MELISSA GOVENDER: Can development finance accelerate Africa’s drive towards a digital economy?

Fintech has dominated Africa’s unicorns (privately held start-ups valued at more than $1bn) — Flutterwave (valued at $1bn) and Opay (valued at $2bn) are perhaps the most eminent.

In November 2020 a report released by Google and the International Finance Corporation (IFC) estimated that Africa’s internet economy has the potential to contribute 5.2% to the continent’s GDP by 2025, adding almost $180bn to the continental economy. By 2050 that potential contribution is projected to reach $712bn.

Digital start-ups in Africa are driving innovation in fast-growing sectors such as fintech, healthtech, media and entertainment, e-commerce, emobility and elogistics, advancing the continent’s growing internet GDP (iGDP). While progress to date has been impressive, how can we accelerate the path towards digital transformation?

There are several areas that require concerted study and solutions, including enhancing digital skills and digital literacy (the continent already has more than 700,000 IT developers, but by 2025 it is estimated that an additional 180,000 ICT professionals will be needed) and addressing the lack of affordable and sustainable internet connectivity.

Growth in iGDP is dependent on a combination of increased access to quality internet connectivity, a “rapidly expanding urban population, a growing tech talent pool, a vibrant start-up ecosystem, and Africa’s commitment to creating the world’s largest single market under the African Continental Free Trade Area (AfCFTA)”, the Google IFC report noted. Have we sufficiently leveraged government-backed development finance institutions (DFIs) in terms of their funding and policy development capabilities?

Isabel Neto, World Bank practice manager: digital development for Eastern and Southern Africa, noted that “DFIs are a catalytic intermediary between private capital and the markets in the developing world; typically, they address market failures and [act] as a complement to government resources and market financing”, Neto said. In funding Africa’s digital economy, DFIs can play a crucial role. Neto explained that the World Bank Group’s flagship initiative, Digital Economy for Africa (DE4A), supports digital transformation and recognises the role the digital economy plays in accelerating the achievement of the UN sustainable development goals, as well as the twin goals of ending extreme poverty and boosting shared prosperity.

Various operations have already been carried out under this initiative, with a specific focus on digital literacy at secondary education institutions. In Cameroon, the World Bank implemented a secondary education and skills development project that was focused on capacitating students with market-relevant ICT skills.

Can the Africa Continental Free Trade Area (AfCFTA) and DFIs enhance digital integration?

The AfCFTA, which commits countries to remove tariffs on 90% of their goods, came into effect in January 2021, progressively liberalising trade in services and addressing a host of non-tariff barriers. The agreement envisages a single African market of more than 1-billion consumers with a total GDP of more than $3-trillion and renders the continent the largest free trade area in the world (in terms of the number of countries participating.) Can the opportunities AfCFTA provides advance Africa’s digitisation?

A well-functioning digital economy is required to achieve faster economic growth, offer innovative products and services, as well as create more job opportunities. Assessing where strategic investments and interventions need to be made is a critical first step to enabling growth in the digital economy.

Frederik Teufel, adviser to the vice-president for regional development, integration and business delivery at the African Development Bank (AfDB), argues that it is African entrepreneurs who will make the AfCFTA work by forging new value chains and exploiting opportunities to scale up via increased trade in regional markets. A recent white paper series by the AfDB on Entrepreneurship and Free Trade outlines how the frontier industries of digitalisation and green economy can act as catalysts to usher in a new era of economic prosperity on the continent.

While African countries have debated intra-continental trade for decades, current levels remain low at 14%-17%, compared with the EU's rate of 70%. However, Teufel explains that the AfCFTA free trade agreement is a game-changer for the continent and that the AfDB is working closely with all stakeholders to accelerate implementation, while investing at the same time in the development of the required hard and soft infrastructure.

Change will be transformative but will not occur overnight. Teufel argued that innovation and digital apps alone will not lead Africans to wealth and stability. Systems, digital connectivity and infrastructure, together with improved human capital and access to services, will be critical for success and sustainability. “We need to create the right policies and conditions to allow the private sector to act as an engine for inclusive prosperity across the continent”.

In terms of tangible and practical pan-African projects that can accelerate Africa’s digitisation the African Export & Import Bank (Afreximbank) is making important strides. In collaboration with the AfCFTA secretariat, the Afreximbank has launched the Pan-African Payment and Settlement System project. This is a cross-border, financial market infrastructure enabling payment transactions across Africa. The project ensures instant or near-instant transfers of funds between originators in one African country and beneficiaries in another. “With 42 currencies in Africa, AfreximBank wants to ensure that traders can transfer funds across borders with ease. Africa cannot afford to be left behind, because failure to bridge the digital divide puts its economies at risk of isolation and stagnation,” said Obinna Ejimofo, head of commercialisation & market solutions at AfreximBank.

While DFIs are integral to Africa’s economic growth and digitisation, and they have made significant progress, their ultimate success will always be underpinned by domestic policies and the implementation thereof. As Neto contends, if governments prioritise policies that make connectivity affordable, Africa’s youth will automatically adopt and use technology as they are eager to learn and benefit from these technologies. She adds that policies “that formalise digital literacy programmes within the country’s curriculum for digital technologies to be mainstreamed in various disciplines” is of the utmost importance.

• Govender is senior policy manager in Africa for Access Partnership.