Building Shining Africa through Sustainable Development of SMEs

The biggest Irony of world is the Continent of Africa which is extensively rich in mineral resources but remains the Poorest in terms of wealth with almost half of its population making less than 1.25$ per day.⁽¹⁾ One in three Africans live below poverty line which represents 70% of the World’s Poorest Population.

Africa houses 30% of earth’s mineral resources like Gold, Nickel, Copper, Aluminum etc, which is worth trillions of dollars. Also, with an estimated 57% of exports earnings through hydrocarbons, Africa is home to five of the world’s top 30 oil-producing countries. No wonder, Europeans, Americans and the Chinese interests remains high in “the El Dorado of the Sahel”, which extends from Mauritania to Algeria across north Mali.

Africa has seen significant growth in last few decades, it has grown despite the global recession and doesn’t show any sign of abating. At a predicted GDP growth rate of 4.5% this year, it is going way ahead than the mature economies of the world. The 2019 GDP growth rate of Ethiopia, Côte d’Ivoir, Rawanda, Ghana, is expected stronger and will average more than 7%.⁽²⁾With driving direct investment from countries like USA, China and India, Africa is edging towards long term Economic Growth.

As per World Data Lab, Africa is reaching milestone in the fight against poverty and estimated 1 million people can fall below the Poverty line however, the road is still long and full of hurdles which needs to be conquered.

African SMEs- Potential and Blocks

SME includes micro, small and medium-sized enterprises which houses up to 250 employees; According to the March 2017 World Bank report ,they add up to 95% of registered firms worldwide and contributes 30% of Gross Domestic Product (GDP) in many emerging markets.⁽³⁾ In Sub-Saharan Africa, SMEs translates to about 90% of firms and as per the World Economic Forum, they generated an average of 80% of jobs in the region in 2015. ⁽⁴⁾

Harness the Power of Youth with SMEs

While Latin America, Northern America, Europe have stagnated with their Youth population, Africa shows a substantial increase. According to the UN, 226 million youth aged 15-24 lived in Africa in 2015, Representing nearly 20% of Africa’s population, making up one fifth of the world’s youth population with predicted 42% increase in number of Youths by 2030. ⁽⁵⁾

This population has a growing need for jobs and better life, rise in population can be converted into Asset by fulfilling the need of Job with these SMEs. Their Education and employment are extremely essential to harness the opportunities for economic growth.

Fig 1: Youth aged 15-24 by region, 1950-2060; www.unpopulation.org

SMEs are the powerful means of including women and youth for Economy Building, this will also lead to active participation in global, regional, national and local governance processes, which can eventually shape up the African Economy, Moreover the proper utilization of Youth can stop the Unrest in Africa.

Investing in SME means more Jobs

As per The African development bank, in 2013 SMEs in the formal sector contributed to about 33% to gross GDP however as per the data of International Finance Corporation the figure is over 64% for high-income countries.⁽³⁾

SMEs in Africa are less productive as they are highly concentrated in the informal sector which are not regulated by Govt and don’t pay taxes. Now this leads to serious implications in terms of Investment as investors seek to protect themselves through Govt regulations and Judicial system. Investments help connect businesses to go Global and help them to learn Innovation, Skills, Get Knowledge, help them find suppliers/Buyers and hence more Job creation and Economic Growth.

Though the continent has shown high improvements in business environment in recent decade, but it is still ranked the worst by The World Bank to do Business. The economic development can only be realized with the right business environment^.

Remove Regulations Hurdles

Africa is full of survivalist entrepreneurs which goes waste due to the current business environment. For the medium-sized firms, the lacking involvement of banks remains the major issue as compared to the bigger and established firms.

Sub-Saharan Africa region is ranked as “the economies with the least business-friendly regulations on average”, as per the 2017 World Bank Doing Business Index. SMEs cannot thrive in such Environment, where due to high regulations coupled with corruption, and heavy taxation, they face hard struggles to officially start a business.

The Making Finance Work for Africa by the World Bank (2007 report) found that there is a correlation between access to private credit and GDP per capita. Africa needs higher involvement by the Banks to provide credits. A functioning financial system plays a pivotal role in economic growth, growth of the business sector, and hence alleviation of poverty.⁽⁶⁾

Relaxing entry regulations and Increase Investments for better access to financing will give the confidence to both existing and aspiring entrepreneurs to enter the market and sustain themselves while encouraging SMEs to move to the Formal Sector as those who stays in the Informal Sector and solely depends on micro financing, personal loans, and moneylenders.

Electricity and Infrastructures

Electricity is the basis of any power system, and its generation adequacy is determined by the availability of resources and cost. Sub-Saharan Africa has long been facing troubles in the energy sector which results in high prices as business depends on Electricity. This also makes price of electricity almost equal to those of OECD which directly effects Efficiency, Production and Economic Growth. Even the lack of adequate infrastructures makes Expansion of SMEs and Access to African Markets difficult.

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In 2012, Sub Saharan Africa (800 million population) generated 90 GW of power ; equivalent to the power generated in Spain (45 million population).As per the International Energy Agency (IEA) Africa Outlook report “Electricity consumption per capita is, on average, less than that needed to power a 50-watt light bulb continuously.”⁽⁷⁾

Even though the interest in Renewable energy is growing with initiatives like President Obama’s Power Africa project and Grand Inga Dam in the Democratic Republic of Congo and the Ashegod in Ethiopia, still the 93% of Hydropower Potential of Africa remains unexploited.

Encouraging Private companies or building a Public-Private Partnership where private companies build and operate projects can help in bridging the gaps by maximizing efficiency and creating good Infrastructure and minimizing the recourse of Taxpayer money and hence minimizing the electricity cost which will in turn create a conducive environment for SMEs to flourish.

Educating entrepreneurs

In Sub-Saharan Africa, entrepreneurs have little to no knowledge on the know-how of doing business, they remain in the Informal Sector and end up failing by building botched businesses due to lack of strategy and hence have no impact on economic growth.

Africa needs to build its identity by empowering its growing young population by the provision of jobs. SMEs are proving to be an essential driver of the economy. Achieving Agenda 2030 for Africa will require leaders and policy makers to pay high attention to SMEs and entrepreneurs so that they learn Innovation, Cost-Benefit Reduction, Competitive advantage, Interpersonal, Communication and Managerial Skills.

Conclusion

Helping African SMEs flourish is not only imperative for Africa but for the entire global economy. It has the potential to create disposable income for growing middle class & youth, in tandem with market opportunities for New Investors.

The recent political issues within the US, slowdown of China’s manufacturing output and EU-Russia sanctions, Africa’s increasing population and consumption has the power to fill the gap left by stagnant wages in Europe and the US.

If we look forward 20 years or so, the present growth factors can create unrivalled opportunities for investors in the long term. The extensively mineral and natural resources rich continent together with its fast-growing economies and young population will sustain high levels of FDI which will make rise of Africa inevitable.

However, Africa needs a solid foundation with long-lasting venture which highly depends on the empowerment of regional SMEs and young entrepreneurs. It’s crucial for the Governments, the private sector and hence the international investors to empower Africa’s young people and SMEs as they are the foundation to the stability of the world’s economy. The world at large can be benefited only if these millions of African future entrepreneurs gets nurtured well enough and if it happens, the next crop of global billionaires might emerge from Africa.

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