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Digital economy: a growth driver for Africa?

Digital economy: a growth driver for Africa? The digital economy represents an opportunity for Africa to emerge, according to specialists. With the demographic pyramid, Africa can build a strong digital economy quickly. In addition to the commitment of African leaders and development partners, the training of talent remains a major challenge.

Digital economy: a growth driver for Africa?

Digital economy, a growth driver for Africa? When discussing digital transformation on the continent, a first observation emerges: digitalization is well underway in the five African sub-regions. However, there are disparities between them and of course between the 54 states of the continent. On the one hand, we have champions of digital transformation, followed by challengers, and finally countries where digital transformation is not a priority for the moment, particularly because they are experiencing a situation of tension or conflict.

“To develop the digital economy, two basic elements are required. First, a consistent ICT infrastructure to launch digital services. One cannot claim to have e-learning or e-health services for example if one does not have an adequate infrastructure… And unlike traditional infrastructure, ICT infrastructure requires a clear impetus and vision to be at the same level and have the same technologies as those of advanced countries,” said Adnan Ben Halima, vice president of public relations at Huawei Northern Africa, speaking at an e-conference organized on April 14 on the digital economy.

Digital economy: a growth driver for Africa?

Indeed, indicators on communication infrastructure and the digital economy would quickly bring us closer to the reality of the continent’s digital transformation: only 17% of the population has enough money to buy a gigabyte of data, compared to 37% in Latin America and the Caribbean and 47% in Asia. The lowest costs are observed in North Africa and the highest in Central Africa.

African digital economy analysis by sub region

Digital economy, a growth driver for Africa?

In Southern Africa, the digital transformation is at two speeds. Among the Southern African Customs Union (SACU) countries – Botswana, Eswatini, Lesotho, Namibia and South Africa – South Africa is leading the way in digital transformation. In contrast, in the non-SACU countries of Angola, Malawi, Mozambique, Zambia and Zimbabwe, digital transformation is still in its infancy with only 25% of the population having access to the Internet.

In this subregion, only 23% of the population can afford to buy 1GB of mobile data each month. South Africa is the main driver of a vibrant digital economy in the region. The country has between 700 and 1,200 technology startups operating in several sectors. South Africa also has the highest number of data centers in Africa at 21, compared to Mozambique’s 1 and Angola’s 3.

According to a recent study by the African Union and the OECD, East Africa, with 14 countries, holds the world record for mobile payment penetration, with 1,106 reported mobile payment accounts per 1,000 adults. The widespread use of mobile payment services in Kenya has lifted at least 194,000 households out of extreme poverty. All told, only 34% of the sub-region’s population can afford to buy 1GB of mobile data each month

In 2019, East African tech startups raised over $729 million in investments, up from $367 million in 2016. For the most part, these investments are in Kenya, ahead of Rwanda and Uganda.

North Africa consolidates its position in the digital economy

With six countries, North Africa is the best-connected region on the continent with mobile penetration at around 70% and 4G coverage at 83% by 2020. Mauritania and Egypt have relatively lower levels of digitalization than the other countries. Telephone penetration is higher in Algeria and Tunisia, while 4G coverage is better in Morocco and Tunisia. Finally, Internet coverage appears to be better in Libya and Algeria.

The digital potential of North Africa has led to improved business communication through websites and the development of e-commerce platforms.

In West Africa, which includes 15 countries, the region’s digital ecosystem is growing rapidly as the number of active technology hubs increased from 84 in 2016 to 142 in 2018. Mobile banking services have boosted financial inclusion in the subregion, which reached 57.1% in the West African Economic and Monetary Union (WAEMU) in 2018, with remarkable rates for some countries, notably Togo with a 71.9% rate.

In Central Africa, which includes 9 countries, only 9 out of 100 people use a computer and only a third (34.2%) of its territory is covered by 4G. Mobile payments have increased ninefold since 2010… but the potential of digital entrepreneurs remains largely untapped. In this subregion, only 5% of intermediate cities are within a ten kilometer radius of a high-speed terrestrial fiber optic network, whereas in West Africa, 20% are within this radius.

Africa’s Potential in Numbers

Digital economy, a growth driver for Africa? Africa has the potential to use the digital economy as an engine of growth and innovation, especially in light of the increased investment in digital transformation, to enable internet access to a wide range of citizens across Africa, and the African Union has developed a digital transformation strategy to seize the opportunities for Africa to leapfrog development.

A study by the Pharos Center for African Business found that Africa has become a hotbed of innovation, as it has witnessed several rounds of investment for emerging African technology companies to get individuals using mobile payment systems that were developed in Kenya and renewable energy solutions in Africa are working toward a more sustainable future.

The African continent has 18% of the world’s population, but accounts for 0.4% of high-tech exports and 2% of large-scale services exports. Promoting these exports would therefore accelerate the continent’s growth.

