The Socio-economic Impact of COVID-19 on the African Economy

The Socio-economic Impact of COVID-19 on the African Economy¹

Apungwa Cornelius Ntabe, Research Associate, African Political Economy Policy Lab
cornelius@africacfsp.org

This paper seeks to demonstrate the possible socio-economic repercussions of the pandemic to the continent and proposes amongst others that, African countries should prioritise cheaper solutions in the fight against the COVID-19 given the acute financial constraints burden by these countries before the outbreak of the pandemic. Also, it is recommended that African countries reinforce the inter-continental trade agreement such as the African Continental Free Trade Agreement (AfCFTA) which could increase intra-African trade by 15 to 25% higher by 2040. And lastly the paper draws attention to the need for good governance and leadership in adequately fighting the harmful effects of the pandemic. To fight the pandemic, governments are taking a series of important decisions and allocating enormous sums of money in the procurement of medical equipment and supplies or direct state aid to businesses to boost the economy. High-value contracts are also swiftly and discreetly being assigned and dizzying sums of relief and recovery money are being infused in the economy on a fast-track basis. It is crucial for the government to remain vigilant and invest significant efforts to ensure that this money is used appropriately, and that unscrupulous actors do not take advantage of the crisis to enrich themselves at the expense of the public.

1. Introduction: COVID-19 in Africa

Coronavirus disease 2019 (COVID-19)² is not the first illness to face the world. Like previous pandemics, sovereign states struggle to manage the effects. For example, the West African Ebola emergency of 2013-2016 was more deadly, yet less contagious and arguably more isolated. The Ebola outbreak was eventually contained, in part, through aid as richer countries donated various resources to Africa.³ However, in 2019, COVID-19 threatens a greater impact as it presents dilemmas for both independent and emerging economies struggling to combat the disease. Thus, fighting the COVID-19 illness presents a greater challenge for the world than Ebola.

This paper seeks to demonstrate the possible socio-economic repercussions of the pandemic to the continent and to propose policy recommendations to respond to the crisis. Our analysis, on the one hand, will evaluate the potential impact of the pandemic on various dimensions of African economies due to the difficulty of quantifying the real impact as a result of the uncertainty, the rapidly evolving nature of the pandemic, and the scarcity of the data. On the other hand, we will discuss some already published figures on the impact of the pandemic so far on the continent as presented by the Africa Union and other international organisations.

Following the first cases of infections in Wuhan-China at the end of 2019, COVID-19 has continued to spread across the world. As of 21 July 2020, there have been approximately 603,691 deaths, with more than 14,348,858 people infected across 216 countries.⁴ According to the 21 July 2020 COVID-19 surveillance update, published by Africa Centres for Disease Control and Prevention (Africa CDC), the spread of the virus has reached 54 of the 55 African Union Member States.⁵ COVID-19 statistics for the 54 states report 1,301,335 cases, 1,038,789 recoveries, and 31,302 deaths.⁶

The COVID-19 pandemic hit Africa at a time when the region was experiencing modest economic growth. The African Development Bank’s 2020 African Economic Outlook (AEO) observes that Africa’s economic growth remained stable in 2019 at 3.4% and expected to rise to 3.9% in 2020 and 4.1% in 2021.⁷ Due to the COVID-19 pandemic, states are imposing physical distancing, enforcing quarantines, total lockdowns, travel restrictions and limitations on public gatherings in order to contain the spread of the disease. These measures will negatively affect key sectors of the economy such as tourism, travel, and exports, making it almost impossible to achieve the 2020-2021 forecasted growth rates by the African Development Bank. A decline in the performance of these key sectors will lead to a decline in government resources that finance public investment.

II. The Socio-Economic Impact to Africa

COVID-19 was declared a pandemic by the World Health Organization (WHO) on 11 March 2020⁸. This disease is a global emergency and has had a significant impact on the global population and the economy. Due to Africa’s openness towards international trade and migration, the continent has not been immune to the harmful effects of COVID-19. Therefore, Africa’s top priority for successfully mitigating the pandemic’s damage is to employ measures that slow down the spread of the virus. Consequently, implementing such measures ⁹ are likely to create major economic shock waves – producing multiple implications that stunt the continent’s economic growth.

