The COVID-19 (coronavirus) outbreak has set off the first recession in the Sub-Saharan Africa region in 25 years, with growth forecast at-5.1% in 2020 from a modest 2.4% in 2019.
This is according to the latest Africa’s Pulse, the World Bank’s bi-annual analysis of the state of the region’s economies.
“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.
Bilateral debt relief
He adds that Africa alone cannot contain the disease and its impacts on its own, hence the urgent need for temporary official bilateral debt relief to help combat the pandemic while preserving macroeconomic stability in the region.
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.
The analysis estimates the pandemic could cost the region between $37 billion and $79 billion in terms of output losses for 2020.
The impact on household welfare is expected to be equally dramatic with welfare losses in the optimistic scenario projected to reach 7% in 2020, compared to a non-pandemic scenario.
Food security crisis
Additionally, COVID-19 has the potential to create a severe food security crisis in the region, with agricultural production contracting between 2.6% and 7% in the scenario with 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.
These fallouts result from a combination of influences, including the disruption in trade and value chains affecting commodity exporters and countries with strong value chain participation; the reduced foreign financing flows of foreign direct investments, foreign aid, remittances, tourism revenues, and capital flight.
The disruptions also stem from containment measures imposed by governments and the response of citizens.
However, the report heightened health risks due to the region’s unique challenges—especially the limited access to safe water and sanitation facilities, urban crowding, weak health systems, and a large informal economy.
Debt sustainability prospects
Regional governments also lack sufficient room for maneuver on the policy side as a result of dwindling revenues, compounded by the larger and riskier debt positions and an increase in external borrowing costs, which will further worsen debt sustainability prospects.
“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.
Furthermore, he adds “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.
- the size of informal employment in the region accounting for 89% of total employment.
- the precariousness of most SSA jobs.
- the predominance of small and medium-sized enterprises which constitute 90% of business units and are the drivers of growth in the region.
- 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”, it added.
Source: World Bank