South Africa in pole position

The study pointed out that the virtual company can be defined as a company that relies on electronic employment, where employees perform their work remotely, and they communicate with each other through electronic means, and do not have a fixed seat, and bear little expense when compared to the physical expenses of the company, and it saves a lot of money, time, effort and buildings, And a company can decide to move from a traditional company that operates in familiar and known methods to a virtual company that relies on everything it does on remote work.

The study reported that South Africa ranks as the 35th largest e-commerce market in the world, with revenues of $3 billion in 2019. The prevalence of e-commerce among internet users in South Africa is about 56%, followed by Russia at 60%, while the global average is 76%. It is the largest online market on the African continent. Among the product categories most in demand by South Africans are: electronics, which is the largest sector and generates 31% of e-commerce revenue; toys, leisure and entertainment, which accounts for 21% of e-commerce revenue; furniture and appliances, which accounts for 21% of e-commerce revenue; fashion, which accounts for 19% of e-commerce revenue; and personal care products, which accounts for 8% of Internet revenue in South Africa.

African leaders commit to building a digital economy

At the 2018 Spring Meetings, the World Bank Group launched the Digital Economy for Africa initiative, which brought together African finance and ICT ministers, central bank governors, global technology and telecom giants, as well as local and regional internet platforms, think tanks, leaders, and entrepreneurs Free Digital and Development Partners. The forum focused on the role of the digital economy as a new engine of growth, discussed how to build its foundations and addressed the risks of being left behind.

Today, the African Digital Economy Initiative is working with a group of countries to prepare a national digital economy assessment that will serve as the basis for national digital economy strategies. One of the goals of the initiative is to increase connectivity throughout the region and connect the rural and urban poor to digital financial and government services, markets, and information. Digital economy, a growth driver for Africa? This will create a foundation for active digital entrepreneurship and raise the level of digital education and skills.

Many countries have already embarked on the path to a digital economy. Senegal has set a goal of getting 10% of its GDP from the digital economy by 2025. Rwanda has launched 4G and fiber connectivity to provide e-government and other services across the country. Kenya pioneered the mobile money transaction services industry and is now exporting its model.

Toward Universal Internet Coverage in Africa

The provision of affordable Internet services is a key requirement for sub-Saharan Africa to participate in the digital economy. However, the region is not fully connected to broadband infrastructure. The African continent has 21 countries among the twenty-five least connected to the digital economy in the world, while the number of those with access to the Internet does not exceed 22% of the total population. The region will benefit from focusing on introducing innovative business connectivity models, leveraging alternative infrastructure, and improving the policy and regulatory environment to increase private sector investment.

In addition to connecting people to the digital world, it is important to facilitate people’s self-expression through digital identity cards. However, 29% of adults in sub-Saharan Africa have no way to prove their identity. This percentage is much higher among women, youth, and the very poor. Digital ID programs can enable people to access basic government services, just as Rwanda is already doing.

Digital economy, a growth driver for Africa

Bringing people together online also helps increase access to financial services, including mobile money transactions. Fortunately, sub-Saharan Africa has seen the highest level of use of mobile money transactions. For example, when the government of Côte d’Ivoire issued several licenses to mobile operators, it opened up the market and with it new data from the Global Financial Inclusion Index showing a significant increase in access to financial services. The challenge, however, is to increase the means of such facilitation. And there are still 57% of adults prevented from opening an account for transactions, while no more than one in five adults have an account for financial transactions on a cell phone. To improve access to financial services, countries are beginning to consider harmonizing regional frameworks for payment systems, cross-border data flows, data privacy, cybersecurity and consumer protection. These are also important for achieving economies of scale and promoting regional integration, both of which are necessary for sub-Saharan Africa to compete in the global digital economy.

Digital Commerce

The creation of mobile payment and transaction platforms opens the door to the “platform economy” through e-commerce, e-markets, and the “shared economy,” all of which are growth engines for digital economies. For these platforms and shared economies to take off, the region needs dynamic entrepreneurial environments to help local businesses transform their operations and energy into value-generating activities online. Sub-Saharan Africa has the most entrepreneurial and youngest population in the world, according to the Early Entrepreneurship Index, but most countries lack the elements of the entrepreneurial system-mentoring, seed capital, and office equipment. While Africa is full of examples of excellence, we need to create businesses with superior technical capabilities that will bring jobs and open new markets.

Improving digital awareness and skills is another necessity. At the least basic level, people need digital knowledge to interact with the digital world. Most workers need digital skills to use technology in their daily work. Digital entrepreneurs need special coding and software skills to build their online businesses. Large technology and education companies like Andela are already developing these skills in key African markets.

We need to work together across the public and private sectors, regional organizations, and development partners to support Africa’s efforts to leverage digital transformation technology to accelerate sustainable development.

