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

09 April 2020

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

The COVID-19 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, 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. “Africa alone will not be able to contain the disease and its impacts on its own; there is an 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.

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.

“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.

Read and download the Africa’s Pulse: An Analysis of Issues Shaping Africa’s Economic Future.

Original source: World Bank
Published on 09 April 2020