Middle East & North Africa development of smes exports through virtual market places

A.INTRODUCTION AND CONTEXT

1. Regional Context

1. 
   The transition countries (Egypt, Jordan, Libya, Morocco, Tunisia, Yemen) in the Middle East and North Africa (MENA) region have been facing similar challenges in terms of economic inclusion and growth, competitiveness, and job creation. These challenges were made even more salient as the Arab Spring unfolded across the MENA region.
   

2. 
   Growth in the MENA region was affected by the Arab Spring, together with the economic contraction in the Euro-zone (the region’s largest trade partner) and high international food and fuel prices. After having contracted by 2.5 percent in 2011, regional average growth recorded a 3.8 percent recovery in 2012, led by 4.6 percent in oil exporting countries, while oil importers recorded a slower recovery of 2.6 percent. Growth started to slowly recover in 2012 in transition countries, except in Morocco, which was affected by weak agricultural production. As a consequence of slower growth, unemployment rate in most of the transition countries increased further since the beginning of the Arab Spring in December 2010. It is estimated to have reached in 2011, 19 percent in Tunisia and almost 13 percent in Jordan. Unemployment remains the most critical concern, as it constituted a major aspect of social discontent that triggered the Arab Spring.
   

3. 
   Inflation remained relatively subdued in the MENA region with an average of 4.5 percent CPI increase in 2011. In particular, social tensions forced the transition countries’ governments to maintain high levels of food and fuel subsidies that have relatively limited the pass-through of the international prices on domestic prices. Egypt, Jordan, Morocco and Tunisia, started to raise domestic fuel prices as the subsidies reached unsustainable levels. In addition, most of these countries have put in place large fiscal stimulus packages and social safety net programs to mitigate the effects of lower growth and in an attempt to relax social tensions. Hence, the average fiscal deficit in the region has widened from 1.8 percent of GDP in 2011 to 4.7 percent in 2012, led by higher fiscal deficits in oil importing transition countries. Consequently, public debt in some countries has reached unsustainable levels, with almost 80 percent of GDP in Egypt and about 66 percent in Jordan in 2012. Moreover, high international food and fuel prices and weakening European demand contributed to the deterioration of current account deficits, notably in Jordan, Morocco and Tunisia. On the other hand, oil exporters benefited from high international oil prices, providing them with relatively comfortable external positions, except for the conflict countries.
   

4. 
   Further, capital and FDI inflows continued to fall since 2011. As a result, many countries continued to draw down their international reserves, such that Tunisia and Egypt are close to the critical level of 3 months of imports. Egypt, Jordan, and to a lesser extent Morocco and Tunisia are expected to use the IMF and donors supports to avoid further decrease of reserves. Relatively sound macroeconomic policies before the Arab Spring in the transition countries provided some room to cope with these challenges over almost two years, but the continued tensions on both fiscal and external positions have eroded their margins to maneuver further.
   

5. 
   Political uncertainty and social tensions will continue to weigh on economic performance of the transition countries in 2013 and beyond. Growth in the region is projected to slow down to 3.4 percent in 2013, led by lower growth in oil exporting countries. High unemployment will continue to keep high fiscal pressures, which would make harder the trade-off between increasing social demand and fiscal reform (including subsidies) implementation. Delayed reforms, however, would have substantial risks, notably in Jordan and Egypt, by delaying the IMF and consequent donors’ financing supports. Moreover, in addition to the Euro-zone crisis impacts, the US budgetary debate and the largest impacts on the most trade dependent countries, including Egypt, Jordan, and Tunisia. Lower global demand could trigger a decline in oil prices and earnings for oil exporting countries. Similarly, possible continuous food price increases in 2013 could further weaken the MENA countries’ fiscal and external positions.
   

2. Sectoral and Institutional Context

A lagging integration to the global economy

6. 
   Non-oil exports growth has remained low in the MENA region. Exports from the overall MENA region have increased considerably over the past two decades. The region’s volume of total exports as a share of GDP grew from around 35 percent in 1990 to 39.2 percent in 2000 and to around 53 percent by 2009. At first glance, this represents higher exporting levels than in other regions. However, a closer look reveals the weight of resource-rich countries, which account for almost 85 percent of all MENA exports, and whose exports are mostly hydrocarbons. Manufactured exports are a smaller share of merchandise exports than in any other region. Indeed, growing exports in the MENA region have been driven mostly by hydrocarbons, whereas non-oil exports growth has remained low (Table 1).
   