III. Socio-Economic Analysis

3.1 Trade

Africa’s major trading partners include the European Union, China, and the United States.¹⁰ The European Union, due to her strong historical ties with the African continent, accounts for 34% of Africa’s total trade.¹¹ Throughout the past decade, China, in its industrialization dynamic, has increased its amount of trade with Africa.18.5% of Africa’s exports are to China.¹² More than 33% of African countries derive most of their resources from the global export of raw materials. The impressive economic growth of almost 5% experienced by Africa in the 14 years preceding 2014 was mainly supported by high commodity prices.¹³ For instance, the drop in oil prices in late 2014 contributed to a significant decline in regional GDP growth for sub-Saharan Africa from 5.1% in 2014 to 1.4% in 2016.¹⁴

The COVID-19 disruption of the world economy through global value chains and the abrupt decrease in commodity prices and fiscal revenues are expected to result in exports and imports by African states decreasing by at least 35% from 2019 levels.¹⁵ Thus, the loss in value is estimated at around USD $270 billion. Before COVID-19, hydrocarbon revenues significantly contributed to the GDP of African nations.¹⁶ As a result of COVID-19, it is expected that all these figures will be reduced considerably. To illustrate, estimates show that Angola and Nigeria could lose up to USD $65 billion in combined income.¹⁷ This kind of drop in revenue will reduce foreign exchange reserves, impact implementation of development programs, and mitigate poverty reduction efforts. The World Bank/IMF biannual Africa Pulse Report suggests that three of the continent’s largest economies (Nigeria, South Africa, Egypt) are expected to contract to 6.9% due to structural issues and their reliance on the exportation of commodities, the prices of which, have declined.¹⁸

3.2 Employment

Unemployment is already a major concern in African countries and mandating lockdowns in African states has led to the shuttering of many businesses.¹⁹ This will lead to a considerable increase in unemployment and a reduction in job creation. As a result of the pandemic and implemented measures to slow down the spread of the virus, approximately 250 million previously employed Africans—and their dependents—in the informal urban employment will be affected.²⁰ The 2008 financial crisis and the 2014 commodity price shock²¹ increased vulnerable employment by ten percent.²² The widespread shock of COVID-19 is expected to increase vulnerable employment considerably more, with the International Labour Organization (ILO) anticipating 19 million lost jobs in Africa as workers face full or partial workplace closures.²³

3.3 Travel and Tourism

Travel and tourism are the main growth engines of the African economy, accounting for 8.5% of continental GDP in 2019, according to the World Tourism and Travel Council (WTTC).²⁴ COVID-19 travel restrictions, border closures, and social distancing measures will significantly affect African economies. The International Air Transport Association (IATA) estimates the economic contribution of the air transport industry in Africa is USD $55.8 billion, supporting 6.2 million jobs and contributing 2.6% of GDP annually. Each job in air transport supports 24 other jobs in the travel and tourism value chain. In total, the air transport industry supports approximately 70 million jobs.²⁵ African airlines have already lost USD $4.4 billion in revenue since 11 March 2020 due to COVID-19. Ethiopian Airlines has indicated a loss of USD $190 million, whereas South African Airlines has documented a loss of USD $3.02 billion.²⁶ Overall, the travel and tourism sector in Africa could lose at least USD $50 billion due to the COVID-19 pandemic and at least 2 million directly and indirectly supported jobs.²⁷

3.4 Government Spending

Since government spending will remain high in order to combat the effects of COVID-19, Africa’s overall fiscal balance is projected to deteriorate substantially, to approximately 2.7 percentage points of GDP.²⁸ Before the pandemic, many countries resorted to more expensive sources of financing, such as sovereign bonds instead of concessional loans, due to liquidity problems stemming from the 2008-2009 global financial crisis and the 2011-2012 European debt crisis. These issues, combined with the deterioration in fiscal balances and the decline in economic activity in the region due to COVID-19, will make it more difficult for these African countries to repay their debts.²⁹ The fight against COVID-19 requires a substantial amount of money and resources, and so far, several international organizations together with the governments of these African countries have injected money and resources into the system.

IV. Policy recommendations

4.1 Immediate actions

4.1.1 Prioritise inexpensive solutions: African states must prioritise cheaper solutions in the fight against COVID-19 given their acute financial constraints. Scientists at the Pasteur Institute of Dakar are already leading the way, working with a biotech laboratory in the United Kingdom to produce a cheap, rapid diagnostic test for COVID-19. The test will be manufactured in Senegal and it could reduce diagnosis time from four hours to 10 minutes.³⁰ Such initiatives ought to be embraced and replicated throughout the continent.

4.1.2 Cutting the red tape on government regulations: Fighting COVID-19 is already challenging as it is, and government regulations should not make it any harder. There should be full deployment of all medical professionals, especially those who can help on the frontlines. However, restrictions on medical licenses and related responsibilities by medical professionals limits their capacity in this fight. Nurses, physical scientists, and medical students should be allowed to collaborate on the frontlines, without limitations of their capacities within the law.³¹

4.1.3 Reinforce the inter-continental trade agreement: In 2019, African countries ratified the African Continental Free Trade Area (AfCFTA), creating the largest free trade area since the establishment of the World Trade Organization³². The free trade area is expected to help boost intra-African trade, which remains far lower than in other regions. The AfCFTA shows promise, according to estimates by the United Nations Economic Commission for Africa (UNECA). Intra-African trade could be 15 to 25% higher by 2040³³. Currently, the continent is in a critical phase of the implementation of the AfCFTA. This is a good time to accelerate the implementation of this agreement, which holds great opportunity for economic growth in Africa. With this agreement, member states should invest in the diversification of export destinations, including destinations in Africa. This will boost intra-African trade, development, and economic diversification, making African economies less vulnerable to economic shock waves and more resilient to global crises and market disruptions.

