As UNECA lowers its forecasts for African GDP growth, Dr. Desné Masie assesses the damage the pandemic is likely to cause to African economies
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At the time of writing in mid-March, Africa appears to have been spared the worst human impact of the coronavirus pandemic so far, but is already suffering the devastating economic impact of a possible global slide into recession.
Medical experts are still unsure why Africa has seen the infection rates seen elsewhere slower – and limited testing can mask the real number of cases – but if the pandemic escalates exponentially across the continent, it could put the urban poor at risk are significant given the continent’s cramped living conditions, limited access to sanitation and meager public health services.
Faced with these fears for the population at risk, South Africa, which had several dozen cases by mid-March, declared a national disaster on March 15 and banned all travel from key countries affected, including China, the UK, Italy and the US. Other African governments are expected to work with South Africa to prioritize the preservation of human life over the economic impact of such measures by introducing a range of restrictive and exclusive measures.
Such painful decisions will compound the devastating effects of the pandemic, which has already strained Africa’s economic ties with China, by lowering the Asian country’s normally insatiable demand for oil, mining products and other raw materials from the continent as Chinese factories respond to slacking global demand react.
The United Nations Economic Commission for Africa (UNECA) has revised Africa’s growth downwards by more than a third from 3.2% to 1.8%, and the Organization for Economic Co-operation and Development (OECD) has the global growth figures of 2 .9% corrected down to 1.5%. With increasing levels of social isolation and forced lockdowns on cities and countries, many are now predicting a global recession. Mohamed El-Erian, Allianz economic advisor, said in mid-March that the world was going into a “sudden and deep recession”.
Equity markets have lost trillions since the pandemic broke out and are likely to continue to decline as the full extent of the economic impact is better understood. March 16, losses on major indices were the worst day for the markets since 1987.
Key sectors of the African economy that are sensitive to the slowdown in global demand, including tourism, agriculture, oil and mining. Disruptions in supply chains, falling raw material prices and a closure of the aviation sector are guaranteed. If countries can quickly control the rate of infection, Africa may be spared the worst economic repercussions. However, if countries fail to replicate the success of China and South Korea in slowing infection and death rates, widespread social unrest can further destabilize the global economy.
The oil industry is suffering from a blow
Travel restrictions – exacerbated by the oil price war between Russia and Saudi Arabia – have lowered the price of oil to less than $ 30 a barrel. Large oil exporters like Nigeria, Algeria and Angola – where oil make up 92%, 96% and 97% of their total exports, respectively – will feel the pain immediately. UNECA estimates that total losses to oil exporters will be around USD 65 billion at current levels.
Oil companies operating in Africa are particularly hard hit. Tullow Oil lost 31% or £ 1.7 billion ($ 2.1 billion) of its share price on March 12. The UK-based, East Africa-focused company has already announced that it will lay off at least a third of its workforce. The outlook for the oil price will continue to deteriorate as travel bans and social distancing emerge around the world.
With Nigeria making its 2020 budget assumptions at an oil price of $ 57, it is not difficult to see how the budgetary situation of many oil-dependent countries, many of which are already highly indebted, will affect the overall economy. Countries like Ghana, Uganda and Kenya, which have priced in an oil bonanza to support spending on infrastructure and debt settlement, are forced to reverse their course.
The fiscal pressure on the three largest economies Nigeria, South Africa and Egypt is already high: Egypt and South Africa have budget constraints of 5.9% and 8% respectively. An international flight of capital to safe havens could make it costly for African countries to raise capital in the Eurobond markets. Sub-Saharan government bond yields are rising due to market risks, putting indebted poorer countries like Zambia and Mozambique at risk of sovereign default.
The sharply depreciating exchange rate for important currencies such as the Nigerian naira, the Kenyan shilling, the South African rand and the Egyptian pound against the US dollar will have a negative impact on the import-dependent economies and the balance of payments in many African countries. Foreign exchange reserves will also come under pressure from declining tourism, remittances and capital flight.
Shutdown of aviation
The aviation sector is facing the worst crisis since the September 11, 2001 attacks. Well-run airlines like Ethiopian Airlines, the continent’s most profitable airline, have not been spared the consequences.
Ethiopian CEO Tewolde Gebremariam said in early March – before the sector largely stalled under a wave of international travel bans – that demand had already slowed by over 20% due to its involvement in Chinese markets.
It remains to be seen whether African countries can weather the storm or have the reserves to bail out their national airlines if necessary. In contrast, the pandemic has demonstrated the importance of having a national airline as countries have been able to rescue stranded citizens in the affected areas.
A greater danger could arise from a global shift towards medical protectionism. The US offered billions of dollars to a German vaccine maker, and India, the world’s largest manufacturer of pharmaceuticals and generics, was able to stock up on supplies for its own citizens. Given Africa’s already precarious position in the global medical market, future bottlenecks could affect the continent’s ability to fight the pandemic.
With markets gearing up for the worst crisis since the global financial crisis of 2008, the short to medium-term trend for African economies inevitably looks bleak. It seems inevitable that many governments will be forced to turn to the International Monetary Fund (IMF) for help. The continent will need assistance in coordinating a policy response to support health systems, medicines and food supplies so that devastating economic losses do not go hand in hand with even more devastating loss of life.