Africa’s labour force is on track to increase dramatically over the coming decade, more than any other region in the world. However, creating enough employment to absorb these workers is set to be a major challenge.
So says the McKinsey Global Institute in a new report, titled Africa at work: Job creation and inclusive growth. To produce the report, McKinsey commissioned an in-person survey with 1,373 business-owners and executives in Egypt, Kenya, Nigeria, Senegal and South Africa.
McKinsey identified a number of barriers preventing African businesses from growing and hiring.
1. Macroeconomic and political stability
Fifty-five per cent of respondents cited worries about macroeconomic conditions as one of the top three constraints on the growth of their companies.
“The prevalence of uncertainty about the macroeconomic situation reflects the fact that, despite Africa’s growth acceleration over the past 15 years, many businesses are still concerned about sufficient demand and the potential for inflation,” says the report.
Many respondents are also worried about political unrest, especially those in the hospitality sector who fear that instability can have a negative impact on visitors.
“African countries have made significant improvements on macroeconomic indicators such as inflation and government debt, and GDP growth in those countries that have pursued reforms has accelerated three times as fast as non-reformers. Nonetheless, our survey results confirm that there is further room for improvement,” notes McKinsey.
2. Access to finance
Access to finance is the third most commonly cited barrier to growth. McKinsey, however, says that the importance of this constraint varies across countries.
“In sub-Saharan Africa, credit to small and medium-sized enterprises needs to roughly quadruple to fill a credit financing gap of between US$130bn and $150bn, the largest increase necessary in any region of the world.”
One of the reasons for this gap is underdeveloped banking systems (with the exception of South Africa). In sub-Saharan Africa, bank deposits are 34% of GDP, compared to 83% in India and more than 175% in China.
Another reason is lack of property rights that can affect the availability of collateral, preventing businesses from borrowing. “In Ethiopia, for instance, an economy that has potential to further develop its leather goods sub-sector, a key constraint to borrowing for small businesses is a lack of clear property rights that would allow owners to offer cattle as collateral,” notes McKinsey.
3. Infrastructure shortcomings
Many companies also said that infrastructure-related concerns – such as a lack of electricity, poor transportation infrastructure, and an inability to access land for development – are barriers to growth.
“Across Africa, infrastructure shortcomings have a direct impact on business and economic growth, but the severity of issues varies from country to country … For example, only 6% of South African business owners surveyed identified lack of access to electricity among their top three constraints on growth. In Nigeria, by contrast, many businesses have to use expensive generators, and 42% of respondents cited a lack of electricity as a hindrance to growth,” explains McKinsey.
High transport and logistics costs are also making it difficult for African companies to obtain inputs and reach customers. “It costs more than $10,000 to move a single 20-foot container overland from Dakar, Senegal, to Ouagadougou, Burkina Faso, a distance of about 2,000 kilometres, passing no fewer than 55 checkpoints that can impose unpredictable delays and add between 11 and 17 days to shipping time. To move a similar container the same distance in China would be roughly $2,300 by road or $1,000 by rail. In Nigeria and Côte d’Ivoire, which have some of the busiest ports in West Africa, the process of completing import procedures and clearing a port can take between 35 and 40 days,” says the report.