MSMEs – A Prerequisite for Inclusive Economic Development

By T. Keyzom Ngodup, co-founder and Executive Director at Ideas sYnergy, an Iraq based private sector development consulting company.

Recent demonstrations across the country in Sulimaniya, Kirkuk, Basra, Kut and other provinces are indicative of the growing disenchantment among the youth who are often jobless or underemployed despite Iraq’s tremendous oil and gas resources. According to the Iraqi Ministry of Planning and Development Corporation, unemployment is estimated at 35-40% as of 2009.

Drawing parallels from similar resource-based countries, oil & gas sector’s contribution to GDP is among the highest while contribution to employment as a percentage is as low as 1%. Historically, resource-based economies have made clear attempts to diversify their economies through focus on niche markets or exploitation of relative advantage, both in real economy and in financial markets. Supporting the development of micro, small and medium enterprises (MSMEs) has been inherent to economic diversification and employment generation.

MSMEs are recognized as the engine of economic growth and for their role in promoting equitable development. Globally, they constitute over 90% of total enterprises in most economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. In Iraq, the exact number of MSMEs and their characteristics are largely unknown, however it is estimated that there are over a million MSMEs, most of them operating informally, and contribute almost two thirds of private sector employment. Despite their rapid growth in recent years, MSMEs face two major obstacles: access to sustainable financing (Iraq ranks 168 out of 181 countries in ‘Ease of Getting Credit’) and access to business development services. Donor agencies such as USAID Economic Development Program Tijara, UNDP Private Sector Development Program among others are attempting to address these gaps, however progress has been limited due to lack of scale, albeit the aforementioned interventions have generated positive attention from local and federal governments. Government of Iraq’s Ministry of Labor and Social Affairs (MOLSA) launched a nation-wide micro-credit scheme in 2007 targeting unemployed youth, however without a sector development approach to improving the overall ecosystem within which the MSMEs operate, all interventions will generate short-lived results without sustainable impact.

Iraq’s ‘Ease of Doing Business’ ranking at 166th is indicative of the difficult bureaucratic registration procedures for MSMEs. In addition, current supply of credit through 12 NGO Microfinance Institutions (MFIs) and SME Lending Units at 14 private banks, supported by USAID-Tijara, outstrips demand. MSMEs require better access to financing and BDS––this includes the deepening and development of financial markets (e.g., improved banking services, venture capital and SME financing) along with systemic improvements in the provision of non-financial business services. Please click here to see a diagram of the challenges in a MSME’s lifecycle.

Despite absence of conducive regulatory environment, business infrastructure and scalable financing mechanisms, Iraqi MSMEs have demonstrated an ability to thrive and provide a basis for the expansion and diversification of the economy. Ideas sYnergy, a recently established multiple bottom line consulting company focused on inclusive private sector development in Iraq, aims to support the creation of MSME lobby clusters/groups in a range of sectors. Ideas sYnergy will work in partnership with ‘enablers’ to build collective capabilities of MSMEs and a wide array of knowledge products towards comprehensive understanding of the MSME landscape in the country.

In world-acclaimed economist Thomas Friedman’s words, ’20-year-olds’ are one of the three major sources of change in today’s world against forces that are upholding the status quo. The Government of Iraq has an opportunity to listen to Iraq’s youth and create opportunities towards building an inclusive economy, where no one is left behind.

T. Keyzom Ngodup is co-founder and Executive Director at Ideas sYnergy, an Iraq based development consulting company committed to economic and social development through market-based solutions that help build and scale innovative businesses for sustainable and inclusive private sector development.