The Arab World’s Smudged Small Business Patchwork

Amid the hype over Saudi Aramco’ s 1.5% sale as the $25 billion world’s largest IPO corralling institutional and retail investors toward the the target $ 2 trillion valuation, an IMF paper laments “patchy progress” among twenty Arab countries in small and midsize enterprise capital markets access. This category is a “cornerstone” accounting for 90% of regional business as a major job and output source, but governments continue to lag in finance, training and infrastructure support. Regulatory, tax and governance frameworks are tilted in favor of large state-owned firms to stifle commercial and funding competition, and higher employment and growth trends will depend on overdue corrections. The analysis does not touch on Aramco, where banks offered retail investors subsidized loans and the wealth fund reached out to Gulf counterparts as an allied group, as an example of headline stock exchange listing advantages with swift inclusion in the core MSCI Index. It also came in the wake of an estimated $45 billion in area sovereign debt issuance, now one-third of the JP Morgan benchmark, as budget deficits soar despite recovering hydrocarbon export prices amid “piecemeal” SME  efforts, the report argues. As formal employers, the sector’s share is already 50% in Iraq and Lebanon and the informal one is greater throughout the geography. Women’s entrepreneurship is only 15%, less than half the world average. Bahrain, Egypt and Morocco have dedicated overall strategies, and three-quarters of the area has established credit bureaus and guarantee schemes. The former cover both individuals and companies, and the latter are often donor-backed with mixed public-private shareholding and presume modernization of insolvency laws. Arab private investment at 15% of GDP is behind emerging economies elsewhere, with small customer bank lending just 7% of the total versus 10-15% ranges in Asia, Europe and Latin America. An increase could lift growth 1% annually and create 8 million jobs over the next five years, the IMF projects.

The region ranks poorly on the World Bank’s Doing Business scorecard, and labor productivity and technology such as broadband are inferior. Research spending and innovation has not kept pace with peer economies, even as the 2018 Arab World Competitiveness Report shows interest in ecosystem development. It finds that early-stage startups lag low-income Africa, despite three-quarters of survey responses endorsing entrepreneurship as a career choice. In governance rankings weighing regulatory quality, rule of law and corruption the majority of countries “deteriorated the past decade.” Procurement and tax procedures are arbitrary, with small firms refusing government contract bids and prone to fiscal evasion.  On finance demand can be better mobilized through literacy and securities market promotion than direct government backing, which should concentrate and general education and infrastructure. Malaysia’s SME master plan through end-decade is featured as a model, which integrates licensing, registration and export match-making in a customized platform. Guarantees are only a partial tool and should be transparent on budget expense. An EU study of hundreds of thousands of small firms concluded that non-financial advice on risk management and networking ultimately raised growth and productivity, and that the group was often too diverse to clearly quantify costs and benefits in a sewn-up case.