As SA’s democracy approaches a quarter century, the country has made substantial development progress. Significant improvements of infrastructure — both physical and financial — have supported economic stability. The expanded provision of essential services has helped reduce access gaps in education and health for the previously excluded.
The country’s economy has risen on the global stage and now ranks as the 39th largest in the world. Representing nearly a quarter of sub-Saharan African GDP, SA’s prosperity is not only important for its own people but essential to advance development in the African continent.
At the same time, SA’s rising prosperity is accompanied by persistent poverty, elevated income inequality and continued high unemployment, especially for youth. A fifth of the population in 2015 lived on less than $1.90 a day — the international threshold for extreme poverty. Some 57% of the population remains poor, living on less than $5.50 a day — the poverty line for upper-middle income countries.
With a Gini coefficient — the widely used measure of inequality — of 63 in 2014, SA is one of the most unequal economies in the world. Unemployment reached a 14-year peak of 28% in 2017, with youth unemployment averaging 54%. The job creation needs are substantial: 8.4-million jobs are required to absorb the unemployed and discouraged and another 2.7-million to keep up with demographics over the next 10 years.
President Cyril Ramaphosa’s state of the nation address in February laid out a vision aimed at tackling these remaining challenges, with a focus on job creation, especially for young people. As the main driver of investment and innovation, the private sector needs to play a key role.
Responsible for more than 90% of job creation worldwide, a thriving private sector will be essential to create jobs for the millions of unemployed. More than 6-million South Africans who are unemployed, or more than 9-million if those who have stopped looking for work are included, need to find a place in the economy.
Moreover, additional investments are needed in infrastructure, education and health to address the remaining access gaps of those lagging behind.
Digital innovation offers unique opportunities to leverage technologies to rapidly improve lives through mobile money and other, often related, services that can be rapidly scaled without relying on traditional business and financing models.
The needs of low-income consumers can be addressed by innovative entrepreneurs offering more affordable products and services. Too often, however, entrepreneurs lack access to appropriate financial services, struggle to penetrate tightly held markets and need better skills to expand their businesses.
Ramaphosa called on private investors to scale up their activities. He is absolutely right, and the International Finance Corporation (IFC), the sister organisation of the World Bank focused on private sector finance, is positioned to do its part. As the largest global development finance institution focused on the private sector, we have six decades of experience in delivering private development solutions and mobilising private capital. We can do more to help companies invest at home, and bring greater leadership in investment across the African continent.
In SA, the IFC has developed strong partnerships with local and international businesses, with nearly $400m in new investments in SA in 2017 alone. In 2017, the corporation developed the SME Push Program to channel more than R30bn over seven years into SA’s small and medium-sized enterprises — a key priority sector of the government.
The IFC’s support extends across many sectors. For example, it is helping with the expansion of vocational educational models, increasing supplier capacity in manufacturing, and the building of the largest concentrated solar power plants in the Northern Cape.
The development of sub-Saharan Africa is a key priority for the IFC. In this respect, the corporation can assist SA’s sophisticated corporations, financial institutions and investment companies as they seek out new investment opportunities beyond the country’s borders.
The IFC’s footprint in Africa has grown significantly, with 21 offices now in the region. Our long-term financing rose rapidly from $167m in 2003 to $3.5bn in 2017 — a 20-fold increase in less than 15 years. However, over the past few years, our commitments to investable projects in SA and in the region have started to plateau. The question therefore is how we go to the next level.
With Africa in mind, the IFC developed a new strategy to push our organisation to support investors willing to take more risk with the right incentives. The cornerstone of this new strategy — called IFC 3.0 — is to systematically create new markets, country by country and sector by sector, by tackling market and regulatory imperfections and by collaborating upstream on the policy side. For the necessary capital to be mobilised, we need to reduce risks — both real and perceived. In the face of credit agency downgrades, investors in SA benefit from IFCs AAA status.
Meanwhile, smaller markets, security concerns and political, institutional and operational uncertainties dampen the appetites of South African companies when they venture abroad. To tackle these concerns, we developed a new derisking tool with the World Bank’s International Development Association — a $2bn Private Sector Window with focus on fragile and conflict-affected countries, to address high-risk projects and broaden access to local currency loans.
The more we scale up in Africa, the greater our need for additional capital. We are now negotiating a capital increase with our shareholders. With our new strategy and additional capital, together we can create markets and jobs and make progress in meeting the development challenges facing SA and the continent.
First Published by Business Day