The Next Wave. Is Africa Ready? Issue of Rising Interest Rates
Interest rate has scared Africans and African businesses. Even innovators have not been spared. With the nest wave around, African governments cannot afford to sleep on this. The state of interest rate greatly reflects the economic situation of any country or region. Interest rate greatly reflects the trajectory of an economy.
Interest rates have a significant influence on economic decisions and financial performance, especially in economies where the market plays a significant role. It influences the willingness to save, and the demand for and allocation of borrowed funds. It also determines the allocation of accumulated savings among domestic and foreign financial assets and physical assets.
The Next Wave, Is Africa Ready? GDP Concerns
In the short run, an increase in interest rates could result in an immediate or permanent increase in demand for domestic interest-bearing financial assets. This could also result in a corresponding decrease in demand for inflation hedges. When interest rates go upward dramatically, it causes a re-allocation of public’s wealth, shifting away from resource investment in the short run. In the long run, the average rate of return on savings will rise, which may result in a continuing increase in the saving-to-income ratio—provided, of course, that incentives remain in place.
Africa’s Reality
As it stands, African governments have not taken advantage of the low global interest rates to borrow relatively inexpensive capital for high return public investments. Higher real interest rates imply lower long-term debt and fiscal sustainability. Lower interest rate is a feature of advanced and developed economies. A principal motive for holding interest rates down in developing countries is to stimulate investment. However, while the interest rate–growth has declined, in advanced economies over the last two decades, it has increased in Africa.
In 2020, Africa averaged a rate of 16.82%. This was 9 times greater than Europe’s at 1.71%. Data showed that countries which have been raising the highest funding in Africa had some of the highest rates in 2022. The big four: Nigeria, South Africa, Egypt and Kenya had interest rates of 11.5%, 4.75%, 11.25% and 7% respectively.
This is not good for countries looking to boost local investment in their economies. Little wonder a report from Techpoint Africa West Africa Decade claimed that 81.3% of the total amount invested in West African startups that have raised at least $1 million in the past ten years came from outside the continent. It also reported that Nigerian startups owed 71.2% of their investments to foreign investors.
How Interest Rate Affects the Next Wave
Rising public investment spending and internally supporting startups financially has been an issue in Africa. Owing a majority of investments to foreigners exposes an economy to diverse economic shocks. Aligning Africa’s rate of interest to the requirement of the next wave will require African governments to build an economy whose people aren’t unable to invest.
A large decline in interest rates will enable a re-allocation of public’s wealth from savings to investment. This may also result in a substantial rise in the general resources available for investment to take place. At the moment, African investors are not doing enough to see Africa and African startups through the next wave. How can they? The government presents a high interest rate that attracts them to saving rather than investing.
More so, high rates discourage innovators from borrowing to fund business and innovators ideas. Founders face the issue of access finance to expand or build a product/service line. Problems of collateral, extra bank charges and inability to evaluate financial proposals are some of the evils that accompany high rate of interest.
Africa needs to wake up. Organisations like Google, Seedstars, Y-Combinator and Microsoft are also playing an active role but it’s not enough. Africa needs to become her solution.