COVID-19: How to save the African entrepreneur
awabisa Ntuli, a hair salon operator in downtown Johannesburg, will remember March 2020 as the month her business was knocked out of the economy. Her salon is among the estimated 2,5 million small enterprises that were ordered to close as South Africa implemented one of Africa’s strictest lockdowns instituted in attempts to “flatten the curve” of COVID-19 infections.
The workings of a hair salon serve as an illustration of how a circular economy operates. The thesis is simple: people needing a haircut or hair treatment pay for services at the salon and operators like Ntuli use the proceeds to pay suppliers, their landlord, their employees’ salaries and to cater for their livelihoods. Clients access a hair salon using personal or public vehicles, therefore paying for fuel directly or indirectly. The accessories and equipment used in the salon are sourced from a manufacturer either directly or through wholesalers or retailers. The electricity used in the salons is paid for, contributing to the sub-economy revolving around the electricity supplier such as the purchase and maintenance of equipment and paying salaries for engineers. This scenario is replicable many times over in the small business sector.
One cannot overstate the role played by small entrepreneurs in the continental economy. The World Bank’s Small and Micro Enterprises (SME) report of 2019 stated that SMEs contribute up to 40% of the gross domestic product (GDP) in Africa. This figure is higher when informal business operators are included in the calculation. Whereas African governments have announced financial relief measures for businesses plighted by the lockdown restrictions, the promised support ignores informal operators. A few examples abound. In late May, Ghana announced the Coronavirus Alleviation Programme (CAP) business support scheme for SMMEs valued at US $ 104 173 800. The Central bank of Nigeria has made available US $ 2 837 025 730 to support manufacturing firms affected by COVID-19 closures. In South Africa, the government is implementing the COVID-19 SMME Debt Relief Finance Scheme administered through the Department of Small Business Development.
- Explore the World Bank's map of SME-Support Measures in Response to COVID-19 here.
These measures are laudable, but problematic. Applying enterprises need to present business plans, financial statements and regulatory documents for them to be considered for support. Against a background of these stringent requirements, it is understandable that the criteria for qualification for relief funding would pose conundrums.
The African Development Bank estimates that about 250 million Africans are involved in informal business activities, which account for 80% of employment. The continent’s urban agglomerations of varying sizes such as metropoles, megacities, towns and rural trading centres are permeated with multitudes of informal operations catering for the needs of rapidly urbanising communities. Intrepid entrepreneurs are defying the odds to provide goods and services in economies that have consistently failed to develop domestic manufacturing capabilities. In this context, business support plans that have little or no consideration for Africa’s informal enterprises are as disastrous as the pandemic.
The majority of informal entrepreneurs do not meet the requirements for support. In several of the cases, the application procedures require elements such as bookkeeping and business-writing skills for which most informal entrepreneurs lack in great measure. This raises two insidious issues.
Firstly, millions are excluded from accessing aid that would enable them to survive the corrosive effects of the lockdown simply because they do not meet governments’ requirements, even though they are participants in the economy. Secondly, these biased measures are an early indicator that the relief efforts will have diminished returns. Already, in a progress report at the end of April, the South African Department of Small Business Development reported that they could not process 6497 of the 9840 enterprises who applied for relief due to applicants’ failure to submit the required compliance documents.
These challenges illustrate that a business intervention strategy that does not consider the informal entrepreneur is fraught with difficulty. A major problem revolves around the fact that informal traders account for the bulk of employment in African countries - a 2018 report by the International Labour Organisation estimated this to be 85%. The collapse of these informal enterprises is increasing unemployment across the continent. In South Africa, the head of the Treasury has reported that the country’s unemployment rate could rise to 40% due to COVID-19.
Another problem revolves around the widening budget deficits in African countries partly due to shortfalls from taxes collected from the small businesses which dominate the local economies. African governments’ tax systems are dependent on indirect taxes mainly imposed at points of import and sales tax on products. Governments unable to track informal transactions rely on indirect taxes for domestic revenue collection. A reduction in these activities will translate into reduced revenues which makes it difficult for governments to fund their programs.
African countries also face the prospect of sitting with idle and under-utilised infrastructure. In the past few years, governments have invested in a high number of mega infrastructure projects such as high-rise commercial properties, transport and communication facilities and energy. Entrepreneurs use these facilities, but with the closure of businesses, they will remain either under-utilised or not used at all. For example in Uganda, the national electricity entity reported a 10% drop in energy demandas businesses that are largely responsible for consuming 60% of the power generated ceased production. Instances such as this shall lead to reduced government revenues, reduced capabilities to maintain facilities and, possibly, failure to return the investments.
As lockdowns affect the distribution and consumption of goods and services, local economies are also experiencing market disruptions due to supply chain distortions. Take the motor vehicle industry as an example. It incorporates small entrepreneurs such as motor parts dealers, vehicle mechanics, fuel distributors and retailers, among others. However, it can only thrive with the mobility of passengers and goods, which is severely curtailed at present. Moreover, due to lockdown rules that prohibit the sale of certain items, people are resorting to illegal supply chains. The South African government’s battle against the sale of cigarettes and alcohol during the lockdown is a good case in point.
In view of the aforementioned challenges wrought by the spread of COVID-19 across the continent, governments should consider the following measures to save the African entrepreneur:
- New metrics to assess the African entrepreneur: Since the typical African entrepreneur’s transactions are not observable proof of their business and financial status, alternative ways such as referrals from existing customers and suppliers, local authority adjudication and endorsement, and proof of production capacity should be designed and used as a means of verification for eligibility for relief funds.
- Develop local value chains and manufacturing: The current distortions in the global supply chains have provided African countries with opportunities to add value to the primary products that they export and re-import as finished goods. Governments must focus on boosting domestic manufacturing and production of essential goods, thereby improving their self-reliance and foreign exchange savings. Additionally, current and the post COVID-19 economies will need to develop new production linkages and market integration models to make up for new participants as some would have closed shop.
- Intra-African trade: With sea lanes and aviation routes in and out of Africa either severely curtailed or closed, African road and rail links can come in handy. It is more feasible for Mozambique to export its tobacco harvest to Kenya by road than to Portugal, one of its major trading partners, by sea or air. Fortuitously, an appreciable rail and road network between Cape Town and Cairo exists and some of the sections in disrepair should be fixed.
- Trade finance, not cash injections: Governments should consider providing financial support in terms of production and trade finance to the local entrepreneurs who secure credible contracts to supply products or services. This would be a much more, predictable, secure and productive means of support.
- Take advantage of the COVID-19 economy: The response to the health challenge has led to a global shortage in the production and supply of COVID-19 accessories and consumables. Personal protective equipment, hygiene products, hospital equipment and medicines have become expensive. Governments can initiate programs to transition the millions of informal entrepreneurs into small-scale manufacturers of these products for local and export markets.
- Social protection for informal workers: While governments have dipped into pension funds and provided employees with tax relief on earnings, this support has largely benefited those in formal employment. A non-discriminatory social protection plan for those in informal employment needs to be urgently considered.
If implemented, these measures would enable the small scale African entrepreneur to acquire production capabilities and access to larger markets. It would save businesses and jobs and contribute to government revenues. It would convert the pandemic’s negatives into positives.
(Main image: A store in Soweto, a sprawling township southwest of Johannesburg, South Africa. – Frédéric Soltan/Corbis via Getty Images)
The views in this article are written in a personal capacity and do not necessarily reflect the views of organisation with which the author is associated. Similarly, the opinions expressed in this article are those of the author(s) and do not necessarily reflect the views of SAIIA or CIGI.