Egypt must turn to SMEs for job creation

Studies show that the birth rate in Egypt is far more prolific than the death rate. This translates to vacancies needed for a growing workforce to fill, Patrick Werr writes.

Hisham Ramadan is an employee at Hot Dog Stand, a small business that is part of the Greek Campus, a small business incubator designed to help entrepreneurs in Cairo. David Degner / Getty Reportage

Egypt will need to act decisively if it wants to find work for the vast and growing armies of youth that will be coming on to the job market in coming years.

The old formula of an expanding civil service and corporate sector has never been enough, and it is time the emphasis switched to start-ups and other small companies that in other countries have been the main motor of growth.

Fortunately, the government has been catching on to the idea, but probably not quickly enough. Serious changes are needed in Egypt’s laws and in the ways its financial institutions channel funds into small companies.

About 600,000 young workers have been entering the labour force annually in recent years, according to a 2014 International Labour Organisation study. This is because the country’s birth rate has been far exceeding its death rate. In 1994, for example, Egyptians gave birth to 1.61 million children, but by the time these newborns reached age 18, in 2012, the country’s death rate was a much smaller 529,000.

The gap between jobseekers and retirees is almost certain to widen. In 2012, the birth rate was 2.63 million. By the time these children grow up, we can probably expect net new jobseekers of more than 1 million a year. The government of Ahmed Nazif had a rule of thumb that GDP had to grow by at least 6 per cent a year to absorb all the new entrants to the labour force. Growth, which had been steaming along at 7 per cent, slowed to as low as 4.3 per cent after the 2008 global economic crisis, which did not help his government’s popularity.

Unemployment is now running at about 13 per cent, and GDP growth has been under 4 per cent.

“SMEs are the only way for the government to deal with the coming demographic bulge in the size of the workforce,” says Ahmed Al Alfi, an Egyptian investor who has dedicated himself to helping small and medium-sized enterprises get off the ground.

He quotes a United Nations Development Programme study that says SMEs, including micro-enterprises, account for 90 per cent of private enterprises in Egypt, 80 per cent of total value-added in the private sector and 75 per cent of the non-agricultural workforce.

In addition, Egypt has a special advantage in that it has more than half of the Arab world’s trained engineers and computer scientists.

But for such companies to increase their contribution to GDP, vast amounts of red tape will have to be cut.

Opening a small business, for example, can take 27 separate steps to process paperwork with the government. After that, there are complicated rules for operating and raising funds. And should the business fail, it can take up to seven years of legal work simply to liquidate it.

Ashraf Ghazaly, the chief executive of Ayadi, a newly formed state-owned investment company, says that company formation has greatly improved at the national government level, but work is still needed to streamline procedures in the municipalities, such as installing gas pipelines and other infrastructure, which can be time-consuming.

The government realises this is a major bottleneck and is working to fix it, he says.

Ayadi, officially formalised in February, has capital of $1.5 billion that it plans to use to help incubate private sector projects over the next five years, taking a 20 to 40 per cent equity in labour-intensive companies in agriculture, industry, tourism and logistics.

It plans to have its first joint venture set up in May.

Another issue hindering start-up companies is a lack of the concept of “vesting” in Egyptian law, says Abdelhameed Sharara, the chief executive of RiseUp Egypt, which specialises in organising conferences for entrepreneurs.

Vesting is where various cofounders of a company, each bringing their own talent, take shares for their work in lieu of salary until the project gets off the ground, say after three years.

Without such a legal framework, there is no way to guarantee that a founding shareholder will actually perform as originally agreed upon, says Mr Sharara.

He also complains that most technology start-ups use electronic payment methods, a concept that the tax authorities have yet to come to terms with, and that raising funds to start up a company can be tortuous.

Mr Al Alfi, who has taken a long-term lease on part of the downtown campus of the American University in Cairo that now houses more than 100 small businesses, says the government has designated multiple funds to finance SMEs, including many of commercial banks, state-owned and private.

But people who have tried to borrow from these funds often hit roadblocks immediately.

The better way would be for the government not to interfere and instead concentrate on “enabling the enablers in the society and the economy”, says Mr Al Alfi.

These could be non-governmental organisations or other professionals specialised in lending to small companies.

Patrick Werr has worked as a financial writer in Egypt for 25 yearsFollow The National's Business section on Twitter