Transcript SME’s and Africa - University of Makeni

SME’s and Africa – the
‘missing middle’
Their growth and place in genuine economic development
The missing middle
 Most African economies consist of INFORMAL microenterprises ( many are very
skilful) and large enterprises ( often in the extractive sector)
 Most companies are small because the private sector is both new and faces
some difficulties with legal and financial obstacles – though as we will note
these are being reduced.
 Between the microenterprises and large business is the ‘missing middle’ – even
in the most advanced African economy, namely South Africa micro and small
business create the majority of jobs and somewhere approximate to 24% of
GDP
 SME’s have struggled against local markets, a local of regional integration, poor
infrastructure, dubious legal systems, a lack of local finance and unattractive
tax systems – again considerable improvements in all of these has taken place
in a number of the leading economies.
 Many small enterprises contain a high skills base – growth tends to be limited
by technical progress and low values of fixed assets, which helps if bankruptcy
looms.
The potential of SME’s
 SMEs account for 70% of Ghana’s gross domestic product (GDP) and 92% of its
businesses.
 They also make up 91% of formalised businesses in South Africa
 70% of the manufacturing sector in Nigeria – processing equals value added –
tax receipts and more opportunity for government to spend on the quality of life
of its citizens
 They are the growing engine of innovation, the application of technology,
diversification and the development of previously under performing sectors of
economies
 They can the nucleus for moving into other markets, cross border trade and the
expansion of the under utilised intra-regional trade
 They can also assist in the preparation fro moving beyond regional and looking
for‘ international connections’.
The continued growth of SME’s and their role in
‘balanced’ development – the current environment
 Government – variations in support
 Lack of credit facilities
 A belief that their business will not grow as fast as ‘western’ equivalents
 If obstacles eased or removed the prospect for growth and development
would increase considerably
WHY?
 The Global Enterprise Monitor(GEM) notes that in South Africa, Uganda
,Angola, Ghana and Zambia have both growing numbers of SME’s and
these are considered to be main drives of growth in their respective parts of
the continent.
Africa’s population is increasing
 571m sub-Saharan Africans (62%) are under 25 years of age, 386m (42%)
are under 14 years of age. Only 3% of the population is over 65.
 The median age is 18.6, the lowest in the world (developing world: 26.5;
developed world: 39.6).
 With fertility rates as well as child mortality rates declining since 2000,
working-age adults have become the fastest-growing population segment.
 The ratio of working-age people to dependants is consequently on the rise.
Out of a 440m increase in sub-Saharan Africa’s population over the next
decade, half will be below 25 (and one third below 14).
The potential is there
Some other factors that business needs
to address
 Inequality – back on political agenda – Republicans (US), Davos and most commentators
are focusing on increase in income levels when considering rich v poor world but greater
disparities within countries.
 The need to be culturally aware*, so reducing business risk. It is surprising how little many
business know about the country(s) they wish to operate in and trade with
 The ways of achieving Corporate Social Goals and increasing your own efficiencies –
building sustainable supply-chains and linking your growth with local increases in prosperity
– insetting etc.
 But because Africa’s population has grown so much in recent years — and because
inequality remains so pronounced — the total number of people living in such extreme
poverty has still increased, to an estimated 413 million in 2010 from 376 million in 1999.
 * I can assist
The challenges facing SME’s in Africa
 A recent World Bank report noted Chad as the most difficult African
country in which to start an SME. This was partly blamed on a 65% tax rate.
 Chad also has high insolvency fees, so making the fear of failure one of
financial ruin for those who started the enterprise.
 In Ethiopia building permits were noted as a major cause of small growth in
SME’s. Land and property rights do need to be looked at in detail
 Other problems, such as corruption, unreliable electricity and poor
infrastructure were blamed for the sluggish nature of SME growth in the
largest economy on the continent, namely Nigeria. This allowed this fast
growing economy to be ranked only 133rd in the ‘ease of doing business’
index. With its young, large and growing middle class Nigeria is an SME
market waiting to be developed.
More challenges facing SME’s
 Those these are known to most prospective business projects it must be noted
that in recent years Mauritius, South Africa, Botswana, Ghana, Rwanda and
Tanzania have made significant improvements in easing the cost of starting and
doing business in their countries.
 Recent World Bank data suggests that 78% of all African countries have made
meaningful improvements to their ‘ease of business’ climates.’
 Botswana is the top nation resolving insolvency and recovery rates.
 South Africa is second in this list and notes its short processing times, high access
to credit lines and the least bureaucracy in obtaining building permits.
 Others – Ghana, Rwanda and Tanzania have all made significant strides
towards easing regulation and creating business enabling environments for
enterprise to grow.
External Debts
 The exchange rate risk of sovereign bonds issued by governments in sub-Saharan Africa in
2013 and 2014 is threatening losses of $10.8 billion - a value equivalent 1.1% of the region’s
Gross Domestic Product (GDP

This is because sovereign bonds are issued and repaid in US dollars but local currencies
depreciated significantly in 2014
 Repayments are dependent on continued strong economic growth in sub-Saharan Africa
but growth is now at risk of stalling as export markets slow and commodity prices especially oil – fall
 governments be held more accountable for the responsible use of funds by national
institutions, development agencies and investors so that funds are used wisely to continue
sub-Saharan Africa’s economic boom.
 Sovereign bonds are a popular way of financing development in emerging economies as
investors lend with little conditionality compared to multilateral banks such as the
International Monetary Fund (IMF) or the World Bank.
