How COVID-19 could impact the African economy

Editorial Team
Editorial Team

Businesses involving face-to-face interactions are closing around the world, as governments introduce quarantine measures to slow the spread of Covid-19, the highly infectious coronavirus that now grips the planet. It has spread to a growing number of countries in Sub-Saharan Africa (SSA), with over 40 nations having reported confirmed cases by mid-March. Given the virulence of the disease, it is set to spread across the entire region. South Africa has already imposed the most drastic restrictions, following its declaration of a ‘state of disaster’. Although SSA has lagged behind most other areas of the world with the onset of the infection, the weak state of most national healthcare systems—including a lack of capacity for screening, testing and quarantining suspected cases—are all factors which increase its vulnerability. 

Set against this, SSA’s relatively low level of urbanisation, underdeveloped travel networks and youthful population will offer a limited degree of protection. The fact that SSA has a young population (over 60 percent of its citizens are under the age of 25) should therefore offer some degree of protection from the very worst consequences.

The overall economic impact on SSA is still unclear but could match, or exceed, that caused by the global financial crisis of 2008/09. Much will depend upon the duration of the global pandemic, although this is again shrouded in uncertainty. The threat to public health poses a particularly formidable challenge to SSA, given the region’s generally poor healthcare provision. Just two countries in SSA (South Africa and Senegal) have dedicated testing facilities. A major outbreak would overwhelm all of the health services in the region, as demonstrated by Italy’s experience. Kenya’s health facility assessment report for 2018/19, for example, indicates a low level of preparedness for infectious disease outbreaks. The WHO names Angola, Côte d’Ivoire, the Democratic Republic of Congo, Ethiopia, Ghana, Kenya, Mauritius, Nigeria, South Africa, Tanzania Uganda and Zambia as being particularly vulnerable, based on their high levels of contact with China. However, given the rapid global transmission of the virus—together with the robust measures taken by the Chinese authorities—Europe is now a much larger threat.

Other factors working in SSA’s favour are its relatively low levels of urbanisation and urban population densities, and limited internal travel networks, both within countries and between countries. This stands in sharp contrast to China and Europe, which have closely packed and largely urban populations, and modern and efficient transport systems. This will help reduce the pace of transmission in SSA, and possibly limit the overall spread. Nonetheless, unlike China, which constructed a new hospital using prefabricated units in just ten days, SSA will struggle to deal with the disease if it becomes entrenched. SSA’s main focus, therefore, will need to be on short-term containment, pending the possible arrival of a dedicated vaccine. However, as it is likely to take at least 12-18 months, SSA faces an extremely challenging period ahead. Quarantine measures, such as travel bans and trade restrictions, will inevitably have damaging effects on countries’ growth, with consumer and business sentiment badly undermined by the outbreak.

Governments throughout SSA will struggle to balance the need for long-term structural reforms with the challenge of preventing a major hit to citizens’ living standards as a result of the coronavirus pandemic. Fiscal positions in some countries have improved in recent years on the back of higher tax revenues and greater expenditure constraint, but this situation is set to go into reverse in the near term. Lower global commodity prices (both oil and non-oil) will also depress the region’s export earnings, and populist policies will ensure that spending pressures remain high. The region’s generally fragile finances will limit the extent to which governments can attempt to cushion the economic impact of the pandemic. However, increased external support including the $50 billion that the IMF has made available through its rapid-disbursing emergency financing facilities could offer a modicum of relief.

African governments will try to introduce financial support measures to dampen the impact of the virus on their economies; in some countries this will include support for key sectors. Many African states still have scope to cut benchmark interest rates and adjust financial regulations to lower stubbornly high commercial lending rates and encourage private sector credit extension. Cash injections and bailouts would be even more effective in propping up companies, but national finances are already stretched in many African countries, despite years of fiscal consolidation, and falling tax revenues will add to the pressures. Recurring budget deficits, rapidly rising public debt and low financial buffers will force African governments to look carefully at the steps they can take to ease the economic crisis.

Understandably, businesses and trade organisations are also calling for financial support from African governments to weather the storm. Their requests include access to low-cost or interest free loans, cash injections for critical enterprises, temporary waivers from various forms of taxation and financial help to protect workers’ incomes. In Europe and Asia, governments are already introducing financial support packages for the sector. However, African governments may struggle to find the funding to introduce similar packages, given the number of other priority sectors that will also need support

African states are also keen to prop up key sectors that are deemed of national importance. For many countries, this includes the travel and tourism sector, which is among those hardest-hit by efforts to control the global spread of Covid-19. Tourism revenues have plummeted, and travel companies are incurring significant financial losses as a result of international travel restrictions and falling global demand. Businesses operating in the sector have responded by implementing business continuity plans, restructuring and refocussing business operations, cutting costs sharply and attempting to secure financial support in the hope of surviving the fall-out from the pandemic.

The threat to companies is immense, whether they are small- and medium-sized enterprises, large corporations or state-owned enterprises such as national airline carriers. Businesses are already reviewing workforce locations and working practices, repatriating staff and scrutinising their sickness and absence policies, particularly for those who need to self-isolate or to look after the elderly or children. Many companies are also allowing employees to work from home. However, remote working will be difficult given the nature of the tourism business, as well as the weakness of telecoms infrastructure, intermittent power supplies and a lack of IT equipment across parts of the region.

Businesses will attempt to shore up their finances through measures such as staff redundancies and cost-cutting, renegotiating supplier contracts, delaying vendor payments, suspending planned investments, selling non-core assets and restructuring corporate debts. A sharp increase in business defaults, delinquencies, liquidations and restructuring are anticipated across a number of sectors during 2020 and possibly early 2021. Under normal circumstances, many countries would turn to external financial support, especially official development assistance and concessional loans. But with the rest of the world also facing economic pressures, such assistance may be difficult to secure. Other options include relaxing regulations and introducing measures to encourage employment and investment. However, such measures will need to wait until a recovery is in sight. Until then, companies will need to survive through a painful period of adjustment.

The Economist Intelligence Unit forecasts that real GDP growth in SSA will deteriorate in 2020 and, under a worse-case scenario, turn negative before recovering in 2021. However, the forecast of a recovery in 2021 is dependent on the success of efforts to suppress the pandemic, which remains an uncertain outcome. Overall economic performance will continue to be heavily influenced by trends in the region’s two largest economies, South Africa and Nigeria, which jointly account for over one third of SSA’s aggregate GDP. Economic activity in both of these countries is set to weaken sharply. It is hoped that this will be partly offset by slightly better conditions in some of the continent’s smaller but more dynamic economies, including Kenya, Ethiopia and Côte d’Ivoire. Furthermore, countries such as Ghana and Senegal, which have more diversified economies and have more supportive institutions, will witness average growth, helped by the resilience of domestic demand and some continuing inward investment. That said, the overall pace of economic expansion in SSA will remain well below recent historical levels (an annual average of 5.6 percent between 2000 and 2014). The mass failure of companies, both large and small, would deepen the looming global downturn and hinder the recovery that will eventually take place once the current pandemic is brought under control.

Written by Pratibha Thaker, Editorial Director, India, Middle East & Africa, the Economist Intelligence Unit

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