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Why the commodity slump could be a good thing for Africa

Countries will be forced to diversify economies to become a lot more sustainable and resilient to economic shocks.
Dr Manessah Alagbaoso, head of commercial banking for Rest of Africa, Standard Bank Group

There is an urgent need for diversification of Africa’s economies and while it is having an immediate negative effect, the recent commodities slump is beginning to drive change. For example, some investors in Nigeria who have historically thrown their lot behind the oil and gas industries are now looking to buy large tracts of agricultural land in a bid to mitigate the effects of the slump in the commodities sector.

After many years in the wilderness, the agricultural sector is fast emerging as one of the most attractive investment opportunities on the continent – and a sector where innovation and supportive policies can be harnessed to drive growth and jobs, so sorely needed across the continent since the Chinese and global economic slowdowns knocked commodity export opportunities.

Many countries, with the exception of a few in the East Africa bloc, have had to contend with low or no growth, and there are fears that it may take at least two years for things to normalise. 

In a particularly worrying sign, some companies in the mining sector are closing loss-making mines, selling their non-core operations at lower prices than they would possibly like and laying-off staff in order to survive the turmoil.

Tumbling commodity prices and weak local currencies make it difficult for businesses to get funding for growth, with dollar shortages plaguing the oil-producing economies of sub-Saharan Africa.

But painful as it may be in the short term, the right tactical approach can ensure richer rewards are reaped over the medium to long term. For far too long Africa has been dependent on natural resources, and every time commodity prices fall the economies of countries such as Nigeria, Angola and the Democratic Republic of Congo come to a halt. And when the slump is severe, ripple effects are felt by the neighbouring countries, and sometimes the whole region.

This is not sustainable. We need more robust industries, innovation, a wider economic base and job growth to ensure Africa can rise to its true potential. History tells us that economic necessity can propel people to innovate. Kenya, for example, was forced to develop a world class mobile banking system by its lack of adequate infrastructure to roll-out bank branches across the country. It had to leapfrog many stages of ICT development, and today has one of the most reliable ICT industries on the continent.  

The Nigerian investors who are now looking for opportunities in the agricultural sector may be acting prudently too. Not so long ago, agriculture fueled many economies in Africa before the discovery of natural resources. But Africa’s agricultural sector now has the lowest productivity in the world despite the continent having the largest share of the world’s arable land. 

That means there is huge scope to develop the sector. And with estimates that the sub-Saharan Africa population will reach 2 billion by 2050, the demand for food can only rise.

Africa has not been able to diversify its economies fast enough partly because a diversification agenda was not pursued strongly enough – leading to many missed opportunities along the way.  

Our own experience at Standard Bank shows that Africa has a great deal of opportunity if we look beyond the short-term. A lot has changed over the past few decades. Many countries now hold regular and democratic elections, literacy rates and education have drastically improved, and the continent has the most youthful population in the world.

These are some of the things that should help to diversify our economies to become a lot more sustainable and resilient to economic shocks. However, businesses need the support structures in place to ensure their long-term journeys to growth and profitability are sustainable. Entire supply chains need sophisticated levels of technological and knowledge-based support and this can only truly happen if the experts are on the ground, have the local knowledge and have a proven track record in assisting businesses in Africa. 

Working with a trusted partner is critical and this is why Standard Bank has initiated a series of dialogues aimed at assisting and educating clients how to explore and benefit from business opportunities across regions on the continent. The first was held last month in Nairobi, Kenya, for East Africa. And the next one, for West Africa, is planned to take place during the course of this year.

One of the gaps often cited as an obstacle to doing business in Africa is an infrastructure backlog. Almost every country on the continent has infrastructure backlogs. For instance, road access in Africa is only 34% compared with 50% in other developing regions, according to the African Development Bank. The continent’s average national electrification rate is 43% compared with 81% in developing countries in Asia and 98% and Latin America.  

This is both a challenge and an opportunity. Lack of infrastructure creates logistical problems for businesses. But with more development finance being made available opportunities are opening up for engineering and construction firms. It is estimated that US$93 billion will be needed annually until 2020 to close the infrastructure gap.

In manufacturing, again Africa is not where it should be. Most of the countries are net importers and at issue is that many African countries are importing goods like toilet paper, toothpicks and toothpaste – things that we have the raw materials to produce.

Make no mistake, doing business in Africa is not easy – you cannot rush in and expect to make a handsome profit. But for once almost every government is trying to remove obstacles to doing business on the continent and with the right kind of support, innovation and desire Africa’s growth position will be significantly enhanced in the years ahead.

Dr. Manessah Alagbaoso is head of commercial banking for Rest of Africa at Standard Bank Group

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