African MICs are living in denial

Several African MICs continue to see their economies struggle. Take South Africa, for example. The Rand recently dropped by 2.4% against the dollar to 19.34, increasing this year's decline to 11.5%. The devaluation of the Rand has also done little to spur export growth, and inflation is rampant.

Until African MICs realize that their fate, and the fate of their private sector, is ultimately dependent on the wealth of its citizens, repeated economic crises will be the norm. (Devon Maylie/IFC)

South Africa isn’t the only African MIC facing serious currency devaluation, coupled with double digit inflation, and floundering exports. Several African MICs are also struggling with the same realities. 

African MICs in tandem are all pushing renewed efforts to promote private sector led growth as a way out of the current crisis. They are all developing approaches to privatizing select state enterprises, accompanied by additional incentives to encourage both foreign and domestic private sector investment.

But, promoting private sector development in select African MICs is no small task. Private investment rates across African MICs stood at approximately 18 percent of GDP as of 2021. Since then, however, private investment rates have declined considerably, with some exceptions. Private investment now stands on average at between 10 to 13 percent of GDP, dropping between 2 to 8 percent in under 18 months. No economy can proposer with such low levels of private investment.

In African MICs, where people live off less than $5 a day, for the private sector to flourish, consumer spending has to rise. But, since devaluation and inflation are eating away at the middle class, consumer purchasing power is eroding. This has pushed the population of several MICs much closer to the dreaded poverty line, and scared away investment. 

Raising interest rates to combat inflation won’t help private sector development either. High interest rates induce consumers to spend less, and the private sector has to pay more to borrow. But, high interest rates are also necessary as MICs are seeing deteriorations in national savings rates. Most African MICs, with the exception of Nigeria, have national savings rates that stand at slightly below 10 percent of GDP. This is compared to 45 percent in China, 30 percent in India, and 14 percent in Pakistan.

As for privatization, with very weak national currencies, the time for divestiture is likely now. Foreign direct investors might see this as an opportunity to buy state enterprises on the cheap, but the question of what and what not to privatize looms large.

The singular focus on more private sector led growth in African MICs misses several key interdependencies. The real problem isn’t just the size of the private sector in these economies, the elephant in the room is the persistent loss of wealth of the general populace. Until African MICs realize that their fate, and the fate of their private sector, is ultimately dependent on the wealth of its citizens, repeated economic crises will be the norm. Denying this reality won’t just impede stabilization, it will impede development.