COVID-19 Africa Watch talks to McKinsey’s Chairman for the Africa region, Acha Leke, about government responses to COVID-19, the support needed for SMEs, and debt sustainability.
The following are a few of the main takeaways from COVID-19 Africa Watch’s conversation with McKinsey’s Chairman for the Africa region, Acha Leke:
- Countries and companies that were more digitally advanced prior to the onset of the pandemic, or that were able to rapidly transition during the pandemic, were better equipped to temper the economic impacts of the crisis.
- Both in the public and private sectors, milestones in digital transition that typically occur on a two- to three-year timeline occurred in the span of three months during the pandemic. Through digital transactions, several governments were able to quickly advance social safety net programs reaching a broad range of their countries’ populations.
- To survive for three months, SMEs need about US$60 billion. So far, stimulus packages directed towards SMEs have amounted to only about $20 billion. Moreover, government aid packages have so far been directed to registered SMEs and large corporations. But only 15% of Africa’s 90 million SMEs are registered.
- Before the pandemic, African governments were to pay $44 billion in debt servicing costs this year. The G20 debt moratorium has been crucial: it has allowed African countries to reallocate the money that would have gone to debt payments to building resilience in their economies.
The interview was conducted by Thierry Nadjo, an IFC-Milken Institute Capital Market Scholar of West Africa’s Bourse Régionale des Valeurs Mobilières. A transcript is available below.
Hello, my name is Thierry Nadjo. I am an IFC-Milken Institute scholar from the regional Stock Exchange of the West African Monetary Union (BRVM). I’m happy to be with you today for this interview.
Let me welcome Mr. Asha Leke, Senior Partner and Chairman of McKinsey’s Africa office. Mr. Leke, thank you for being with us today to share some ideas and lessons about the COVID-19 responses in Africa and the post COVID-19 outlook.
Thanks for the invitation.
Mr. Leke, at the end of May 2020, the McKinsey office published ‘Reopening and re-imagining Africa’, and in this article you dropped nine bold ideas for re-imagining Africa through three main channels: reimagining society, reimagining business and reimagining government. Five months later, we are more experienced. Is there one idea that is more accurate than the others? Is there something missing?
Like you said, we came up with some thoughts around how to think about the continent out of the crisis. That was because we were in the middle of the crisis. We felt it was also time to start thinking about what opportunities the crisis could create for us. Every crisis, as you know, also brings opportunities. We did research and we interviewed a bunch of African leaders and people close to African leaders. And we had some ideas around imagining society, imagining business and imagining government. Do I think all of them are right? I think they are fairly accurate – people quite resonated with them.
“Africa had already been going digital before the crisis, but the crisis really showed that the countries and the companies that were more digitally advanced just performed better.”
The one that I would argue has actually taken off more so than we thought it would, is the first one that we had: accelerating Africa’s digital transformation. Africa had already been going digital before the crisis, but the crisis really showed that the countries and the companies that were more digitally advanced just performed better.
Things that we typically see happening in two to three years, we’ve seen happen in three months: for example the number of people who are working from home and the number of people who have pivoted their businesses to be more online and to accept more electronic payments than cash. It’s been a fundamental transformation. And governments have recognized that they need to continue to be able to provide government services, even in the middle of this crisis. And there will be other crisis as well. So, I think we were surprised by how fast and how big of an acceleration we have seen already in both the public and the private sectors across the continent.
Thank you Mr. Leke for highlighting how the digital processes were and are important to these responses given by the government, and society and the business in general. We’ve seen that most of the governments were taking fiscal and monetary measures as a response to the sanitary crisis. Can you give us an overview of what was the best response according to you from the African governments?
It’s hard to say which response was best. But I can give you some sense of what we’ve seen that was actually quite successful in terms of the impact it’s had. There are a number of governments who really very quickly put together programs to support our local populations. They were very much at risk, there were no jobs and economies were closed. For example, there was the new VC program that the government put together. And a number of other African governments launched programs as well. Many of these countries we didn’t have social safety nets. But very quickly, and again, through digital transactions, we were able to provide social safety net programs for a broad range of the population. That was very, very necessary at the time and has been hugely impactful. So that’s one component of the innovation that we saw coming out of this crisis.
“Only 15% of Africa’s 90 million SMEs are registered.”
We’ve also seen governments put a lot of stimulus packages in place to help businesses protect jobs, in particular for SMEs. There we feel a lot of those packages really went into some of the larger companies and the registered SMEs, right? Only 15% of Africa’s 90 million SMEs are registered. So in that area, I think a lot more work needs to go in there to really help protect unregistered SMEs. But governments were quite serious about putting in place the stimulus packages.
