Diversification has been a watchword for African economies, but what are they actually doing about it? The 2014 oil price drop was felt by many African economies, which discovered that they were over-reliant on natural resources. The need to avoid a repeat and to find more revenue streams to support industrialization has made diversification a critical objective of these governments.
‘’Historically most African countries have relied on monoculture or at least export of primary products and natural resources’’ says Andrew Skipper, head of Hogans Lovells in this recent report. ‘’The challenge is many countries is to build infrastructure and get power in place for them to implement their universally acclaimed aspirations’’ It is a process that has already begun. Skipper notes that in May 2018, oil-producing Nigeria’s other industries accounted for 91% of its GDP, led by agriculture, and agribusiness is one of the main sectors of interest for countries looking to expand their range, along with entertainment, tourism, education, health and fintech.
The limiting factor is scale, he explains ‘’Most individuals countries in Africa, with obvious exceptions, are too small to establish enough scale to diversify to any great extent’’ The signing of the African Continental Free Trade Agreement AfCFTA in 2018 in part intended ‘’to provide sufficient scale from intra-Africa trade to encourage diversification’’ says Skipper. ‘’By driving official intra-African trade from its current low base of around 15% to something even approaching the European Union’s 67% this should lead to diversification.
Interest in the education and healthcare sectors are linked due to interest from universities in the United States and elsewhere, says Washington, DC-based Hogan Lovells partner William Ferreira. ‘’This interest in Africa is much greater than simply the nuts and bolts of an education programme,’’ he says, identifying investment in ‘’treatment and care programmes, public health programmes-HIV and AIDS in particular, clinical trials- because these schools have medical schools- and capacity building programmes’’
That includes public or private sector investors funding the establishment of physical infrastructure, supply chains and providing specialist knowledge. The United States, with its large private education sector, has been a particular player in this regard, including distance education companies selling courses and software. Ferreira has seen particular activity in Nigeria and South Africa, with ‘’a tremendous amount of interest in Zambia’’ and it is a sector which he only expects to grow in the coming years, saying governments are beginning to see ‘’how important it is to have a vibrant education sector, because not only is that important for the vast numbers of youth across Africa, but it has been proved to be an economic engine across many other countries’’
He continues ‘’When there are strong vibrant universities, they have relationships into industry and they have relationships across borders, and there are economic opportunities that come from that’’ Few sectors have generated as much buzz over the past few years as fintech. There has been soaring interest in a wave of start-ups tackling a range of social and business problems, most notably providing banking to people who could not previously access it. Nigeria, Kenya, Uganda and Rwanda have led the way on this, followed by South Africa, and corporations including goggle and IBM are investing in the technology.
James Black, Hogan Lovells counsel in London, notes that with the market still dominated by start-ups, the capital in Africa does not yet match the 54 Billion US Dollars in the Americas or 34 billion US Dollars in Europe, according to a recent KPMG report, but ‘’give that a few years and there will be a huge amount of investment from investment banks, from retail banks and angel investors and the like’’
The other main area of interest has been in financial services for small and medium-sized enterprises, explains Amina Boshoff, a partner in Johannesburg, ‘’on boarding costs for banks have increased over the past decade. It has become more and more difficult for traditional financial institutions to finance small borrowers’’ this has created space for new technology-focused banks and alternative lenders to operate.
Professor Angela Itzikowitz, of the University of the Witwatersrand, says the arrival of the digital banks shows the demand for reduced costs and alternative approaches and that banks are now competing with mobile operators. ‘’while consumers do not have bank accounts, unbanked or under banked, they all have cell phones’’. This places a premium on interoperability, a big focus for mobile operators at the moment.
