Africa will bear the brunt of the economic consequences of the COVID-19 pandemic. What can be done to mitigate these impacts? Beyond a debt moratorium, all forms of financial mobilization will be needed from the international community.
Before even being hit by the COVID-19 epidemic wave, Africa has “imported” an economic shock of unprecedented magnitude. The effects of this tsunami are being felt through a wide range of channels: outflows of capital to developed countries, oil prices slashed in half, tourism grinding to a halt and the likely decrease in transfers from the African diaspora. With the second wave looming ahead and an increase in the number of cases, we must analyze the magnitude of the expected human and social impacts and map ways out of the crisis.
Africa has fallen into recession and the impacts will be considerable. On April 9, 2020, the World Bank revised its forecasts. It now expects African GDP to shrink by between 2.1% and 5.1% in 2020 (the second scenario is considered most likely). This adds up to 7.5 points less than expected. Given the rate of Africa’s population growth (approximately 2.5% per year), per capita income is expected to decrease by nearly 5% “at best” and 10% at worst in 2020 in these two scenarios.
Risk of a rapid spread of COVID-19
The number of people tested and affected by the COVID-19 epidemic is currently lower in Africa than elsewhere in the world, but the continent will not be spared. While the low number of regular screenings does not currently provide a clear view of the spread of COVID-19 in Africa, the number of cases is certainly significantly underestimated.
Several factors are even likely to accelerate the transmission of COVID-19 in Africa: very dense urban areas, a high portion of the population living in impoverished neighborhoods and slums with little access to water and sanitation, and a lack of social safety nets that would make a sustained lockdown of the population difficult to bear. For poor populations or those that have only recently moved out of poverty, the risk of relapse is clearly less acceptable than in high-income countries.
Finally, strict lockdown measures would be much more complex to implement since a large portion of labor is concentrated in the informal sector and, as a result, all workers in the informal sector would instantly lose 100% of their income if forced to stay at home.
To limit the spread of the virus, several countries have taken rapid measures to close airports, schools and markets, ban public and religious gatherings and impose curfews. However, these measures may prove unsustainable despite the high economic cost.
Health systems ill-prepared to handle the COVID-19 pandemic
Furthermore, the fragility of health systems and certain sections of the population increases the risks of severe infection and death. Although the structure of the African population, characterized by a high proportion of young people under the age of 25 (60% in 2020), is a factor that should limit the explosion of severe cases, offering significant protection for societies, other risk factors do exist.
These factors vary greatly based on sub-region, but malnutrition (and sometimes obesity), the still high prevalence of HIV in southern Africa, tuberculosis, and malaria may constitute additional risk factors that prevent any hope of Africa being “spared” by this scourge.
Above all, the fragile state of health systems that are poorly equipped to handle large numbers of severe cases (low numbers of intensive care units, ventilators, protective equipment for medical personnel, etc.) increases the risk of mortality in the event of infection. Out of the 25 countries most vulnerable to an infectious disease, 22 are located in Africa.
Limited and unequal room for maneuver in handling the economic and social crisis
African countries will all be socially and economically affected by the direct consequences of the COVID-19 epidemic, but they will also be unequally equipped to respond to them. These direct consequences result from the increase in the number of people affected, the decrease in productivity and associated economic activity, exacerbated in certain countries by lockdown measures.
For the most part, the room for fiscal maneuver for African states is narrow and limits opportunities for supporting the economy. According to the IMF and World Bank, out of some 40 African countries for which “analysis of debt sustainability” has been conducted, approximately half present a high risk of over-indebtedness or are currently in a state of “debt distress”. Some fifteen countries present a moderate risk and less than five are at low risk.
This situation considerably limits the support countries can offer, particularly for major essential (electricity, water) and strategic companies (airports, oil, etc.), and businesses and SMEs that are likely to be highly vulnerable. Furthermore, a portion of public spending will likely be redirected to the emergency response to the health crisis before the response to the economic crisis.
African countries are very vulnerable to the global economic impacts of COVID-19
Certain consequences of COVID-19 that have already emerged could have major implications for African countries. These consequences are caused by several factors:
- a drop in demand from the world’s major economies (Europe, China, United States, etc.), which weighs down on countries that are more dependent on their world exports of goods and services (the share of these exports exceeds 30% of GDP for approximately half of African countries);
- the effect is even stronger among countries exporting commodities due to the falling prices caused by this drop in demand. This is specifically the case for the oil-producing CEMAC countries (Cameroon, Gabon, Chad, Congo, Equatorial Guinea) and for some of the largest African oil-exporting economies (Nigeria, Angola, Algeria), as well as for countries exporting ores and metals from southern Africa. For the most part, these states had been severely weakened by the drop in commodity prices in 2014-2015, from which they have only partially recovered. Therefore, a new crisis would have severe consequences;
- the disruption of global value chains has led to the shutdown of factories in sectors in which inputs are not available (such as the automobile sector in South Africa and Morocco). The disruption of logistics chains and transportation difficulties in the context of lockdown can also disrupt the supply of essential products, food, and health supplies. Some experts warn of risks to food security for countries that are most dependent on food imports.