The third thing was the size of the packages: we had some countries whose packages were a bit small (1% to 2% of GDP), but we had other countries, like South Africa, that had packages that were 10% of GDP and like Senegal, with 15% of GDP – those were quite significant. The sizes of the packages that governments put in place was important because there was a lot of need for support.
The final thing I’d say is the additional support that, as Africa, we came together and requested for all of our development partners – the hundred billion dollars or so that was needed. That was something that was very positive and very much needed to help us with the crisis.
The reality is for us to fund this, it has to really come from two sources, right? Either governments can create the capacity to fund some of these stimulus packages, or we need some support, typically from multilateral or bilateral partners. And we’ve gone down both paths.
On the government funding, we had done some work in the past. We showed that as Africa, we had a hundred billion dollar public finance opportunity. Half of it was revenue. So those are the potential increases in revenues: about $50 billion from tax revenues by being more efficient in collecting taxes. However, half was also in cost: to really be much more efficient as a government across the country. And so, we’ve seen a number of governments who’ve gone in and said, ‘let’s really try to figure out how much we can save costs to boost our capacity to support the economy, we need that to be much more sustainable’. We looked internally and said, ‘what can we do?’
Then on the other hand, we said that we also need partners to help us. And when we ran the numbers that were needed, we realized it was about a hundred billion dollars of support that was needed. Now in the context in which this year, African governments were supposed to pay $44 billion in debt servicing costs. So, the moratorium on the debt was actually one of the quickest levers, because that money had been budgeted already. If there’s a moratorium, you can then use that money very quickly to pump it into the economy. So, we were happy that we got the moratorium from our partners, at least for this year, and we’re looking to extend it to next year. But there’s also some fresh capital that is needed – that moratorium on its own is not enough. I think it’s important in the short term to help us address the crisis, along with us trying to figure out how we can generate more capacity within our own economies. Or like I said, from either cost savings. Over time, revenue generation is a bit harder because the economy has been hit hard. So, it’s hard to drive more tax revenues.
I think it’s all three things. It’s about support from the development partners. It’s us looking internally to figure out how much we can save costs. And then the third is, looking at the figure, what are other levers for us to increase revenues for our countries.
Thank you for those precisions. We hope that all that spending will go for the support of SMEs which are very important in the economies of Africa. Talking about SMEs, you are known, Mr. Leke, to be very optimistic about the potential of Africa. In this COVID-19 crisis, a lot of SMEs are experiencing a hard time just to survive. So, in this context, what are you saying to your clients to keep their presence on the continent or to come on board?
You’re right that on the continent, the crisis has affected us. We’re waking up this morning to 1.5 million cases and over 35,000 deaths.
“It’s a big, big crisis. And those who are the most affected from a business perspective are SMEs.”
Africa as a continent is going to go into a recession most likely for the first time in 25 years. People are losing jobs, right? If we are to run some numbers, about a third of formal jobs are at risk. It’s a big, big crisis. And those who are the most affected from a business perspective are SMEs. They don’t have the cushion that some of the largest companies have, and most of them are informal. So, we’ve been doing some work with Ecobank on this, and out of the 90 million SMEs in Africa, only 15% of them are registered. If you look at how much these SMEs need just to survive for three months, to pay staff and things like that: they need about $60 billion. If you look at the stimulus packages that have been announced to support SMEs, they’re only about $20 billion. So there’s a massive, massive gap. Some of them closed shop and people lost their jobs.
Despite this, we started talking about some of the opportunities that are coming out of the crisis: digitization opportunity of the manufacturing and doing a lot more local manufacturing. So, there are opportunities for companies to come out of this crisis as winners. For us, a lot of the work we’re doing with our clients is helping them understand what they need to do to be resilient because what we found is that companies who actually win within the crisis do much, much better coming out of the crisis. It’s important to build resilience.
If you step back from all of that, that the continent is going through a tough time, the fundamentals are still there. The consumer story is still there. The resources we have are still there. The opportunity for technology to help us leapfrog is still there. I suppose fundamentals don’t change. And so I still believe in Africa. I am still quite positive about our continent. I think it’s an amazing place. It’s a great place where you can actually do well and do good. You can make money for your shareholders, but also make a real, tangible difference in people’s lives. But there are a number of things we need to get right. We’ve been talking about the potential for Africa for a long time, but I think this crisis has just created more urgency for us to re-focus and get some of those basics right.
The Milken Institute and I would like to thank you for those powerful insights. We wish you all the best in providing your clients with the great experience of your teams. Goodbye and stay safe.
Thank you. You do the same and thanks for having me here. Take care.
COVID-19 Africa Watch tracks major developments and policy announcements from across the continent and also offers a curated selection of analysis on how the pandemic will impact African economies and development efforts. The site is a project of the Milken Institute’s Global Market Development Practice.