Draft Digital Transformation Strategy for Africa (2020-2030)

Africa presents a sea of economic opportunity in almost every sector, the continent’s predominantly young demographic structure represents a huge opportunity in the digital age, and therefore Africa must make digital social and economic development a high priority. Digital transformation is an engine for achieving innovative, inclusive and sustainable growth. From innovations such as mobile money platforms to the development of large-scale business outsourcing, digital transformation creates jobs, fights poverty, reduces inequality, facilitates the delivery of goods and services, and contributes to the achievement of Agenda 2063 and the Sustainable Development Goals.

Africa’s digital economy will grow sixfold by 2050, to $712 billion

The size of the digital economy in Africa is expected to grow sixfold by 2050, to $712 billion from the current $115 billion, the international network of high-impact entrepreneurs Endeavor estimated in a report released on June 9, 2022.

Entitled “The inflection point: Africa’s digital economy is about to take off,” the report states that the continent represents “the next growth frontier” of the digital economy.

Boosted by the Covid-19 pandemic in recent years, the growth of the digital economy in Africa is based primarily on three factors: the rising penetration of digital tools among the population, rapid urbanization, increased consumer spending and strong economic growth.

By 2030, consumer spending is expected to reach $2.5 trillion on the continent. By 2025, one in six Internet users worldwide will be in Africa, while 33% of new cell phone subscriptions will come from sub-Saharan Africa.

Significant impact on African economies

Endeavor also believes that the growth potential of the digital economy in Africa remains very high compared to other regions of the world. All the more so as there is still a lot of room for improvement. Only 33% of Africans use the Internet compared to a global average of 63%, while mobile broadband penetration is only 41% in Africa compared to a global average of 83%.

On the other hand, the digital opportunity is currently concentrated in four countries on the continent. Nigeria, South Africa, Egypt and Kenya. These countries capture 51% of all mobile subscriptions on the continent, 50% of software developers, and 73% of startup gas pedals.

Despite the differences between countries, the growth of the digital economy is expected to have a significant impact on African economies. GDP per capita is expected to increase by 2.5% for every 10% increase in mobile penetration, and by 1.9% for every 10% increase in digitization (conversion of information to a digital medium).

44 million jobs could also be created if Africa’s Internet penetration rate reaches 75%, and 3 million jobs will be created by marketplaces by 2025.

Growing opportunities for investors

The digital economy is already attracting considerable funding in Africa. Investments in strat-ups operating on the continent have increased 18-fold between 2015 and 2021. Between 2020 and 2021, these investments grew twice as fast as the global average.

The increase in the number of mega rounds (over $50 million), liquidity events, and unicorns further reinforces investors’ excitement about digital opportunities on the continent. 

Since 2011, there have been 7 liquidity events over $50 million and over 20 mega rounds over $50 million. In addition, Africa has produced 11 unicorns in the past six years, including Jumia, Interswitch, Opay, and Flutterwave, while the time it takes for an African startup to become a unicorn is rapidly decreasing.

In the coming years, opportunities will exist in pre-seed, seed, and early stage as well as in scale-up and exit. Endeavor notes, however, that “white space” remains important. Due to the large number of deals in the $0.2-5 million range recorded in 2021 (600 raises) compared to the $5-50 million range (150 raises), there is likely to be a shortage of funding supply when companies that have raised between $1-5 million need additional capital to scale further. To fill this gap, investors will have to consider adjusting their ticket sizes

In this context, the authors of the report recommend that international investors looking to support the development of African tech nuggets should learn more about the continent’s markets, working with local incubators and gas pedals.

Training the talents of tomorrow

The second basic element for developing a digital economy is resources in terms of talent, as Ben Halima reminds us. “In the countries where Huawei is present in Africa, we have launched various training programs with local institutions, such as ICT Academy, which aims to train between 5,000 and 10,000 students or engineering students per country. We also work with national government departments to select the best engineering students to provide them with training in China,” says Adnan Ben Halima.

Internet access remains out of reach for most people on the continent, digital startups struggle to attract funding, and “traditional” businesses are slow to adopt digital technologies and platforms to boost productivity and sales. Few governments are investing strategically and systematically in developing digital infrastructure, services, skills, and entrepreneurship. Digital economy, a growth driver for Africa?

Africa needs to think big on digital development. At the current rate of socio-economic achievement, many young Africans will be denied the opportunity to realize their potential. Digital technologies offer a chance to correct this trajectory, opening up new avenues for rapid economic growth, innovation, job creation, and access to services that would have been unimaginable just ten years ago.

In a universal vision, the digital economy should inevitably accelerate the achievement of the United Nations Sustainable Development Goals (SDGs), especially on the African continent. Finally, there would be no secret to building a real digital economy: political will, targeted investments, quality digital infrastructure and talented human resources to meet the challenge of the next ten years.

“I believe that technologies will boost emerging economies. They should allow Africa to play a more important role by 2030, with more foreign investment, lower unemployment and more opportunities for young people to develop their talents,” says Ben Halima.