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Silver linings: How the pandemic has accelerated digitalisation in Africa

by Thabo Makoko, Head of cash management, Absa

Published: March 15th 2022

It has long been accepted, by some, that if you wanted to find the most exciting developments in digitalisation, you looked at developed economies. While these economies might boast sophisticated systems, the adversity borne from the pandemic has accelerated an interesting development in Africa which shouldn’t be ignored: the proliferation and advancement of digitalisation across the continent.

Africa’s booming digital sector, characterised by increased mobile phone use, a young and ambitious population, and rapid urbanisation, offers a unique opportunity for public and private companies, as well as governments, to capitalise on a new growth cycle in the aftermath of the pandemic.

Digitalise to survive

Possibly the most acute impact of the pandemic was the closure of borders and the subsequent shock to supply chains. As governments looked to contain infection rates, it generated a unique blow to African businesses as cash flow problems followed disrupted supply chains.

Supply chain disruption has meant that businesses have become reliant on new suppliers to meet demand. Though in theory this is a simple solution, in practice it can prove complicated and costly. The main issue was that new suppliers wouldn’t issue payment terms to these businesses on short notice which increased pressure on cash flow management.

The result of this was profound shift in mentality across the continent. Multinational corporates and SMEs throughout Africa recognised that existing supply chain links – where they relied on just one or two suppliers – were no longer fit for purpose. The pandemic revealed the importance of diversifying supply base and in order to achieve this, it required an enabler: digitalisation.

A catalyst for change

As outlined in Baker McKenzie’s recent report on reimagining supply chains, digitalisation can help companies build resilient supply chains through combining data-driven solutions and AI to identify potential risks and underperformance. Through digital technology, many multinationals in Africa are mapping out their supply chains to understand the geographic location of suppliers and their potential vulnerabilities, helping to build defences against additional unexpected shocks.

Thabo Makoko, Head of Cash Management, Africa, Corporate and Invest Banking

Countries that were affected by Covid-19 due to their diverse and vast foot traffic – including Ghana and Nigeria – have adopted digitalisation far quicker than their counterparts. This is a symptom of businesses needing to adapt to survive.

This has taken shape in the way that the pandemic has already challenged entrenched behaviours and attitudes – by removing some of the cultural and financial barriers to digitalisation, such as treasury processes. The disruptions caused by the pandemic created a level of urgency as digitalising treasury processes makes it easy to adapt and reduces operational costs. As other regions realise the benefits of digitalisation – such as simplifying reconciliation, predicting liquidity requirements, and providing more data on customer behaviour – businesses are embedding digital processes and not looking back.

The digital road ahead

In every circumstance, digitalisation remains at the whim of robust infrastructure such as reliable land, sea, and air travel to facilitate the movement of goods in-country and around the continent. Plugging the continent’s infrastructure funding gap through concessionary and blended finance will not only support general economic growth in Africa but it will reduce the friction of adopting and applying digital processes.

Moreover, marrying together reliable infrastructure and effective policy implementation – like the African Continental Free Trade Area (AfCFTA) – would further break down barriers to adopting digitalisation. Reducing tariff and non-tariff barriers to intra-African trade is possibly the most obvious effect but this isn’t the only advantage of the free trade area. Another, more cloaked benefit, is that the implementation of AfCFTA has identified red tape that exists in different markets throughout Africa which are currently thwarting growth and innovation. Identifying bottlenecks will enlighten the digital sector as it will create a salubrious environment for innovation to thrive and disrupt the status-quo.

The impact has been most felt across the payments sector as fintechs have made it easier for customers to access services, while reducing operational costs for providers. And given the incremental funding for fintechs in Africa during the pandemic – raising almost $5 billion USD in 2021 alone – capital injected into these start-ups is only likely to increase and therefore deepen the transition towards a digital economy.

Multinationals and businesses remain reluctant to divert capital towards developing digitalisation infrastructure, particularly in those areas where the pandemic’s impact hasn’t been so vigorous.

As it stands, it’s a hopeful outlook for the growth of digitalisation in Africa. Indeed, failure to recognise the opportunity of digitalisation could lead to countries falling behind, as financial markets in Africa continue to evolve in new and innovate ways. And one thing is clear – countries that are digitalising will be better placed to withstand any additional shock impacts as the continent’s economy recovers.