‘’some of the players are on a fairly robust acquisitive drive, acquiring fintechs, says Itzikowitz, highlighting Goldman Sachs’ investment in mobile banking company JUMO, which operates in many countries across Africa. ‘’coupling the fintech activity with the investment driver is the agency banking model, where banks are partnering with non-bank fintech companies and allowing the companies to conduct banking activity on the back of the bank’’
‘’South Africa is really well placed to get a lot of that investment directed towards it’’, says Black, pointing out that it is English-speaking and has a ‘’focus on rule of law and a well-established legal system as well as a fairly stable economy and being fairly stable politically’’ Meanwhile, recent developments have further changed conceptions of what is possible. ‘’Block chain has brought a fresh breath to the whole industry in terms of the transparency of the technology and reducing that costs of operation’’ argues Alice Blazevic, an associate partner with Ugandan firm. The technology is allowing fintech companies to bypass banks for online money and bringing transparency. ‘’taking care of financial inclusion’’ she says
However, unhelpful attitudes from government were pervasive early on this space too, says Blazevic. ‘’It was the private sector companies that were pushing and they received a lot of resistance at first,’’ due to a lack of understanding about what the technology was and fears due to ‘’a misconception between block chain and crypocurrency’’’’. Time shave already begun to change, however, and ‘’there has been a complete turnaround’’ with governments becoming more helpful, particularly in Uganda, which now has block chain associations and academics.
The need for good regulation is not exclusive to this sector, with Skipper pointing out that all industries ‘’need to have well-developed regulatory structures that are sufficiently advanced to deal with the relevant sector’’, with a particular need for ‘’certainty of policy, rule of law and relative stability in security and currency terms’’ ‘’So many of the shareholders who are buying share in this fintechs are actually foreign companies’’, says Blazevic, and she expects to see more growth in the near future.
‘’I t is definitely not going back in terms of the mainstream financial sector, that is now completely gone, because right now the experience people are having in the financial sector, it doesn’t make sense to go back to the traditional’’ That need to leave the traditional behind is one which will pervade many industries if they are to flourish and allow African countries to diversify.
Marcian Concepts have been contracted by Selibe Phikwe Economic Unit (SPEDU) in a P230 million project to raise the town from its ghost status. The project is in the design and building phase of building an industrial hub for Phikwe; putting together an infrastructure in Bolelanoto and Senwelo industrial sites.
This project comes as a life-raft for Selibe Phikwe, a town which was turned into a ghost town when the area’s economic mainstay, BCL mine, closed four years ago. In that catastrophe, 5000 people lost their livelihoods as the town’s life sunk into a gloomy horizon. Businesses were closed and some migrated to better places as industrial places and malls became almost empty.
However, SPEDU has now started plans to breathe life into the town. Information reaching this publication is that Marcian Concepts is now on the ground at Bolelanoto and Senwelo and works have commenced. Marcian as a contractor already promises to hire Phikwe locals only, even subcontract only companies from the area as a way to empower the place’s economy.
The procurement method for the tender is Open Domestic bidding which means Joint Ventures with foreign companies is not allowed. According to Marcian Concepts General Manager, Andre Strydom, in an interview with this publication, the project will come with 150 to 200 jobs. The project is expected to take 15 months at a tune of P230 531 402. 76. Marcian will put together construction of roadworks, storm-water drains, water reticulation, street lighting and telecommunication infrastructure. This tender was flouted last year August, but was awarded in June this year. This project is seen as the beginning of Phikwe’s revival and investors will be targeted to the area after the town has worn the ghost city status for almost half a decade.
The International Monetary Fund (IMF) has slashed its outlook the world economy projecting a significantly deeper recession and slower recovery than it anticipated just two months ago.
On Wednesday when delivering its World Economic Outlook report titled “A long difficult Ascent” the Washington Based global lender said it now expects global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April. For 2021, IMF experts have projected growth of 5.4%, down from 5.8%. “We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast,” said Gita Gopinath Economic Counsellor and Director of Research.
The struggle of humanity is now how to dribble past the ‘Great Pandemic’ in order to salvage a lean economic score. Botswana is already working on dwindling fiscal accounts, budget deficit, threatened foreign reserves and the GDP data that is screaming recession.
