SMME sector is key for long-term economic viability

Keletso Setimela

Head of Business Banking at Absa Bank Botswana

Despite commendable efforts and interventions by various state and private sector entities, there is no silver bullet to how economies across Africa and the small and medium enterprise sector will recover from the global health pandemic.

Across the continent, we see a K-shaped recovery as different economies and sectors recover at differing rates from the worst effects of COVID-19 through stimulus packages and global support funds. Countries that acted early and decisively and have the mechanisms to channel support to sectors in critical need of assistance are better placed to lead the recovery. From a business perspective, sectors such as tech and telecoms are running ahead while leisure and tourism and aviation have a long road to regain lost ground.

Simply put, one year on from the pandemic, there is no linear or homogenous road to economic recovery.

So, where does this leave the critical SME sector in Africa?

According to the African Development Bank’s report African SMEs Through COVID-19, small and medium sized enterprises (SMEs) account for more than 90% of businesses and almost 80% of 

employment in African economies. The majority of these enterprises are to be found in the informal sector. Small business owners, particularly in the informal sector, can start afresh and pivot their business offerings according to the market needs.

But this adaptability and agility – the very qualities that make SMEs such a feature of the African economic landscape – are also the sector’s biggest Achilles heel. Anyone with an idea, the drive and the perseverance can start a small business in support of their families and even communities, but by its nature, it does not lend itself to long-term sustainability.

A 2020 Catalyst for Growth report found that the impact of the COVID-19 pandemic was felt to a far greater extent in emerging markets due to SMEs in these markets being constrained by institutional inadequacies.

Depending on the scale of the SME, when COVID-19 hit, some were unable to pay their own and employee wages, others were forced to retrench staff, while many were unable to meet financial obligations as they were not prepared and equipped to withstand such a tremendous economic shock.

SMEs with very little in the balance sheet in terms of investments or liquid assets and highly geared struggled for survival during the pandemic. It goes back to only borrowing money for necessary projects and where the business owner has a line of sight of cash flow to service that debt.

The April 2021 AfDB report African SMEs Through COVID-19 stated that in addition to immediate support and relief measures, governments should also “consider mid-to-long term structural policies for African SMEs that would enhance their resilience after the crisis”.

Key recommendations include: strengthening awareness of opportunities for SMEs, investing in skills and capacities, speeding up the adoption of digital technologies, and strengthening credit reporting institutions.

The way back from the brink

Education to support the SME sector will be crucial, and this is where corporates such as Absa Regional Operations (ARO) play such a critical role through Enterprise Supply Chain Development programmes (ESD) and supporting initiatives.

Africa is a vibrant and growing economic pot but still subject to regular economic shocks and bouts of turbulence, be that due to political instability or natural disasters. The SME sector, in particular micro-enterprises, will have to learn the importance of contingency reserves and a culture of saving instead of a hand-to-mouth approach, which leaves zero room to manoeuvre and too exposed to external factors.

SMEs can adapt to changing circumstances, but the sector needs to incorporate contingency and succession planning as critical parts of its make-up. In addition, adequately documented procedures which allow your business to continue to operate in your absence as well as optimal stocking and resourcing levels to drive efficiency will have to become part of the fabric of the SME sector.

During the pandemic, Absa provided financial assistance in payment relief to at least 670,000 customers in Africa, with approximately US$72m dollars in cash flow relief provided to our retail and business banking customers We also incentivised the use of digital channels for ease and safety of transacting, and in a market like Botswana, this translated into a 25% discount on transacting fees for online channels.

Furthermore, we provided counsel to small business owners and through our business development support programmes worked to upskill and empower SMEs. Meaningful support of this critical economic sector requires multi-stakeholder involvement from both the public and private sectors.

The economic green shoots of recovery can be seen all over the continent in key data points such as the GDP outlook, which the African Development Bank predicts will grow at 3.4% in 2021, as opposed to a contraction of 2.1% in 2020, and there has also been a solid rebound in commodity prices. Allied to that are vaccine roll-out programmes, which will help boost confidence in various economic sectors.

As a small business owner can adapt quickly, it is imperative that SMEs keep their ears close to the ground in terms of sector recoveries and quickly try and plug into those sectors that are potentially doing well and leading the economic recovery. Understand what your business can offer and link into the value chains of large firms in those sectors, maybe as a supplier or as a distributor.

The opportunities will be there. However, the SME sector will need to be agile and increasingly resilient in ensuring its long-term sustainability and ability to withstand any future shocks.