up the social and financial status of the population but also helps a country in realizing the Sustainable Development Goals (SDGs). To further enunciate, a self-sufficient economy reduces poverty (SDG 1), zeroes down hunger (SDG 2), improves gender equality (SDG 5), upgrades the quality of decent work and ensures economic growth (SDG 8). In addition, builds up industry, innovation, and infrastructure (SDG 9), reduces inequality (SDG 10), develops sustainable cities and communities (SDG 11), promotes responsible consumption and production (SDG 12), makes way for peace, justice and strong institutions (SDG 16), and binds people together to partner for these goals (SDG 12) (UNDP). Thus, it is wise to say that SMEs are a harbinger of progress for Egypt so the government ought to put the necessary measures in place to create a conducive environment for their operation.

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