HomeFeatures/AnalysisHow SOEs could generate inclusive growth in MENA region

How SOEs could generate inclusive growth in MENA region

How to generate strong, sustainable, job-rich, inclusive growth is a growing challenge for SOEs across the Middle East, North Africa and Central Asia (ME&CA) region.

The sizable state-owned enterprise (SOE) footprint across the region, together with its cost to the government, calls for revisiting the sector to help open the fiscal space, look for growth opportunities and foster economic and social development.

The IMF recently released a report into State-Owned Enterprise in Middle East, North Africa, and Central Asia: Size, Costs, and Challenges.

State-owned enterprises (SOEs) are a prominent economic feature of the ME&CA region, involved in all economic sectors. There are 164 multinational SOEs from Middle East, North Africa, and Pakistan (MENAP) and 16 multinational SOEs from the Caucasus and Central Asia (CCA)—primarily operating in the natural resource and financial sectors—bringing the ME&CA regional total to 180.

This makes the ME&CA region rank third in terms of the largest multinational SOE presence globally.

However, the bulk of SOEs based in the region are not multinationals as they span all sectors of the economy, including network industries (for example, post offices, electricity companies, and transportation) as well as activities usually thought of as being better handled by the private sector, such as cement production in Tajikistan, steel mills in Pakistan, tobacco manufacturing in Tunisia, and carpets in Iraq.

Findings of the SOE report

The large and diverse footprint of SOEs in the regions raises questions about their role and contribution to the economy and the diverse landscape also raises questions about the rationales for SOEs’ roles and whether their objects are being achieved.

The report points out that SOE footprints in the ME&CA region tend to be larger than that estimated for the Organisation for Economic Co-operation and Development (OECD) countries, with significant heterogeneity across countries.

It ranges from one SOE in West Bank Gaza to several thousand in Azerbaijan. Nonetheless, their share of employment is less than 4% (except in Yemen) and concentrated in the largest SOEs.

SOEs in the region generate sizable fiscal costs, averaging more than 2% of GDP a year to offset operational losses. Moreover, quasi-fiscal activities undertaken by SOEs are not always fully compensated or disclosed. Governments are also exposed to explicit and implicit fiscal risks from SOEs, which can materialise at high costs to public finances.

SOEs tend to have weak operating performance, relying on government support. Nonetheless, SOEs in most countries also hold sizable assets, with most concentrated in the largest SOEs.

Special rules for SOEs

There are large gaps in de jure SOE corporate governance compared to the OECD guidelines, particularly in the areas of ownership policy as well as fiscal and policy interactions with government.

Many SOEs do not operate in a competitive environment, often enjoying a range of protections and benefits that put them in a stronger competitive position vis-à-vis the private sector. Some SOEs are exempt from the competition law, benefit from favourable tax treatments, or receive special status/privileges in sector-specific regulations. These, and the practice of providing extensive support measures, guarantees and subsidies, create market distortions, hampering the development of a job-rich private sector.

COVID-19 has had a strong impact on both private firms and SOEs in ME&CA. While in many cases governments have provided extraordinary financial support to SOEs during the COVID-19 shock, these funds have often been unconditional and in some cases for an indefinite period. Many countries have not identified an exit strategy to withdraw financial support to SOEs.

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Reforming the SOE sector to rise to the challenge

The IMF report notes the most pressing challenge facing policymakers is how to generate strong, sustainable, diversified and inclusive growth and job creation in a post-COVID-19 environment.

“This will likely require reforming the SOE sector—to increase competitiveness and to determine which activities are appropriate for state involvement—to create an environment that promotes private sector activity as well as the necessary fiscal space to support the recovery, all while ensuring that social and economic development objectives are met,” reads the report.

The IMF report notes a set of recommendations that should be tailored to account for countr-specific institutional development and technical capacities.

These include:

  • Know what you own. Countries should establish a country-relevant SOE definition and publish—and compile if not already done so—a complete list of all SOEs.
  • Fiscal management frameworks need to be strengthened to facilitate effective monitoring and reduce government exposure to SOEs.
  • Governance shortcomings, especially related to ownership policy as well as fiscal and policy links, should be addressed. Countries need to ask whether the objectives of state ownership are being achieved and if not, progress should be tracked toward meeting the objectives, including through better operational and financial oversight.
  • Ownership policies stating the rationale and priorities for government ownership should be created to help align objectives and implementation.
  • Ensuring fair competition requires efforts to level the playing field between SOEs and private enterprises—including public procurement, taxation, competition policies, access to credit, and bankruptcy protection. Commercial and noncommercial SOE activities should be clearly separated.
  • Policymakers need to develop clear and conditional policies for when to provide regular, as well as exceptional, support to SOEs. Explicit exit strategies for the withdrawal of exceptional support also need to be developed.

In conclusion, the report states governments need to objectively re-examine the need to participate in economic activities that could be better served by private enterprises.

The full State-Owned Enterprise in Middle East, North Africa, and Central Asia: Size, Costs, and Challenge report is available online.

Theresa Smith
Theresa Smith is a Content Specialist for ESI Africa.