# **1 Introduction**

The economic environment in the Middle East and North Africa (MENA) regions is characterized by a long-lasting stagnation in job creation. Over the period 2016-2019, employment growth was about 1.4%, which is well below the performance of lower-middle and upper middle-income countries (respectively 4,8% and 3,3%). One crucial determinant of employment growth is finance. Recent evidence documents the importance of such relationships for MENA countries, especially in regard to the positive effect of access to credit on employment and investment (Ayyagari et al., 2021). Yet, an obstacle to the virtuous role of the financial system is represented by the _disconnectedness_ of private firms from the banking sector. This has been shown to be a distinguishing feature of MENA countries and a possible element contributing to the poor job creation of the private sector in the region (De Lima et al., 2016; Amin, 2021). Another important feature of MENA countries is informality. Data from the World Bank Enterprise Survey (hereinafter, WBES) shows that 29% of MENA firms report to be exposed to competition from informal firms, with this share reaching more than 40% of firms in Lebanon and Tunisia. A large informal sector is a possible threat to the proper functioning of the economy and to the operation of formal firms which are negatively affected by the competition from informal ones (Distinguin et al., 2016; Rozo and Winkler, 2021; Avenyo et al., 2021).

This paper explores the link between jobs, finance, and informality. We begin our analysis by looking at the link between jobs and finance. Using longitudinal firm-level data for MENA countries, we document that jobs creation is positively associated with access to finance. At the same time, we show that access to finance is lower for formal firms more exposure to informal competition. As a possible mechanism underlying this result, we provide evidence that formal firms that are more exposed to informal competition have worse _expectations_ on future sales growth, which in turn are associated with fewer loan applications.

Our analysis employs WBES data for a large sample of private companies from the MENA countries. This data have two important features. First, they have a panel dimension that we exploit to account for the evolution of firm’s economic performance and characteristics across time and deal with the simultaneity bias. Second, the WBES is the only survey of firms in developing countries which provides - in addition to a large set of comparable financial variables and firms’ characteristics - information on firms’ expectations on their future performance. This is an unique type of information that we use to provide evidence of the existence of a demand channel explaining our main result.

We begin our analysis documenting the link between jobs and access to finance. Our results indicate that employment, employment growth, productivity, and wage are positively associated with loan availability for firms in MENA countries, confirming previous studies showing the beneficial effect of access to finance on job creation (Betz and Ravasan, 2016; Ayyagari et al., 2021). Next, we show that formal firms that report 1