Latest data by think tank and renowned rating agency, Moody’s Investor Service, is that Botswana’s fiscal status is on the red and it is mostly because of its mineral-dependency garment and tourism-related taxation. Botswana decided to close borders as one of the containment measures of Covid-19; trade and travellers have been locked out of the country. Moody’s also acknowledges that closing borders by countries like Botswana results in the collapse of tourism which will also indirectly weigh on revenue through lower import duties, VAT receipts and other taxes.
Latest economic data shows that Gross Domestic Product (GDP) for the second quarter of 2020 with a decrease of 27 percent. One of the factors that led to contraction of the local economy is the suspension of air travel occasioned by COVID-19 containment measures impacted on the number of tourists entering through the country’s borders and hence affecting the output of the hotels and restaurants industry. This will also be weighed down by, according to Moody’s, emerging markets which will see government losing average revenue worth 2.1 percentage points (pps) of GDP in 2020, exceeding the 1.0 pps loss in advanced economies (AEs).
“Fiscal revenue in emerging markets is particularly vulnerable to this current crisis because of concentrated revenue structures and less sophisticated tax administrations than those in AEs. Oil exporters will see the largest falls but revenue volatility is a common feature of their credit profiles historically,” says Moody’s. The domino effects of containment measures could be seen cracking all sectors of the local economy as taxes from outside were locked out by the closure of borders hence dwindling tax revenue.
Moody’s has placed Botswana among oil importers, small, tourism-reliant economies which will see the largest fall in revenue. Botswana is in the top 10 of that pecking order where Moody’s pointed out recently that other resource-rich countries like Botswana (A2 negative) will also face a large drop in fiscal revenue.
This situation of countries’ revenue on the red is going to stay stubborn for a long run. Moody’s predicts that the spending pressures faced by governments across the globe are unlikely to ease in the short term, particularly because this crisis has emphasized the social role governments perform in areas like healthcare and labour markets.
For countries like Botswana, these spending pressures are generally exacerbated by a range of other factors like a higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes and more precarious employment. As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side, says Moody’s.
Moody’s then moves to the revenue spin of taxation. The rating agency looked at the likelihood and probability of sovereigns to raise up revenue by increasing tax to offset what was lost in mineral revenue and tourism-related tax revenue. Moody’s said the capacity to raise tax revenue distinguishes governments from other debt issuers. “In theory, governments can change a given tax system as they wish, subject to the relevant legislative process and within the constraints of international law. In practice, however, there are material constraints,” says Moody’s.
‘‘The coronavirus crisis will lead to long-lasting revenue losses for emerging market sovereigns because their ability to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy we expect next year.’’
According to Moody’s, together with a rise in stimulus and healthcare spending related to the crisis, the think tank expects this drop in revenue will trigger a sizeable fiscal deterioration across emerging market sovereigns. Most countries, including Botswana, are under pressure of widening their tax bases, Moody’s says that this will be challenging. “Even if governments reversed or do not extend tax-easing measures implemented in 2020 to support the economy through the coronavirus shock, which would be politically challenging, this would only provide a modest boost to revenue, especially as these measures were relatively modest in most emerging markets,” says Moody’s.
Botswana has been seen internationally as a ‘tax ease’ country and its taxes are seen as lower when compared to its regional counterparts. This country’s name has also been mentioned in various international investigative journalism tax evasion reports. In recent years there was a division of opinions over whether this country can stretch its tax base. But like other sovereigns who have tried but struggled to increase or even maintain their tax intake before the crisis, Botswana will face additional challenges, according to Moody’s.
“Additional measures to reduce tax evasion and cutting tax expenditure should support the recovery in government revenue, albeit from low levels,” advised Moody’s. Botswana’s tax revenue to the percentage of the GDP was 27 percent in 2008, dropped to 23 percent in 2010 to 23 percent before rising to 27 percent again in 2012. In years 2013 and 2014 the percentage went to 25 percent before it took a slip to decline in respective years of 2015 up to now where it is at 19.8 percent.