A guest article By Wangechi Muriuki, Invest in Africa.
The announcement of a prolonged shutdown across many major African countries as a measure to contain the spread of COVID-19 could have dramatic negative effects on the economy of the entire continent. Africa’s GDP is largely driven by Small and Medium Enterprises (SMEs) and the informal sector which accounts for over 80% percent of the total workforce. SMEs are the driving force and the backbone of most African economies and represent the areas of greatest growth and job creation potential.
SMEs also employs about 85% of the labor force across a typical Southern African economy, they utilize locally accessible resources, foster innovation, employ technology, assemble small-dispersed private savings, and foster entrepreneurship development. They are key to not only driving industrialization as envisaged in many governments’ national development plans but are also crucial in the achievement of the United Nations’ sustainable development goals (SDGs).
The pandemic has massively impacted SMEs by multiple factors, ranging from disruption on supply chains, massive lay-offs by large organisations, decreased air freight services and limited outbound air freights among others. In the services industry, the drop-in customers mean no cash coming in to offset expenses and looming shut down of thousands of businesses. The entire leisure and hospitality sectors have been shut down or severely limited across Africa. The COVID-19 era is an unprecedented crisis that poses very tough times for SMEs who are struggling with survival as demand plunges.
While it may be too early to estimate how deeply the pandemic will affect SMEs, government measures to help these struggling businesses may take some time to kick-in. McKinsey has just released some chilling projections citing sub -3% economic growth in a recent report analysing the impact of the virus on Africa.
The critical point many governments and intervention measures don’t seem to have grasped is that many of the businesses that are lost to this crisis (due to cash slow challenges, collapse in demand) will never come back. Thousands of well run, profitable businesses that support livelihoods will be gone forever.
This points to the need for stakeholders to act with a sense of urgency in protecting our SMEs. We must start to act through sustainable approaches and measures to that will minimise these negative impacts. While we don’t know how long this will take, we must be cognizant of the fact that opening the economy will be more difficult than shutting it down. The new normal, whenever it arrives, will be different than the old one.
At a time of crisis, knee jerk and ad – hoc reactions will not be sustainable in helping to bounce back SMEs and keeping jobs as we move to recovery. Urgently launched funding programmes may plug some short-term gaps, but they won’t protect the thousands of jobs that hang in the balance.
We need SMEs to survive, grow and continue making their contribution to African economies. I offer four suggestions on approaches that stakeholders might adopt:
1: A strategic approach will provide clarity to direct support actions
SMEs are numerous and heterogeneous. In order to formulate effective and impactful solutions, intervention must be informed by a clear understanding of SMEs, mapped needs by segments and clearly defined objectives targeting sectors affected the most (like oil, gas and energy). This information will be crucial in painting a clear picture of the desired outcome in view of the unprecedented scale of the crisis and national goals and development plans as outlined in Governments’ national development plans often presented as “Vision…”.
2: A cohesive multi-stakeholder approach and coordinated action is needed to effectively deliver solutions
Sustainable SME interventions will require a holistic and coordinated approach with involvement of multiple stakeholders as support actors including: the public and private sector, research institutions, financiers, policy, academia, technical support providers, business membership organisations and business development support services. The SME ecosystem has been disjointed and now is the time to step up partnerships and collaborations. An ecosystem approach that is unified by common objectives through one platform that brings support actors together to collaborate will create shared value. This approach must leverage technology to support and power the collaboration.
3: Targeted technical assistance to business support intermediaries on the front-line to offer immediate relief to SMEs
The COVID crisis has thrown Southern Africa’s SMEs into the deep end. There is a need to collect data on the ground that will inform practical interventions. Many business owners are turning to support organizations of which they are a member for help and information (such as the South Africa Oil and Gas Alliance for the oil and gas sector). At this point, chambers of commerce, sector associations, trade promotion organizations, investment promotion agencies and co-operatives are well-positioned to collect data and provide credible solutions and resources to help SMEs rethink their next steps and navigate the crisis. Support intermediaries and organizations will need to build capacity in order to effectively support their SME members. Networks like Invest in Africa (IIA) have quickly responded with a COVID-19 Survival Toolkit offering a range of webinars, resources and business clinic hotlines for SMEs and are collecting SME data.
4: Creating a desirable proposition for lenders in the Financing Ecosystem
The fact that SMEs usually have fewer assets and collateral means they are riskier and therefore may be a less desirable proposition for lenders. The lack of access to finance is one of the most pressing challenges that SMEs face as the funding gap continues to widen. At a time of crisis, maintaining the lines of credit open to viable SMEs through readily available negotiated loan packages by banks and other financial institutions is crucial. While bank financing will continue to be paramount for the SME sector, there is a broad concern that credit constraints will simply become “the new normal” for SMEs unless action is taken.
The question is how do we create a desirable proposition to banks and other providers to lend to SMEs? Firstly, engagement with stakeholders to explore new approaches and innovative policies for SME financing is paramount. Secondly, the creation of partnerships to de-risk mechanisms through guarantees and other instruments is equally important. Thirdly, broadening the range of financing products available, targeting a blend of both mainstream and alternative solutions including: bank debt, Private Equity and Mezzanine Financing (a blend of debt and equity).
In conclusion, the important role of SMEs in Southern Africa cannot be overstated. This is a clarion call to all SME support actors to rise to action as key stakeholders to get out of silos and collaborate, share resources, synergise and cohesively develop targeted interventions to salvage the region’s SMEs.