Africa is undergoing a period of unprecedented economic growth. According to The Economist, six of the 10 fastest-growing countries last year were in Africa. Average external debt on the continent has fallen from 63 percent of GDP in 2000 to 22.2 percent this year, while average inflation now stands at 8 percent, down from 15 percent in 2000.
This positive trend is likely to persist, given that it is based on structural geographic and demographic factors, such as rising exports, improved trade conditions and steadily increasing domestic consumption.
However, Africa’s national governments still face significant challenges, given the wide variety of factors at play in each country. Economic characteristics vary significantly by country, depending on, for example, whether a fixed or floating foreign exchange regime is in place and which natural resources the country controls.
As a result, prospects also differ by country. Although the average annual GDP growth rate for the entire continent has been forecast at roughly 6 percent for this year, South Africa’s economy is expected to grow by only 3.6 percent, while Ivory Coast is expected to grow at a rate of 8.5 percent. In order to tailor national economic policy effectively, policymakers must identify the drivers of, and barriers to, growth in each country.
Africa’s growth potential has caught the attention of foreign investors, who have contributed to a rapid increase in capital expenditure. Between 2008 and last year, sub-Saharan Africa received on average 4.4 percent of all funds invested in developing countries worldwide and 3.1 percent of investment spending. Foreign direct investment in Africa has been on the rise since the early 2000s, increasing fivefold from 2000 to 2010. However, foreign investors remain aware of the challenges faced by certain countries. For example, much of the Horn of Africa (particularly Somalia), Mali and Guinea Bissau carry significant political risk.
Nevertheless, many economic indicators suggest that the bullish trend is sustainable and that the conditions needed to change Africa’s image and international trade position are finally in place. Last year, 67 percent of potential investors interviewed said that they considered Africa attractive, while half of them planned to invest in sub-Saharan Africa before next year. In addition, a growing number of large corporations count Africa among their primary strategic targets for business development.
The growth of small and medium-sized enterprises (SMEs) will be a key factor in coping with the risks associated with rapid economic expansion. SMEs already play a crucial role in African economies, involved as they are in all sectors of rural and urban economies.
SMEs are open to innovation, technology transfer and industrialization. They are ideally positioned to make an impact locally, given their willingness to adopt positive environmental and governance practices, and their ability to improve living conditions by creating permanent jobs.
African SMEs also point the way to dynamic, sustainable and fair growth. They have demonstrated a genuine capacity to withstand the effects of crisis, owing to their flexible capital base and limited involvement in the international financial system.
Yet, despite their potential, African SMEs are subject to significant internal and external pressures, including poor infrastructure, high labor costs, deficient governance and a dearth of skilled workers. Above all, they lack access to long-term finance.