It is widely believed that SMEs are crucial to developing economic growth across the African continent and for that, consumer spending and export-led growth will play major roles over the next decade. While in most cases, the focus is on Africa’s consumer market, research shows that business-to-business spendings are having a great impact on economic development as well.
In Nigeria, the proportion of SMEs employs 84% of the active workforce and in Kenya, this number is 74%. Those SMEs are the ones that create at least 87% of new jobs and opportunities in the country and this job creation means the growth of domestic spending, consumer confidence, and many other factors that are very important for sustainable economic growth.
In fact, B2B spending is greater than consumer spending and companies are increasing their spending from $2.6 trillion in 2015 to $3.5 trillion by 2025. It is also expected Africa to double its manufacturing output in just 10 years and the countries are trying to establish their comparative advantage in different industries, for example, cotton in Ethiopia and flowers in Kenya.
In order to make the economy of the continent grow, the role of trade, in this case, is crucial and it is even more achievable nowadays due to the improvement in the infrastructure. Even though the intra-African trade was $159 billion dollars in 2018, the number is significantly low in comparison to other blogs like the EU. Intra-African export only represents 17 % of the total amount of exports from the African countries, this means that they prefer to sell their goods and services in more developed countries and blocs rather than on the continents.
How paradoxical it might sound, in the case of trading, African countries are emerging and are considered to be one of the major hubs for forex trading. The number of South African Forex brokers or Nigerian Forex brokers are increasing due to the fact that they are providing the clients with more efficient service due to the fertile soil in those countries to become involved in the trading process.
Although we have mentioned that SMEs are playing an important role and even the most important role in the case of tremendous growth opportunities in Africa, the same SMEs are contributing more in the other parts of the world, for example, an average of 64% to global GDP. Due to the fact that the rates of the local currencies in Africa are very volatile and unavailable, the supplier demands the payments to be made in dollars or other G10 currency. However, the supply of dollars in many African countries is distributed to the big businesses, it is also scarce and controlled by the central bank. Because of this, small businesses have to pay about 200 % more than large businesses to clear transactions and execute the payment process.
Bank transfers also require the dollar as the intermediary settlement currency and the transaction fees range anywhere from 3% to 10%. Cross-border transfers require three days and in some cases even two weeks. There is no doubt that the process of regulating and supervising cross-border payments is very difficult, as in many cases, they are transacted via cash through the informal sectors. The challenging environment has made it vivid to the specialists that there is a need for the specific system to empower the SMEs across Africa and holding the foreign reserves, most importantly USD is vitally important for the regional economic growth.
In 2019 there was an initiative made to launch Pan-African Payment across the entire continent, that would enable payment in local currencies. The main reason for that appeared to be the policy that requires the cross-border payment to involve the third currency, for example, the USD or Euro that takes high transactions and long transaction settlement periods. The government has found the solution to this, to develop a hybrid infrastructure that can make the process easier. For example, AZA was created to play the role of the hub and connect middle-market frontier business to the rest of the world.
This solution promotes the use of local currencies for international trade, which diminishes the USD role in this case, and the internet and mobile service are encouraged to deepen financial inclusion by making FX available for the informal market as well. There is a need for the player on the financial market that would facilitate during the cross-border exchange, but primarily on the consumer level. At the end of the day, it is evident that the situation is pretty serious and the government and private sector have to come together and find the solution and implement the projects that would increase the foreign currency reserves and in-country liquidity, that require the proper collaboration.