14 January 2021

Small businesses key to economic growth in Africa

by Moono Mupotola / in Op-ed
Originally published by the International Trade Centre (ITC) International Trade Forum Magazine on 9 December 2020

The COVID-19 pandemic has had an adverse economic impact on Africa, with sub-Saharan Africa experiencing its first recession in 25 years. The continent’s gross domestic product (GDP) is expected to decline from about 3% in 2019 to -2% to -5% in 2020, with the region’s major sources of revenue declining. To give a few concrete examples, commodity exports and remittances declined by 17% and over 23% respectively, and the tourism sector has lost up to $120 billion in revenue.

The partial or complete lockdowns in most African countries imposed a huge economic shock on the private sector, especially for those on the fringes of the formal economy. Micro, small and medium-sized enterprises (MSMEs), took a heavy toll. If not effectively addressed, this does not bode well for the continent’s recovery prospects, as MSMEs are the engine of Africa’s job growth. Although many African countries borrowed from the African Development Bank (AfDB) for economic stimulus packages to cushion the effects of the pandemic, the support for MSMEs has been limited.

The current crisis, also required the Bank to reconfigure its MSME support systems to address the pandemic’s economic consequences. This included, for the first time, leveraging the Bank’s Regional Operations Envelope to bolster national budgets and supplement policy-based allocations from the Bank. These operations all had very strong MSME - support components to mitigate the impact on these enterprises.

With MSMEs constituting 80% of Africa’s enterprises, multilateral financing institutions, such as the AfDB, need to support these small businesses to trade. Enhanced Bank support to MSMEs is particularly important now that the African Continental Free Trade Area (AfCFTA) is in force and will be creating tremendous economic opportunities. Creating a larger market that goes beyond national borders will increase product demand, ensuring full capacity utilization of these MSMEs, and ultimately result in expanded MSME investments in the continent.

More importantly, MSMEs as part of a supply chain are better placed to benefit from partnerships with potential foreign investors, seeking to expand or launch their business on the continent. MSMEs would benefit from improved management practices, technology transfers, capital infusion and greater market penetration locally, regionally and globally. Through its support interventions, which address the above, the Bank is enabling MSMEs to leverage both the AfCFTA and Africa’s fastest-growing consumer markets, as well as integrate into regional and global value chains.

Financing small businesses is a priority

The African Development Bank has a long and successful history in providing support to the private sector, and MSMEs in particular. The Bank’s interventions foster a suitable business and operational environment; promote further entrepreneurial development through technical assistance and business development services; and provide trade finance through innovative financing instruments. All of these make specific provision for marginalized groups, such as for women and youth.

The Bank’s trade finance programme, for instance, has made great strides since 2013 and so far supported more than $7 billion of trade. It has facilitated more than 1,900 trade transactions for a cumulative trade value of around $4.9 billion, involving 113 financial institutions in at least 32 African countries.

Using a transaction size of $1 million or less as a proxy for MSME transactions, 60% of all supported transactions are attributable to MSMEs. In addition, the programme supported intra-African trade accounting for approximately $1 billion of total trade with sectors such as agriculture, forestry and fishery as well as manufacturing, respectively accounting for 22% and 25% of total value of trade supported.

Under the Africa Trade Fund, which focuses on trade-related technical assistance, nearly two-thirds of the entire Fund operations of around $7 million, have been dedicated to MSMEs in more than 10 countries.

The Fund’s support also extends to the informal sector, including honey value-chain development projects in Guinea, Rwanda and Zambia, and meat in Rwanda. These projects focus on product development and markets, as well as strengthening skills and business linkages for MSMEs.

Additionally, the Bank administers the Fund for Private Sector Assistance promoting innovative projects that support small businesses. In Ghana, for example, where over 85% of enterprises are MSMEs contributing about 70% of the country’s GDP, the Ghana Business Linkages Project focused specifically on skills development as well as improving production technologies and linkages. By the project’s end in 2018, over 1,700 MSMEs were registered on the African Partner Pool Platform – an innovative database of credible local suppliers; with 15 large companies already using the tool to source goods and services; over 104 trained MSMEs; and MSMEs winning 67 tenders in the country.

Looking forward

The Bank has a huge role to play in Africa’s trade and in the development of MSMEs. As the continent’s premier development institution, and in pursuit of its MSME development agenda, the Bank is working on an ecosystem that brings together the different fragments of support under various programmes to strengthen the coordination and synergies within the Bank.

At the same time, the Bank is considering its revised Private Sector Development strategy for 2021-25, which proposes a value chain-based approach for developing the private sector, including MSMEs. These strategic documents, which take into full account the pandemic’s impact, will also look at future challenges.

Any views and opinions expressed on Trade for Development News are those of the author(s), and do not necessarily reflect those of EIF.