by Prof. Lyal White and Liezl Rees
The COVID-19 pandemic looks set to devastate African economies. A dramatic increase in public expenditure with a sharp drop in revenues on the back of global market turmoil, declining commodity prices and sharp declines in key sectors such as travel and tourism, will have a profound and lasting impact. While numbers are still uncertain, the global economy is expected to shrink by a massive 5.2 percent this year with sub-Saharan Africa’s economy declining by over 3 percent. This follows a period of modest economic performance in recent years, with gross domestic product (GDP) growth barely matching the continent’s 2.7 percent population growth rate.
Despite these alarming statistics, the crisis does present an opportunity for economic transformation in Africa. Shortened supply chains with value-added local content and support will reduce the continent’s dependence on external resources. Bolstered by the African Continental Free Trade Area (AfCFTA), a unique space has opened up for purpose-built Small, Medium and Micro Enterprises (SMMEs), equipped specifically for the African context, to emerge as the new pistons of economic recovery.
Never before has the need for economic modernisation and diversification, driven by scalable production and services, been more critical. Regional integration is key to unlocking this. The AfCFTA, launched in March 2018, will be the largest free trade area in the world, based on the number of participating countries, and an ambitious leap into an industrial future.
With a combined GDP of about US$3,4 trillion, and connecting 1.3 billion people across 55 countries, the AfCFTA could lift 30 million Africans out of extreme poverty, and drive the reforms needed to significantly improve the long-term growth potential of African countries through true connectivity and the movement of goods, services, people and information.
Trading under the agreement was expected to begin in July 2020, but this has been postponed to January 2021 as a result of COVID-19. This delay presents an opportunity for policy makers to tailor the rebuilding of economies in the post-pandemic phase to the objectives of the AfCFTA, thus leveraging the benefits more decisively.
While African governments moved quickly to co-ordinate their response to the crisis and integrate their supply chains across the continent, African enterprises supported their efforts by creating a range of critical products and services to fill local supply gaps, which had the added benefit of helping to build local capacity and value chains. The crisis has shown that industrial production in Africa can be rapidly intensified, and African industries can respond to demand if given the opportunity to do so.
Some examples include: U-Mask in South Africa, which redirected its production from protective masks for mining to medical respirator masks; e-commerce giant Jumia, which has partnered with local authorities to use its logistics network to distribute health products to communities; Nigeria’s National Agency for Science and Engineering Infrastructure (NASENI), which produced the first locally made ventilators in the country; Incas Diagnostics in Ghana in partnership with the Kwame Nkrumah University of Science and Technology, which developed a COVID-19 test that delivers results in under 20 minutes; and FabLab in Rwanda, which is producing face shields using local materials.
The potential reach and contribution of SMMEs in African economies is well known. They represent more than 90% of businesses on the continent and employ about 60% of the workforce. However, most African enterprises are informal, small and survivalist, operating with low productivity rates in labour-intensive industries.
A United Nations Conference on Trade and Development (UNCTAD) study found that 63% of early entrepreneurs and 57% of established businesses are engaged in consumer-oriented services, with only 15% and 20% respectively operating in transformative sectors. Furthermore, small national markets hinder their potential to scale, compete and thrive, jeopardising both their sustainability and ability to grow beyond their own borders. As a result, the participation of African enterprises in continental trade is low when compared to other regions such as Asia and Latin America.
Recent economic shocks and spiralling debt have forced African governments to recognise that local SMMEs need to be scaled up to play a leading role in economic growth and address high unemployment. To become more competitive, they need to be empowered by skills development and training, assisted with market entry for exports and regional trade facilitation, as well as access to new technologies and finance. To be sustainable, they need to be supported in their efforts to build capacity and resources.
The AfCFTA is a catalyst for these enterprises to not only realise greater economic efficiency, but also to meet the demands of an integrated market. Beyond the broader regional integration challenges of infrastructure development, connectivity, and tariffs, the AfCFTA has identified key issues to be addressed that may benefit SMMEs in particular.
These include agreement on rules and regulations to minimise invisible barriers to trade and investment, patent protection, and the standardisation of product requirements to enable companies to more easily access regional markets.
The crisis has highlighted the need to develop intra-African regional value chains and unlock the continent’s business potential.
As African policymakers begin the process of post-pandemic rebuilding, they need to understand the benefits offered by the AfCFTA to support their efforts and engage with business to leverage the opportunities. This is particularly true for SMMEs seeking cross-border advantage to scale their products and services.
Deeper integration requires building the competitiveness of local companies to enable them to engage more widely. Efforts to this end will improve Africa’s attractiveness as an investment destination, and ultimately, put the continent on the path to finally achieving its economic transformation agenda, led by home-grown African players. Prof. Lyal White is Senior Director at the Johannesburg Business School (JBS), University of Johannesburg. Liezl Rees heads the Centre for African Business (CAB) at JBS.