Other areas of economic activity could also quickly encounter difficulties, including the export of cut flowers in East Africa (especially Kenya and Ethiopia), which is also suffering from limited flights.
The COVID-19 crisis seriously destabilizes African economies
In the short term, recovery from the crisis will depend on the lifting of lockdown measures in Africa and around the world, as countries succeed in stopping the spread of the COVID-19 epidemic.
From a global perspective, several recovery scenarios are possible, but it is still too early to predict which will occur:
- V-shaped recovery–rapid exit and recovery if the COVID-19 epidemic is stopped quickly;
- U-shaped recovery–slower recovery if it is difficult to restore trust following the financial crisis;
- L-shaped recovery–if the health crisis drags on;
- W-shaped recovery–temporary exit followed by relapse, especially if the right conditions are not met in the easing of lockdown restrictions.
In Africa, the magnitude of the crisis will largely depend on the form of recovery from the global crisis. In addition to the recovery of economic activity and demand, which is the prerequisite for the recovery of Africa’s exports, the pace at which oil prices rebound will be crucial for several African economies which depend on the exportation of their raw materials.
While in principle these economies could absorb the impacts of a V or U-shaped recovery of oil prices, the effects of an L or W-shaped recovery would be much more destabilizing, especially in terms of the external balance of these economies. If it continues, the crisis could also affect the countries’ solvency (i.e. their ability to pay their debts) in addition to their liquidity, and increase their burden, even as their needs for funding remain high.
The necessity of increased funding from the international community
The way authorities respond to the health crisis and their support of the economy until COVID-19 has been eradicated will be paramount, and yet the margins for maneuver are limited. In Africa, several central banks have reacted by lowering their policy rates to support the economy. Fiscal support from authorities will also be required, but likely will not be enough for countries already under tight fiscal constraints.
When bond markets are closed to developing countries due to prohibitively high rates, since the large-scale direct funding of additional expenses is unthinkable, increased efforts from the international community remain the only option. The one-year debt moratorium for the 76 poorest countries, a suspension advocated by France in particular and coordinated by the Secretariat of the Paris Club, comes as a breath of fresh air. Debt service in 2020 had been estimated at $32 billion.
It will be crucial to maintain this coordination and goodwill of creditors long-term, since there will be a greater number and variety than in 1990 and 2000, during a first wave of debt restructuring. For the poorest countries, IDA beneficiaries, multilateral donors are believed to represent 33% of the debt service in 2020, according to analysis by CGDEV, bilateral donors 43%, and private creditors account for the remaining 24%. This coordinated and balanced approach offers the only fair and effective solution. Otherwise, the efforts of certain donors would only be used to reimburse others and would not address the numerous health and social emergencies.
While the issue of debt cancellation has now been raised and over time will be enforced for countries whose debt already appears unsustainable, it will need to be maintained long-term in order to prevent the all too familiar “free rider” phenomenon.
Going beyond debt moratorium
Given the magnitude of the crisis, African countries will need additional funding, not only at the government level but through all channels (local and regional authorities, development banks, public services, microfinance) that can quickly reach vulnerable populations. A drop of 5 points of GDP represents a loss of income close to $125 billion across the continent.
A debt moratorium will only provide the means to meet approximately one fourth of needs. The issuance of special drawing rights from the IMF, also of great value, could provide low-income countries with around $15 billion in the event of a massive issuance at the global level (500 billion). These figures, which are still estimates and must be viewed with caution, nevertheless reveal that only the mobilization of all financial stakeholders, likely over two years rather than one, will succeed in softening the blow, without fully resolving the crisis.
The initial announcements from the European Union (with a package of €15 billion) could also help to limit the magnitude of the shock. All of these tools–additional funds from banks and development agencies, the deferral of debt repayment, mobilizing of central banks from developed countries to provide foreign exchange at moderate rates, the use of the IMF’s capacity to issue currency–will be needed simultaneously and perhaps long-term in order to brace against the double tsunami looming over Africa.
The opinions expressed on this blog are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.