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COVID-19 (Coronavirus) drives Sub-Saharan Africa toward first recession in 25 years

COVID-19 (Coronavirus) drives Sub-Saharan Africa toward first recession in 25 years
Image credit: World Bank

09 Apr 2020

For Sub-Saharan Africa, Coronavirus crisis calls for policies for greater resilience

Growth in Sub-Saharan Africa has been significantly impacted by the ongoing coronavirus outbreak and is forecast to fall sharply from 2.4% in 2019 to -2.1 to -5.1% in 2020, the first recession in the region over the past 25 years, according to the latest Africa’s Pulse, the World Bank’s twice-yearly economic update for the region.

“The COVID-19 pandemic is testing the limits of societies and economies across the world, and African countries are likely to be hit particularly hard,” said Hafez Ghanem, World Bank Vice President for Africa. “We are rallying all possible resources to help countries meet people’s immediate health and survival needs while also safeguarding livelihoods and jobs in the longer term – including calling for a standstill on official bilateral debt service payments which would free up funds for strengthening health systems to deal with COVID 19 and save lives, social safety nets to save livelihoods and help workers who lose jobs, support to small and medium enterprises, and food security.”

The Pulse authors recommend that African policymakers focus on saving lives and protecting livelihoods by focusing on strengthening health systems and taking quick actions to minimize disruptions in food supply chains. They also recommend implementing social protection programs, including cash transfers, food distribution and fee waivers, to support citizens, especially those working in the informal sector.

The analysis shows that COVID-19 will cost the region between $37 billion and $79 billion in output losses for 2020 due to a combination of effects. They include trade and value chain disruption, which impacts commodity exporters and countries with strong value chain participation; reduced foreign financing flows from remittances, tourism, foreign direct investment, foreign aid, combined with capital flight; and through direct impacts on health systems, and disruptions caused by containment measures and the public response.

While most countries in the region have been affected to different degrees by the pandemic, real gross domestic product growth is projected to fall sharply particularly in the region’s three largest economies – Nigeria, Angola, and South Africa – as a result of persistently weak growth and investment. In general, oil exporting-countries will also be hard-hit; while growth is also expected to weaken substantially in the two fastest growing areas – the West African Economic and Monetary Union and the East African Community – due to weak external demand, disruptions to supply chains and domestic production. The region’s tourism sector is expected to contract sharply due to severe disruption to travel.

The Sub-Saharan Africa (SSA) region paid $35.8 billion in total debt service in 2018, 2.1% of regional gross domestic product (GDP), of which $9.4 billion was paid to official bilateral creditors (about 0.7% of the regional GDP). Given that the region may need an emergency economic stimulus of $100 billion – including an estimated $44 billion waiver for interest payments in 2020 – the report notes a debt moratorium would immediately inject liquidity and enlarge the fiscal space of African governments.

“Due to deteriorating fiscal positions and increased public debt, governments in the region do not have much room for wiggle in deploying fiscal policy to address the COVID-19 crisis,” said Albert Zeufack, Chief Economist for Africa at the World Bank. “Africa alone will not be able to contain the disease and its impacts on its own; there is urgent need for temporary official bilateral debt relief to help combat the pandemic while preserving macroeconomic stability in the region.”

The COVID-19 crisis also has the potential to spark a food security crisis in Africa, with agricultural production potentially contracting between 2.6% in an optimistic scenario and up to 7% if there are trade blockages. Food imports would decline substantially (as much as 25% or as little as 13%) due to a combination of higher transaction costs and reduced domestic demand.

Several African countries have reacted quickly and decisively to curb the potential influx and spread of the coronavirus, very much in line with international guidelines. However, the report points out several factors that pose challenges to the containment and mitigation measures, in particular the large and densely populated urban informal settlements, poor access to safe water and sanitation facilities, and fragile health systems. Ultimately, the magnitude of the impact will depend on the public’s reaction within respective countries, the spread of the disease, and the policy response. And these factors together could lead to reduced labor market participation, capital underutilization, lower human capital accumulation, and long-term productivity effects.

“In addition to containment measures, we have seen that in responding to COVID-19, countries are opting for a combination of emergency fiscal and monetary policy actions with many central banks in the region taking important actions like cutting interest rates and providing extraordinary liquidity assistance,” said Albert Zeufack, Chief Economist for Africa at the World Bank. “However, it is important to ensure that fiscal policy builds in space for social protection interventions, especially targeting workers in the informal sector, and sows the seed for future resilience of our economies.”

“Short-term fiscal policy should aim at redirecting government expenditure to increase the capacity of the health system to protect and equip the already  scarce the medical personnel, and to provide adequate and affordable medical attention to the people affected by COVID-19 pandemic,” said Cesar Calderon, World Bank Lead Economist and lead author of the report. “But at this time it is also important to consider that most workers in the region are engaged in the large informal sector where they lack benefits such as health insurance, unemployment insurance, and paid leave. They usually need to work every day to earn their living and pay for their basic household necessities. A prolonged lockdown would put their basic survival at great risk.”

African countries urgently need to take on a customized short-term policy approach that takes into consideration the structural features of the region: (1) the size of informal employment in the region accounting for 89% of total employment; (2) the precariousness of most SSA jobs, (3) the predominance of small and medium-sized enterprises which constitute 90% of business units and are the drivers of growth in the region, and (4) the ineffectiveness of monetary stimulus due to the reduced labor supply and closed businesses, and in the recovery phase due to weak monetary transmission in countries with underdeveloped financial markets.

The report recommends a fiscal-policy approach with two primary objectives – to save lives and protect livelihoods. Immediate actions to consider include:

  • Focusing on strengthening health systems. The availability and allocation of financing for the health sector is still a major concern in Sub-Saharan Africa. The medical personnel in the region should be protected and properly equipped.

  • Implementing social protection programs to support workers, especially those in the informal sector. This calls for cash transfers, in-kind transfers (food distribution), social grants to disabled people and the elderly, wage subsidies to prevent massive layoffs, and fee waivers for basic services (e.g. electricity tariffs and mobile money transactions)

  • Minimize disruptions within countries and in the critical intra-African food supply chains, and keeping logistics open to avert a looming food crisis in the region.

The report also encourages African policymakers to think about the exit strategy from COVID-19.

“Once the containment and mitigating measures are lifted, economic policies should be geared towards building future resilience,” the report says. “Economies still need to design policy pathways to achieve sustainable growth, economic diversification and inclusion.”

“The immediate measures are important but there is no doubt there will be need for some sort of debt relief from bilateral creditors to secure the resources urgently needed to fight COVID-19 and to help manage or maintain macroeconomic stability in the region,” said Calderon.

Due to the COVID-19 pandemic, economic circumstances within countries and regions are fluid and change on a day-by-day basis. The macroeconomic analysis in the report is based on data available by the first quarter of March 2020.

The World Bank Group is taking broad, fast action to help developing countries strengthen their pandemic response, increase disease surveillance, improve public health interventions, and help the private sector continue to operate and sustain jobs. It is deploying up to $160 billion in financial support over the next 15 months to help countries protect the poor and vulnerable, support businesses, and bolster economic recovery.

Source World Bank
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Date 09 Apr 2020
 
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