The Namibian economy has recently seen its worst years in terms of economic growth. The economy has been in a recession due to a decline in activity in the mining, agriculture, construction, and most recently the hospitality and tourism sectors. Before that, the country experienced years of accelerated GDP growth due to a high, unsustainable levels of fiscal stimulus which has left the government with US$1.25 billion in Eurobonds and liquidity issues. Simply put, this indicates that our government cannot afford to pump money into the economy as a means of growth, and we thus have to look towards private investment to stimulate growth.
A form of private investment that has seen rapid growth and unlocked untapped economic potential in Africa over the past few years is venture capital (VC). VC is a form of private equity financing that is provided to start-up companies and small businesses that are believed to have long-term growth potential. VC funding in Africa has increased exponentially from US$277 million in 2015 to a whopping US$2 billion in 2019. A decline was seen in 2020 due to the Covid-19 pandemic, but analysts expect this to pick up in late 2021.
In addition, research published by The MIT Press’ peer-reviewed journal titled ‘The Review of Economics and Statistics Journal’ indicates that increasing the number of VC-backed firms has a positive impact on job creation, income, and ultimately economic growth. In fact, evidence shows that VC firms play an inevitable role in the development of the economy through capitalising on:
Promoting innovation by financing the development of new products/technologies, and processes of the companies that are meant to influence the economy directly and positively.
Improving the absorptive capacity by raising the level of knowledge, skills and business acumen acquired from the process of inventing various solutions and start-ups.
Creating jobs through the various employment opportunities the empowered start-ups get to offer.
However, Namibia has missed out on the “African VC wave” and its potential economic benefits due to an unfriendly business environment. To elaborate, VC funds are purely focused on new businesses, and opening a new business in Namibia is an administrative nightmare. Furthermore, raising additional funding through alternative sources, namely banks, has proven almost impossible for many entrepreneurs, in addition to unfavourable tax rates. A study compiled by the World Bank on the ‘Ease of Doing Business’ in 2020 shows that Namibia ranked 104th out of 190 countries. Mauritius, a popular investor and VC destination in SADC, ranks 13th in this study. They have also managed to grow their economy by an average of 3.5% while our economy was entering recession. Likewise, Botswana, a country we share similar demographics with, is also ranked better than us in this regard, and have managed to grow their economy by an average of over 3.5% in the same period.
The Namibian government does not have the financial resources to stimulate economic growth, like they did in the past. We, therefore, need to look at attracting private investment. Evidence suggests that there is a growing appetite for VC in Africa, and it may provide us with a unique opportunity to restore our economy. We, however, need to focus our resources on reforming business regulatory frameworks to ensure that we create an enabling business environment in which new businesses can be seamlessly started and, within reason, effortlessly grown. New businesses create new jobs, new jobs create new wealth, and new wealth leads to economic prosperity.
*Etuna Hango is a junior analyst at Eos Capital, where he primarily focuses on investments and business development, while occasionally supporting the value-add team. He holds a Bachelor of Business Science degree specialising in finance from the University of Cape Town.