South Africa and Nigeria lag as internet set to add $300 billion to Africa’s GDP

By:
Kanika Saigal
Published on:

Internet connectivity in Africa has the potential to transform the continent, contributing up to $300 billion to GDP by 2025, according to a McKinsey report. However, some of the country’s most advanced economies, such as South Africa and Nigeria, are lagging behind other innovative peers, says Paul Cook of Silvertree Capital.

Africa is poised for its next leg of the technology revolution, states a report published by McKinsey titled Lions go digital: the internet’s transformative potential in Africa.

It estimates that the internet could contribute $300 billion to Africa’s GDP – equivalent to the output of Nigeria – transforming the continent’s political economy.

From the expansion of banking services, eruption of new products and services to a shift in the relationship between the citizen and the state – akin to the transformative impact of the mobile phone in rural areas in recent years – the internet revolution cannot be overestimated, if McKinsey’s estimates are anything to go by.

“Mobile telephony has already had an outsized effect in Africa, as it connected people who previously had little or no access to telecommunications due to the scarcity of fixed-line infrastructure," states the report. "If the internet matches or exceeds that level of impact, the result could be a leap forward in Africa’s economic growth and development.

“In this scenario, increased internet penetration and use could propel private consumption almost 13 times higher than current levels of $12 billion, reaching some $154 billion by 2025. The amount spent on internet access and use alone could increase from $5.7 billion today to $35 billion in 2025. If 10% of retail spending in Africa’s largest economies were to move online, e-commerce activity could result in revenue of $75 billion.”

In financial services, more than 60% of Africans could have access to banking services by 2025, and more than 90% could use mobile wallets for daily transactions and remittances.

Other sectors that wider internet coverage will impact include education, health, retail, agriculture, and government.

Only 16% of the population is online and the internet’s contribution to GDP is half that in other emerging regions, contributing 1.1% to GDP in Africa. As it stands, more than 720 million Africans have mobile phones, 167 million use the internet and 52 million are on Facebook.

The share is rising rapidly, explains the report, as African countries have introduced 3G networks, and planned investment will increase bandwidth and connectivity, and cut costs.

Variation

However, there are stark differences between African countries when it comes to progress developing internet and online services, says Paul Cook, founding partner at Silvertree Capital, an Africa-based business builder and seed investor which focuses in online and mobile platforms.

“Kenya is really punching above its weight," says Cook. "Although it has a mid-size population, and the economy is better off than some others on the continent, the country is not vastly wealthy – the city of Lagos has a larger GDP than the whole country of Kenya.

“But the main reason that it has excelled in internet coverage is the success of M-Pesa and the convergence of supportive regulation and the market position of Spherics [ Kenya’s leading telecommunications provider and creator of M-Pesa]."

He adds: “And in Africa, mobile phones are key to internet coverage. It’s just like having a mini computer in your pocket.”

Cook highlights that even Somalia has a promising start when it comes to mobile network coverage, and potentially the internet. “Although Somalia doesn’t have a functioning government, it actually has pretty good cell phone coverage," he says.

Countries lagging behind include economic heavyweights South Africa and Nigeria.

“Given the number of wealthy consumers in South Africa, the presence of a physical fixed-line network and an advanced economy, South Africa is falling behind," says Cook. "One of the main reasons for this is because internet services are so expensive."

Telkom, South Africa’s premier telecommunications provider supported by the ruling ANC government, has the monopoly.

“Regardless of the company you pay your telephone bill to, Telkom is the one who gets the fee, which means that the internet is not as attractive as elsewhere where competition brings costs down,” says Cook.

Nigeria, on the other hand, lags behind some of its peers because the country has failed to see mobile money take off.

“Nigeria is a cash-based economy, so mobile banking hasn’t had the same effect here as it has in Kenya with mobile phones and connectivity,” says Cook.

However, there is still a lot of potential in Nigeria, partly because of the attention the economy receives through investment but also because of the growing importance of e-commerce.

“There is literally no formal retail in Nigeria, which means that it is difficult to get things predictably and reliably, so e-commerce and online retailers are growing," says Cook. "This could be what drives the internet connectivity in Nigeria. And it doesn’t hurt that big names are throwing money at the country.”

New measurement

McKinsey developed the concept of iGDP – to measure the internet’s contribution to the overall economy as a share of total GDP – by summing up all activities linked to the creation and use of internet networks and services in four main categories: private consumption; public expenditure; private investment; and trade balance.

According to the methodology, Senegal’s iGDP is 3.3% and Kenya’s is 2.9%, similar to France and Germany. The continent’s largest economies, South Africa and Nigeria, have iGDPs of 1.4% and 0.8% respectively.

The report studied the progress and potential of the internet in 14 economies, which make up 90% of Africa’s total GDP.