Table 1. Export behavior in the MENA region

A lagging regional integration²

7. 
   In contrast with many regions (East Asia, Eastern Europe, Europe, Latin America), there are relatively few economic links between MENA countries. The share of intra-MENA merchandise exports to GDP varies between 1 percent and 22 percent (for the transition countries, the average is approximately 7 percent). Despite many economic, geographic and cultural features that favor cross-country links, past regional integration attempts failed.³ Reasons of this failure are i) insufficient political commitment, ii) administrative challenges on implementation and nontariff barriers, iii) narrow focus in terms of preferential trade coverage, iv) low complementarity, and v) poor trade logistics.
   

High firm-level constraints

8. 
   While policy reforms are needed to further expand regional and global integration, promoting new exports is also hampered by some firm-level constraints. In a recent study⁴, it appears that uncertainty is the major factor constraining the discovery of new export activities. These uncertainties are caused by the lack of information about demand in specific markets and the price that new products or services can command. For SMEs, these uncertainties are all the greater, as they have limited access to finance and limited skills, including export skills. As a result, very few can afford to market their products abroad. In addition, the incentive for first-time exporters to experiment an export activity may be reduced by the possibility that imitators would appropriate part of their returns produced by the new activity.
   

Large E-Commerce gap

9. 
   MENA firms are almost totally absent from the Virtual Market Places (VMPs). Even though the use of social networks is very common, this is not the case for business transactions. According to the analyst firm eMarketer, the aggregated share of the Middle East and North Africa just made up 1.9% of global B2B e-commerce in 2012⁵. The business and trading culture in the MENA region is still very much focused on personal contacts and less on the use of electronic tools despite their cost effectiveness.
   

Table 2. E-commerce Index

10. 
    At a country level, the situations are similar, with some differences related to the geographic location, language and business environment. In Tunisia, the number of merchant websites is about 600; however, there is no merchant website among the top 100 Tunisian websites. Currently, the development of e-commerce is slowed down by several factors:
    

• Lack of confidence in the use of e-commerce by consumers, especially when it comes to e-payment;

• Absence of a specific e-commerce trust label, like in Morocco;

• Reluctance of banks to finance e-commerce projects, and

• E-logistics are underdeveloped

11. 
    In Morocco, while the business environment for e-commerce has been improving over the last few years and electronic payment methods are being diversified, e-commerce still remains a marginal sales channel. Consumers distrust electronic payment and lack the confidence to buy online, despite attempts to build trust with the eThiqa Trustmark lead by the Confederation générale des entreprises du Maroc (CGEM), the employers’ union. For example, according to the Centre Monétique Interbancaire (CMI), transaction volumes, however, are increasing year by year, with a strong local drive. Moreover, the government has made the development of e-commerce a priority and views the Virtual Market Places for the Development of Export SMEs project as a useful contribution to that end.
    

12. 
    The situation of e-commerce in Jordan is paradoxical: on the one hand, there is still a widespread reluctance to buy online; the number of e-shops is low. Online payment is poorly trusted; as a result, “cash on delivery” is a successful payment method, as shown by e-retailers like Jumia. Still, many SMEs do not have a website; if they do, it is most of the times not seen as a serious marketing channel. On the other hand, there are national champions, including MarkaVIP, which has spread across the region. The country has been among the first to realize the potential of e-commerce, investing in 2008 into a “national e-commerce strategy”, one of the few of its kind. Austerity measures, unfortunately, have led to the termination of the related e-commerce action plan in 2012.
    

13. 
    Altogether, key stakeholders in all three countries interviewed clearly perceived the benefits of e-commerce related tools, particularly with a sector approach. Henceforth, the need for a coaching/capacity building exercise that focuses on one-on-one support complemented by broad institutional reforms.
    

3.