Management Consulting, Accounting, Tax, Advisory.

2022 World Bank Report: South Africa is The Most Unequal Country in the World. Why? Limited Funding Options for SMMEs, Low Manufacturing Sector Growth Rate.

It’s documented that South Africa is the Most Unequal Country in the World. Problems? Limited Funding Options for SMMEs, Low Manufacturing Sector Growth Rate, Unemployment. And yet, South Africa has one of the highest levels of gross domestic product per capita in Africa.

Share This Insight:

Although South Africa has one of the highest gross domestic product per capita in Sub-Saharan Africa, it remains the most unequal country in the world in terms of income distribution. The country’s high unemployment rate, which has increased materially in the last decade and is particularly high among previously disadvantaged communities and youth (who are predominantly black) contributes to this inequality.

Senior government officials in South Africa have repeatedly stressed that small business is a catalyst to unlocking economic growth and creating jobs. Recent estimates show that SMME’s employ between 50 and 60 percent of South Africa’s work force and contribute a whopping 34 percent of GDP. Small business however has been relatively stagnant as approximately only 14% of these are formalized, capping their job creation and economic contribution potential.

While reasonably substantial in terms of size, South Africa’s rate of established entrepreneurship is extremely low compared to other African countries.

The Most Unequal Country In The World: Getting to the Root of the Problem

Given its GDP per capita, South Africa should have a rate of early-stage entrepreneurship much higher than it is currently. There are fewer start-ups which have a low rate of survival as there is a thin pipeline of businesses. Government procurement has been a particular large part of market spending for these small terms who have coined the term of tenderpreneurs. These businesses become too dependent on government programmes which have significant shortcomings as they are prone to corruption, red-tape and poor administration leading to non-payment. These factors have led to businesses which are not sustainable, nor competitive in the private sector.

The Most Unequal Country In The World: Low Manufacturing Sector Growth Rate

In order to have a more catalytic impact, SMME’s need to invest in the industrialising the South African economy. The need to be more self-sustainable and to shift the balance of payments has been exasperated by the COVID-19 pandemic, and lately, by the impact of Russia’s invasion of the Ukraine. South Africa’s current manufacturing output is still below that of 2008. Contrast this against emerging markets overall, whose manufacturing output has increased by some 50%. South African manufacturing output growth has consistently been below output growth in the rest of the global economy. In sharp contrast to the IPAP and government strategies which envisaged a growing share of manufacturing. The declared objective of the IPAP was to create an additional 350,000 manufacturing jobs by 2021. This objective was confirmed by the government’s overall strategy, as outlined in the New Growth Path (NGP) (Economic Development Department, 2013). However, South Africa’s manufacturing employment has fallen steadily. Manufacturing employs 320,000 fewer people than in 2008 (IPAP, 2018:20). This decline in manufacturing employment arises not only because of the slow rate of growth of manufacturing output, but also because the employment intensity of that growth – i.e the amount of jobs per unit of output – is low.

The Most Unequal Country In The World: Limited Funding Options For SMMEs

President Cyril Ramaphosa has successfully raised just under R1.14 trillion largely from big business who have access to a larger pool of capital, predominantly as large lenders see big business as a lower credit risk. It is clear that in their struggle to access funds—both during the crisis and before it—not all SMEs are affected equally. According to Justin Kettle, Managing Director of Kettle, our experience shows that larger SMEs are the most likely to receive financing. The South African Reserve Bank data on corporate and retail SMEs indicates that businesses in this segment show have significant success accessing credit from commercial banks. These businesses are usually formal in nature, and they have the administrative and operational capacity to meet the credit criteria of the commercial banks. At the other end of the spectrum, while microbusinesses with turnover of less than 1 million rand that employ five or fewer people have limited access to bank lending facilities, they are able to tap into personal credit facilities, microfinance funding, grants, and other forms of government financing which are sometimes expensive and reduces profitability. These need to be assessed by modelling each deal to carefully manage your margins.

Insight by:

Do you have comments or feedback about this article? We would love to hear it! Please send your comments/feedback via the form below.

Comments or Feedback?

    HomeAbout ServicesContact