V. Long term Actions

5.1 Reduction in the dependencies of African economies vis-a-vis Western economy: African economic growth has improved significantly between 2000-2010. After this decade of renewed confidence, doubts have arisen on Africa’s ability to maintain sustainable high growth rates. An important reason behind this doubt was the persistent dependence of Africa’s largest economies on global commodity prices. The high dependency of African economies, vis-à-vis foreign economies, predicts a negative economic spinoff for the continent, evaluated at an average loss of 1.5 points on economic growth 2020. With Europe and the United States now at the epicentre of the pandemic and being major sources of support and development for Africa, economic impact is expected to be worse than originally imagined. A paradigm shift is needed to change the trade patterns of African countries amongst themselves and with the rest of the world, particularly China, Europe, and the United States. The COVID-19 pandemic has afforded Africa an opportunity to enact the policy recommendations on productive transformation as described in Africa’s Development Dynamics (AfDD) 2019. AfDD underscores economies that are resilient to external shocks and that achieve sustainable development are at the behest of the establishment of productive transformation policies.

5.2 Good governance and leadership: The Ebola crisis in West Africa serves as a reminder that dealing with a pandemic strongly depends on the capacity of impactful leadership and governance. To successfully fight the pandemic, government and leadership must be cognizant and critical in their decision-making; allocate enormous sums of money for the procurement of medical equipment and supplies; and direct state aid to businesses to boost the economy. High-value contracts are being swiftly assigned, while funds for relief and recovery are infused into the economy at a rapid pace.

It is imperative for the government to ensure that relief funds are properly and efficiently utilized. Moreover, keen oversight of unscrupulous actors’ abuse of the crisis will enforce protection of public welfare. Implementing robust systems of checks and balances will ensure the money is spent wisely. Sadly, the pandemic is giving way to fertile ground for criminal organizations to buy out legitimate businesses that are on the verge of bankruptcy.³⁴

It is important that governments are vigilant in protecting the economy from criminal infiltrations. Therefore, good governance is indispensable for a successful fight against the pandemic, as citizens trust their government to lead, communicate and take steps to prevent such crises in the future is of utmost importance. Lack of trust compromises citizens’ willingness to comply with government mandates and contribute to the recovery from the crisis. Furthermore, governments should review and revise their budgets to reprioritise spending towards the anticipated negative impacts from COVID-19.³⁵ The revised budgets should also reflect an intensified fight against corruption and the embezzlement of public funds.³⁶

Conclusion

UNECA 2020 estimates are that in a best-case scenario, Africa’s average GDP growth will fall 1.4 percentage points from 3.2% to 1.8% because of the COVID-19 pandemic.³⁷ The worst-case scenario is a 2.6% economic reduction. Even though the effects of the COVID-19 pandemic are devastating an already fragile African economy, prospects are not completely dire. The value chains needed to jump-start the closed or struggling industries might not exist in a single country, but the recently signed African Continental Free Trade Area frees up opportunities to develop value chains on a continental level, providing the requisite scale for the sector to be competitive on the global stage.

African governmental strategies geared at curbing the pandemic should not overlook the socio-economic situation that most Africans face where most live below the global poverty index. Africa consists of 70% of the world’s poorest population and faces the most significant wealth disparity between the “haves” and the “have nots.” Therefore, adopting, and duplicating COVID-19 mitigation measures taken by other continents will be extremely challenging.³⁸

African governments seeking to respond to and mitigate the risk of COVID-19 should bear in mind the socio-economic circumstances of its people. If they fail to consider the locality and temporality factors when implementing strategies to curb the pandemic, their measures are likely to backfire and begin an onset of other detrimental social and economic uncertainties.

Africa’s subsequent responses to the pandemic are definitive in that they guide the future recovery and inclusive growth of the continent. The reliance of African markets on imported goods and services has proven to be a detrimental factor during the crisis. African leaders must strive to cultivate domestic production capabilities that are supported by a strong institutional framework and that steer towards international trade and regional integration. We cannot predict the future, but we can certainly be better prepared for the uncertainties that lie ahead. Decisive, research-driven, and solution-orientated steps need to be taken to turn adversity into opportunity.

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