Africa has undergone significant changes since the turn of the century thanks to structural and policy reforms, promises to unlock the continent’s economic fortunes and higher levels of foreign investment. As a result of that, Africa has witnessed significant economic expansion, rising foreign direct investment (FDI) levels, and major improvements in a number of social indicators from schooling to health care and poverty.
The commodity bust that started in 2013, however, shone a light on the lingering fragility of the continent’s economic foundation. According to the UN Conference on Trade and Development (UNCTAD), FDI flows into Africa fell from $55bn in 2015 to $42bn in 2017, owing primarily to the drop in commodity prices. This has been compounded more recently, with added volatility brought by a strengthening dollar, Fed rate hikes and an escalating trade war between the US and China taking most emerging and frontier markets for a bumpy ride in 2018.
Building resilience
Diversification has been at the heart of most of the continent’s political and economic agendas throughout the past decade, with the view to promote sounder and more sustainable development models that do not depend solely on commodities such as oil, gold and cocoa to justify growth. EY’s 2018 “Turning tides: Attractiveness Program Africa” report highlights a continuing shift in recent years from extractive to sustainable investment, with projects flowing into a new generation of sectors such as infrastructure, manufacturing and renewables.
While the outcomes of such policies have started to bear fruit in some markets, most remain in the very early stages of development. The pace, however, at which change has taken place in recent years in some areas provides cause for optimism. Kenya’s ICT sector and Ethiopia’s textile industry are examples that spring to mind.
Shifting perceptions, improved business conditions and technological uptake are some of the factors that have driven change and interest in Africa. Looking to the not-so-distant future though, efforts to reap economic opportunities and deliver on the continent’s promises for sustainable growth and social inclusion will require navigating a number of key challenges, namely stronger governance, continuous economic reforms, better infrastructure and more jobs.
Strengthening fundamentals
According to the World Bank’s “Doing Business 2019” report, sub-Saharan Africa has been the region with the highest number of reforms since 2012, registering a record 107 reforms in 2018. Subsequently, the region has seen the average time and cost to register a business go from 59 days and 192% of income per capita in 2006 to 23 days and 40%, respectively, today. Five sub-Saharan countries, namely Djibouti, Côte d’Ivoire, Togo, Kenya and Rwanda, were among the top-10 improvers in 2018 in terms of the reforms carried out.
All this shows that there is a rising awareness among the region’s policymakers of the importance of reform in paving the way for a business-friendly environment that is conducive to investment. This – combined with strategic policies that foster sounder macro-economic foundations – is what will help provide for the much-needed stable and sustainable development of the continent.
Areas for improvement highlighted by the report include regulatory quality and efficiency, trading across borders, access to electricity and resolving insolvency.
Laying the groundwork
Africa’s current needs in terms of infrastructure are estimated at $130bn-$170bn, according to the African Development Bank (AfDB), and this is expected to grow exponentially as economies mature and the population grows.
This is perhaps one of the most challenging bottlenecks that has held back development and one Africa is striving to overcome, especially in the wake of the recent Africa Continental Free Trade Area (AfCFTA). Signed in early 2018, the AfCFTA is expected to boost trade volumes by 50% over the next five years, but without the adequate infrastructure to support these flows, such a target would become unreasonable.
Evidently, this is not to say that Africa hasn’t made any headway in recent years. Examples of new construction and expansion projects are endless, be they roads, ports, railways, special economic zones or smart cities. China has been particularly active in all these areas, with total investment into the continent estimated to have increased from £13bn in 2010 to £35bn today, and channelled primarily into construction and infrastructure, according to UNCTAD.
Much has been achieved but more remains to be established, whether it’s factories to bolster the continent’s industrial base, schools and housing to accommodate a growing population or roads to connect hinterlands with increasingly urbanising cities. With some of the world’s fastest-growing urban centres such as Bamak¬o, Lagos and Addis Ababa, African cities are expected to be home to 760m people by 2030 and 1.2bn by 2050. The continent’s total population, meanwhile, is slated to reach 1.7bn in 2030 and 2.5bn in 2050, according to the UN. Efficient management and planning in such areas will be key in shaping the future of these centres and turning what currently appears as added pressure into development and investment opportunities.
Leveraging the demographic dividend
With 60% of Africa’s population under the age of 24, there is no denying that a big part of the continent’s fortunes resides in its youth. With this in mind, the working age population is expected to rise by 900m people in the next 35 years. By contrast, this figure is expected to drop by 85m people in Europe and 200m in China. But so far, job creation across Africa has lagged behind the development gains witnessed in recent years. An estimated 10m-12m young Africans supposedly enter the job market every year and yet only 3m jobs are created.
Most countries have become aware of the need to speed up job creation to keep the labour market participation afloat and stave off unemployment and informality. Policy formulation and programmes to create more opportunities and align skills with the future needs of each market are crucial in that regard. Attracting investment into the aforementioned new generation sectors is certainly another solution.
More importantly, understanding the business landscape across Africa is another critical aspect to consider. With 90% of business in sub-Saharan Africa carried out by small and medium-sized enterprises, paying more attention to entrepreneurial talent and home-grown innovation will undoubtedly contribute to promoting sustainable economic opportunities.
Read More from OBG
