The International Finance Corporation (IFC) estimates 230 million jobs in Sub-Saharan Africa will require digital skills by 2030. That’s a $130 billion opportunity to train the future workforce in digital skills.

Globally 2.7 billion people don’t have access to the Internet. That’s one-third of the world’s population. The majority of which are in Africa. 40% only of which have access to Internet. In comparison, 64% in Asia and the Pacific, 80% in the Americas and 89% in Europe.

In contrast, according to the International Monetary Fund (IMF), global inflation increased to 8.0% in 4Q2022, from an average of 2.1 percent in the decade preceding the COVID-19 pandemic. A major trend was the collapse in global demand lowering inflation during the initial stage of the COVID-19 pandemic, followed by the strong recovery in economic activity pushing consumer prices higher.

The fast rebound of economic activity due to vaccine drives, the lifting lockdowns, and virtual working exerted upward pressure on consumer price inflation, while supply chain disruptions contributed to rising inflation when firms passed their increasing costs to consumers.

*(Traffic jam in Nairobi, Kenya / Photo by NODO News)*

The cessation of numerous economic activities contributed to widespread unemployment. In its latest assessment of the state of the labour market, the International Labour Organization (ILO) reported that unemployment would remain above 2019 levels until at least 2023, and the damage caused by the pandemic and war on Ukraine would take years to repair.

The decline in global trade in 2020 was comparable to the 2008/2009 global financial crisis and significantly worse than the 2015 recession. Global trade fell by approximately $2.5 trillion in 2020 (or by about 9 percent compared with global trade in 2019).

According to data compiled by United Nations Conference on Trade and Development (UNCTAD), as economic conditions improved in 2021, the value of global trade rebounded strongly, reaching a record high of approximately US$28.5 trillion, equivalent to an increase of about 13 percent when compared with pre-pandemic levels.

‘Perfect Storm’ Lands in Africa

*(People waiting at bank ATMs in Lagos, Nigeria / Photo by NODO News)*

Since 2019, the relationship between the exchange rate and external debt in emerging markets shows staggering divergence at alarming levels. In East Africa, Kenya alone witnessed an 8-10x increase in external debt as a result of the devaluation of the Kenyan Shilling.

In Nigeria, external debt jumped close to 80x than in pre-pandemic levels. South Africa’s external debt doubled from approximately $100 billion in 2019 to $200 billion in 2022. In North Africa, Egypt witnessed a sharp 5x uptick in external debt from roughly $40 billion in 2021 to just under $200 billion.

Every country has its own conditions, economic history, leadership outlook, geopolitical place etc. However, in the absence of calculated fiscal and monetary policies and sound governance structures, haphazard and unplanned measures can often lead to detrimental outcomes in a short timeframe.

Currency fluctuations, paired with shooting inflation and increased government spending is the perfect storm for a flailing economy. This then creates a negative balance of trade, lack of foreign direct investment and in-turn, absence of foreign currency for imports of basic raw materials and thus lack of foreign currency in-country to repay debts. Hence, a vicious cycle of inability to conduct business to attract foreign capital to sustain the economy ensues.

Power of Blockchain

*(Cape Town, South Africa / Photo by NODO News)*

Case in point, traditional finance hampers the growth of emerging markets due to the debt cycle they get caught in where generation after generation carries the burden of repaying the debt of their forefathers. The power of blockchain, the infrastructure on which digital currencies and stablecoins are built on, facilitates the innate ability of stablecoins to maintain constant value – by tying the digital currency to an asset or basket of assets such as commercial bank deposits or government-issued bonds.

Stablecoins differ from the original set of cryptocurrencies in that they may be issued by a central entity and rely on third-party institutions for certain aspects. Stablecoins are a powerful tool to bridge the traditional finance world with the relatively unregulated cryptocurrency world.

Stablecoins, like traditional (fiat) currencies abide by similar measures, reserves, central bank(ish) dynamics, supply, demand etc. Both digital currencies and stablecoins are maintained by blockchain technology, are cheaper and able to conduct international transactions in a shorter time frame than fiat currencies.

The fast settlement times make these currencies an excellent, cross-border medium of exchange and hold of value. More importantly, stablecoins and digital currencies promise to bring fast and cheap services within reach of those who need it most: the unbanked and underbanked.

Unbanked but Digitized Africa

*(The northeastern tip of the African continent / Photo by NODO News)*

In 2021, 45% of Sub-Saharan Africa’s population of 1.17 billion did not have a bank account, that’s just shy of 600 million people. Interestingly enough, mobile penetration in Sub-Saharan Africa was 46% in 2021.

Hereby lies a Midas opportunity to capture half of SSA’s population through mobile penetration, provide access to finance, liquidity and lending capabilities for these individuals and SME owners on a retail and institutional level, creating standards and mechanisms for credit scoring of the unbanked. Credable, a BaaS (banking as a service) solution is doing this via M-Pesa in East Africa and in other countries throughout Africa.

How do stablecoins fit in this equation?

Well, say Credable has operations in East, Central and West Africa. These different countries/regions have different fiat currencies that fluctuate significantly. Using blockchain enabled stablecoins and digital currencies for lending enables cross-border payment, clearing and settlement and mitigates FX risk associated with cross-border lending.

Let’s think about how governments and their respective central banks can mitigate the damage that’s been done as a result of the global macroeconomic landscape. After the fact, central banks in many emerging (and developed) economies are constantly increasing interest rates, from as low as 25 bps to as high as 200 bps every quarter.

In trying hard to minimize and thereby control the outflow of foreign currency from their respective countries, central banks are pushing lending rates so high to the extent they are becoming unaffordable for SMEs, the backbone of many emerging economies.

This starts to cause stagflation, an economic term attributed to the stagnation of an economy as a result of shooting consumer price indices driven by rising rates of inflation and unemployment. However, that has an adverse effect on trade cycles, exports and creates parallel FX markets that turn currency arbitrage into a cannibalizing industry that controls supply and demand of basic necessities and in-country goods and services.

Stablecoins and Central Banks

*(Ahmed M. Amer, CEO of Emurgo Africa/ Photo by NODO News)*

At this instant, central banks have a stellar opportunity to create testing facilities to facilitate the provision of foreign currency in the form of stablecoins and digital currencies, as an addition to traditional fiat currencies.

These sandboxes would regulate the ability of registering institutions to thereby secure stablecoins without any foreign currency outflows, and create appropriate and analyzed investment vehicles and structures for sellers of stablecoins to invest the local currency proceeds of selling the stablecoins in-country.

Moreover, central banks can tax these transactions and earn additional foreign capital liquidity in stablecoin reserves. We are starting to see tidbits of this in Africa with central banks adopting the digital yuan as a trade currency. However, stablecoins pegged to the US dollar, euro or other currencies would be more fitting for US and European import/export capabilities.

Industries that can benefit from such sandboxes are hospitality, tourism and real estate, food and agriculture, construction and building materials and finally, manufacturing and FMCGs (fast moving consumer goods).

Ahmed M. Amer: CEO of Emurgo Africa, bringing forth over 15 years of experience in financial services and developing and investing in frontier technologies. Over the last ten years, he has attracted and directed over $100 million in private capital, providing high-level technical expertise to financial institutions, governments and other stakeholders.

-Edited by Shigeru Sato