SMEs need strong financial market to thrive — Report

A report is calling on African governments to focus on strengthening regional financial markets, providing access to derisking instruments and enhancing enterprise risk management systems.

These measures, it said will not only support small and medium-sized enterprises (SMEs) but also boost investor confidence, driving economic transformation.

“To help SMEs seize opportunities and drive economic transformation, African governments need to strengthen regional financial markets and enhance regulatory frameworks.

Key actions such as improving access to financial derisking instruments and bolstering enterprise risk management systems will build resilience and boost investor confidence,” it said.

Titled: “Economic Development in Africa Report 2024: Unlocking Africa’s Trade Potential – Boosting Regional Markets and Reducing Risks ”, the report, launched on February 10 by the UN Trade and Development (UNCTAD) Secretary-General Rebeca Grynspan and Côte d’Ivoire’s Minister of Trade, Industry, and SME Promotion, Souleymane Diarrassouba, highlighted key opportunities for Africa.

It emphasized the importance of the AfCFTA Protocol on Investment, adopted in 2023, which has sparked a surge in intra-African investment.

The report explained that Africa held immense potential for business growth, offering expanding markets and attractive investment returns.

However, small and medium-sized enterprises (SMEs), which contribute 80% of employment on the continent remain vulnerable to economic shocks, financial constraints and energy challenges.

According to the report, 32% of African firms in 2023 cited limited access to financial tools as a major barrier to growth.

Additionally, currency volatility has created further difficulties for SMEs dependent on foreign currency for trade.

That year, African investors financed 20% of international projects in services and manufacturing and 13% in resource-based industries. 

Energy dependency

The report revealed energy dependency poses a significant hurdle, with over half of Africa’s energy supply coming from fossil fuels leaving businesses vulnerable to volatile energy markets and risks during the global energy transition.

In 2023, renewable energy investment in Africa totaled just $15 billion – only 2.3% of global renewable energy investment.

However, the report said countries such as Botswana, Cabo Verde, Mauritius, Morocco and South Africa show that resilience can be strengthened in Africa through stronger regulatory environments, connectivity, economic diversification and political stability.

Trade vulnerabilities

According to the report, between 2002 and 2023, Africa experienced strong economic growth, enhancing its appeal for trade and investment.

It said from 2000 to 2010, the continent’s economy grew by 4.8% annually, outpacing the global average of 3.1%.

Africa’s growth slowed to 3.1% between 2011 and 2020 but remained above the global average of 2.4%. However, the growth was closely tied to commodity price booms. 

“Over half of African nations depend on oil, gas or minerals for at least 60% of export earnings, leaving them vulnerable to volatile global markets.

The 2014 commodity price downturn and the COVID-19 pandemic highlighted these vulnerabilities, severely impacting investment. Gross fixed capital formation – investments in physical assets like infrastructure – fell from 11.4% in 2014 to 4.8% in 2015. The pandemic caused a 4.1% contraction in 2020,” it said.

The report explained that macroeconomic risks, such as fiscal imbalances, further deter investment, such that in 2014, falling commodity prices led to an average fiscal deficit deviation – the gap between actual and planned deficits – of 2% of GDP across Africa.

“In 2020, pandemic-related spending and revenue losses pushed deficit deviations to 3.4%, underscoring how external shocks strain government revenues,” it added.

The report called for macroeconomic stability and fiscal reforms saying, “governments should balance growth-focused spending with disciplined fiscal management, reduce reliance on external borrowing, diversify revenue sources and strengthen institutions.”