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Abu Dhabi, UAESaturday 20 October 2018

What is needed to ignite the region's entrepreneurial ecosystem?

Mena’s young and tech-savvy population is the key to unlocking the region’s potential

Ahlam Al Hosani (L) and Elyazia Al Mazrouie (R), co-founders of Mehna. Pawan Singh / The National
Ahlam Al Hosani (L) and Elyazia Al Mazrouie (R), co-founders of Mehna. Pawan Singh / The National

The region’s young, educated, tech-savvy population presents an unprecedented opportunity to drive development.

Entrepreneurial activities have been increasing steadily in the Arab world over recent years, boosting innovation and generating jobs and opportunities, according to the Arab World Competitiveness Report 2018, published jointly by the International Finance Corporation (IFC), the World Bank and the World Economic Forum.

A number of successful reforms implemented across the region, in particular the UAE, Bahrain and Oman, have led to significant progress in infrastructure development. In Gulf Cooperation Council (GCC) countries, a total of $2.7 trillion was spent on infrastructure projects in 2017. Egypt invested in a new extension of the Suez Canal and is expanding two major ports, while Morocco’s Tangier-Med Port is set to become one of the world’s largest once completed.

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However, many countries are still struggling to diversify their economies and develop a vibrant, competitive private sector to boost innovation and job creation. The region needs to generate an estimated 58 million jobs by 2040 just to maintain current unemployment rates, and even more to lower them, according to the report.

To unleash its full potential, structural reforms that drive growth by reducing the dependency on the public sector and boosting economic diversification, competitiveness, and job creation are vital, as well as a comprehensive support package to strengthen the region’s entrepreneurial ecosystem. Achieving such economic transformation, however, will require both governments and the private sector to address four key interlinked challenges.

First, implementing a range of reforms to address the macroeconomic challenges, including unemployment, high levels of public debt, and inflation. Countries like Jordan, Egypt, Lebanon and Tunisia, where the debt to GDP ratio is high, need to change their public finance model to provide more space for the private sector and public-private partnerships, especially in large infrastructure projects like airports and power.

The expansion of Queen Alia Airport in Jordan, which helped improve services, generate more revenue for the government and boost growth and job creation is an excellent example of this. Egypt’s energy sector offers another strong example, with the government creating the necessary business and legal environment, and IFC and other IFIs providing the finance needed to develop the largest solar photovoltaic project in the world with a total capacity of 590MWac/752MWp.

Second, creating a more entrepreneurial private sector is a must. Global experience shows entrepreneurship stimulates job creation, with most new jobs created by young firms. According to the report, many GCC countries have made concerted efforts to support this, with Saudi Arabia creating a $1 billion (Dh3.6bn) fund to invest in SMEs, and Bahrain ($100 million) and Oman ($200m) launching similar funds. Lebanon’s central bank has pledged to invest $600m in innovative firms, while Egypt’s central bank is pushing banks to raise their financing for smaller businesses to 20 per cent of their credit portfolio by 2019.

Despite this, entrepreneurship has not yet reached its full potential, with the report showing entrepreneurship ecosystems are still largely underdeveloped. The average score for the region’s countries in the 2018 Global Entrepreneurship Index (GEI) is just 37 out of 100, though the picture is not uniformly bleak; the UAE, for example, has high quality entrepreneurship ecosystems and even outperforms Japan and Singapore.

Third, business environment reforms are vital. Smaller businesses form the backbone of most Mena economies, but they struggle to access the financing they need to grow and create jobs; approximately two-thirds of the 23 million SMEs in Mena have no access to credit. World Bank data shows just 8 per cent of all bank lending in Mena goes to SMEs, with the total credit gap facing smaller businesses estimated at about $240bn.

The report also reveals a strong correlation between a rank on the GEI and Doing Business report. Leading Arab countries on the GEI, such as Bahrain, Oman and the UAE, also perform best in the region on the Doing Business rankings.

Fourth, supporting human capital development. Tackling the youth unemployment challenge requires a dual focus on private-sector-led economic growth to create labour and employment opportunities (including self-employment), and the availability of a well-educated and skilled workforce aligned with labour market needs - a key ingredient for successful economic transition and growth.

International financial institutions can be critical in supporting these processes and developing innovative solutions. This is a long-term process - no short cuts can be taken - but improving the region’s business environment, developing key infrastructure, and boosting skills and entrepreneurship development will help speed up the process of economic transformation, promoting strong, sustainable private-sector-led growth and job creation, boosting shared prosperity, and improving the lives of millions of citizens in Mena.

Sufyan Al-Issa is regional head of operations, Middle East and North Africa, at the International Finance Corporation