Ngozi Okonjo-Iweala,Finance Minister,
Nigeria
 Emerging markets have provided more than half the global growth at
some point during the time of the financial crisis
 With the young population that will be one of the largest in the world,
Africa stands a very good chance of turning this into a demographic
dividend
 We would need to make sure that we provide the means for productivity to
rise within the continent, basically focusing on infrastructure
 You can’t afford to have a young population not gainfully employed. We
all have seen what happened with the Arab Spring. And that absolutely
has to be avoided so that we don’t have causes of instability within the
continent. But I think that working on sectors like agriculture, for instance,
which generates a lot of labour all along the value chain—changing the
concept of agriculture to one of a business.
More from Nigeria
 running through the whole value chain as well as creating the right
infrastructure: looking for how to improve education, focusing on technology
and skills—to be able to really equip our young people to work in the modern
world. Communications technologies will be critical, the access to the Internet.
All of these things I think are areas that the continent will need to work on to
avoid these risks.
 the creation of a rising middle class and the opportunities offered for a growth
driven by internal consumption, a growth driven by the nonoil sector but really
by services, by manufacturing, by agriculture
 the type of growth, the quality of growth we’ve had in the past, needs to be
radically improved because it has resulted in rising inequality. And that is not a
sustainable situation for the future.
 certainly true that the type of growth, the quality of growth we’ve had in the
past, needs to be radically improved because it has resulted in rising inequality.
And that is not a sustainable situation for the future.
A snapshot of Africa
 An increasing number of African economies are growing at pleasing rates
 SME’s are playing pivotal role in driving these growth rates – they assist in
restructuring, industrial development and in satisfying local demand for
services – this encourages domestic specialisation, many of which support
larger corporations.
 Too many SME’s remain in the informal sector – this restricts their ability to
raise finance, enter new markets or work with the public sector.
 There is a growing body of evidence that the better the business
environment the more SME’s arise and greater is their influence of
economic growth
The current role of SME’s in Africa
 First, with so many countries and in theory SME’s accounting for 95% of SubSaharan registered business, we need to know exactly to what we referring.
 It is not the microbusiness market, which is often measured as 1-9
employees. SME’s begin at 10 employees and can rise as far as 250
employees. At the top end of this range they are the dominant factor in all
economies ( including UK), and it a rough average figure the continent
records micro ( 1-9) as being about 90% of all enterprise, small records 8%,
medium 1.5% and large 0.5% - though this is an average it is reasonably
accurate for the majority of Sub-Saharan economies.
 Despite growth, most African countries are not well integrated with
international financial markets. Those countries who have recorded lower
than average growth rates have ben under the burden of specific factors,
including wars and international isolation.
What are the drivers? ( these do NOT apply
to all countries and are ‘at best’ a trend.)
 Reductions in external debt repayments, caused in part by (a) wiping-off
some debts (b) lower interest rates in some developed economies and
major lenders
 Natural resources – first warning on NATURAL CAPITAL – lack of processing
power
 Agriculture – remain low in productivity but large in employment – think
traditional mixed with modern – surprising yields. In some countries e.g.
Zambia, how can it made 12 months of the year
 Raw materials and agriculture account for around 70% of Sub-Saharan
exports – different from that of Latin America and Asia
 Imports, especially of foodstuffs and electrical equipment are increasing in
BOTH quantity and value ( SME opportunity area)
More drivers…
 An incomes rise so Foreign Direct Investment flows are rising – see earlier
presentation
 Returns on FDI have risen to as high as 25% , whilst Eastern Europe struggles
to reach 10% - though this number does contain some volatility.
 At present Africa receives approximately 2% of FDI – African Stock
Exchanges are recording attractive rates of return, some as high as 35%
and with risk premiums falling Africa is seen as a less risky investment than it
was in first decade of this century. The majority of elections are now
considered to be ‘reasonably free and fair’ – lower risk and higher growth
rates are attracting increasing amount of both paper speculation and
direct FDI.
 Against this we have to offset actions by groups such as Boko Harem,
military coups, ethnic tensions and natural disaster (Ebola)
More drivers….
 As a more settled pattern emerges across Africa so risk premiums are falling – by about
1.5% in recent years.
 Lines of credit are also increasing – this is assisting private investment to expand and most
economists agree that this is normally more of a stimulus to economic growth – this is
another term we need to consider, as many prefer to focus on economic development,
which contains many more measurements that just GDP/GNP/GNI.
 Channelling FDI into the private sector investment is now agreed to normally be more
growth oriented than into the public section – though infrastructure investment is normally
focused on the public and is known as being complementary to growth prospects.
 Private consumption and private investment are now the largest drivers of economic
growth in the majority of African countries.
 The informal sector in most Sub-Saharan economies represent between 40-60% of GDP.
The sector mostly consists of small merchandise traders, the selling and producing of basic
services, simple manufactured goods and processed food and drink. As such this sector is
ready for inward investment.
More drivers…
 Though SME’s are a growing market in Africa the precise number is influenced
by the institutional factors already mentioned – they are not necessarily related
to level of economic development and can be widely spread over a range of
business areas.
 Research from IMF and World Bank suggests that the wealthier the country is the
more important is the role of SME’s. This research also shows a negative
correlation between the proportion of employment and GDP generated by the
informal sector and GDP per capita. This would point to African countries who
have a large informal sector being capable of promoting more entrants in the
SME market but with the proviso that GDP per capita may not grow as fast as
expected.
 The ‘perfect storm’ scenario for SME’s in Africa would appear to be that when a
country is following a persistent path of economic growth, then as levels of
income grow so does the demand for the goods and services that SME’s can
provide – in the formal sector.
It’s a growing market and set to get
larger!
Any questions?
 You can always contact me on:
Email – [email protected]
Phone – 07531053582
African Research Associates
Thank You