Fintech, other knowledge-intensive services can drive Africa’s prosperity, increase inclusion – Welcome to the Sierra Leone Telegraph

by James · September 25, 2022

Kingsley Ighobor: Sierra Leone Telegraph: 25 September 2022:

Paul Akiwumi, Director of UNCTAD’s Division for Africa, discusses a recently released report that calls for the diversification of African economies. The United Nations Conference on Trade and Development (UNCTAD) Director of the Department for Africa and Least Developed Countries Paul Akiwumi is usually intense when he talks about Africa’s economic development. This much is the case in a discussion of UNCTAD’s latest report entitled Rethinking the foundations of export diversification in Africa: the catalytic role of business and financial services

The report gives a clear call to African countries to diversify away from goods to knowledge-intensive services. Mr. Akiwumi echoes one of the core arguments that externalities such as the Ukraine crisis and the COVID-19 pandemic will continue to put commodity-dependent economies at risk.

Certainly, a staggering 83 percent of African countries are commodity dependent. These countries also make up 45 percent of commodity-dependent countries worldwide, the report notes. According to UNCTAD, a country is commodity dependent when its share of primary commodity exports is more than 60 percent of total commodity exports.

Africa’s commodity dependence is a stark reality that worries Mr. Akiwumi. “When we look at least developed countries [LDCs]over 40 only five [countries] have graduated [out of LDCs]. It means that our development model, the commodity development model, has not worked,” he claims, warning that events that could shock the global economy will continue to happen.

Africa is feeling the impact of the war “6,000 miles away,” he laments. “When global energy prices go up, everything goes up. Only about 15 percent of the value of trade is within Africa, while 85 percent goes outside the continent,” he adds, emphasizing the interconnectedness of the global economy.

Mr. Akiwumi further explains that small and medium enterprises (SMEs) in fintech, agri-tech, health technology and other high knowledge-based and technology-driven SMEs can help the continent achieve economic and social inclusion.

Therefore, Africa needs to diversify into knowledge-intensive services to achieve the twin goals of providing “support to existing traditional economic activities” and creating “innovative approaches that will increase productivity,” he insists.

Fintech on the rise

The good news is that investment in fintech in Africa is on the rise. UNCTAD reports an increase in investment in the sector from $400 million to over $2 billion between 2017 and 2021. And Mr. Akiwumi estimates that figure could reach $4 billion by the end of 2022.

Nevertheless, he would prefer faster and even growth between the countries. “Nigeria is doing extremely well. You go to Nigeria and they have all these economic mechanisms to support fintech. But this must be the case across Africa, he says.

The UNCTAD report points to Opay, a Nigerian sales platform and mobile payment service company, which raised $400 million in 2021 and currently has 160 million users, including millions in the vast unbanked population.

Investments in fintech in Africa are on the rise. UNCTAD reports an increase in investment in the sector from $400 million to over $2 billion between 2017 and 2021. And Mr. Akiwumi estimates that figure could reach $4 billion by the end of 2022.

Mr. Akiwumi says other examples abound in Africa of technology “that provides food storage opportunities and satellite data to farmers about when to plant because they know when the rains are coming and supports extension services by just taking a photograph of a leaf of a plant and knowing what which must be done.

“We have health technologies that offer affordable dialysis systems for the population. We have fintech that promotes financial inclusion of people. You don’t need a physical bank anymore. People don’t need to have an address anymore. They can manage their accounts in their apps. It’s wealth management fintech that helps the poor and the lower middle class.”

Photo: Source: UNCTAD, based on data from Fintech Global, 2022.

Obstacles in the way

Despite such progress, there are still obstacles in the way. The report lists “limited access to finance, poor integration into regional and global markets, and a limited skills base”.

The fintech sector is also not developed enough to support production. “For example, mobile money, the most widely used financial technology in Africa, is only used to provide users with short-term microloans,” the report said.

Is globalization or increasing interdependence of world economies forcing African fintech to offer services that are of international standards?

Mr. Akiwumi is not concerned about such issues. Rather, he believes that a proper regulatory environment and necessary infrastructure will attract foreign investors anyway.

Insisting that the quality of African fintech is good, he explains: “You have venture capital firms from India or the US or Europe coming to East and Southern Africa through Mauritius because Mauritius is now a financial hub. Companies enter because good standards exist there.

“So, if money comes from America, it is [Mauritius] maintains the standards American firms demand. “It’s about pursuing the right policy. Mauritius decided to diversify away from textiles and sugar cane and tea. And they said their financial sector would be the gateway to East and South Africa. Now, if you go to Mauritius, there are local financial firms that know all about the global rules and regulations.

His concern – again – is that “It shouldn’t just be one country; there should be many countries that attract these investments.”

About 50 million micro-enterprises and small and medium-sized enterprises in Africa need about 416 billion dollars annually, the report says. Where will that money come from?

Mr. Akiwumi says it is the government that should first provide the right environment, including cyber security, because most transactions are electronic; adequate power supply, because there can be no development without power; internet infrastructure and other regulatory frameworks.

After that, he says firmly: “The government must let the private sector get on with its life.

Financial technology and alternative finance are mostly driven by the private sector, and the report maintains that they can increase export diversification if appropriate legal and institutional frameworks are in place. That’s all the more important because of “decreasing inefficiencies in resource allocation within the traditional banking sector.”

AfCFTA is a catalyst

Mr. Akiwumi, not for the first time, speaks glowingly of the African Continental Free Trade Area (AfCFTA), which could potentially consolidate a market of about 1.2 billion people. “That [market] is a great potential for export diversification, he points out. “AfCFTA will facilitate business transactions because businesses will operate under continental rules, regulations and procedures vis-à-vis individual countries.

The report notes that the AfCFTA will help national efforts to “prioritize service sectors relevant to a value chain that is strategically important to a given country.”

“I tell you, in ten years you will see a different Africa. There may still be poverty, but you will see economic growth and development and prosperity in many places. There will be more countries like Nigeria, many more like South Africa, Kenya, Mauritius, of course, Egypt and Morocco. It will happen. I guarantee you this.

Africa Renewal asks: “You must be an incurable optimist. are you not?”

“We must be optimistic, my friend. We have no choice,” Mr. Akiwumi replies with a smile.

The report’s recommendation to countries to remove protectionist policies is debatable given that Africa’s leading economists and development experts are divided on the issue. For example, Carlos Lopes, a former executive secretary of the United Nations Economic Commission for Africa once argued for what he called “sophisticated protectionism,” which is a government’s strategic intervention with policies that target specific sectors to benefit the national economy.

Mr. Akiwumi counters that “Protectionism only makes you less prepared for competition. There has to be competition, and competition leads to efficiency and cost effectiveness.”

He’s not opposed to policies that protect certain areas of national security, but aside from that, he insists, “protectionism stifles innovation and the ability to absorb new technology.”