Article

Economic recovery from COVID-19 in Africa requires intentional action

May 26th, 2021

Economic recovery from COVID-19 in Africa requires intentional action

The COVID-19 pandemic, termed ‘the Great Disruption’ hit the global economy in 2020 and was defined by divergent impact within and between economies. 2021 is already being defined by multispeed and divergent recovery in the global and local economies. Rich economies and China are set for a strong recovery led by the USA, mainly linked to their willingness to support incomes and deploy unprecedented fiscal and monetary support, and quick COVID-19 vaccine rollouts which have muted the extremities of sustained economic contractions. Low-income countries however face grimmer economic prospects due to limited access to COVID-19 vaccines and weak public finances; they will suffer more significant medium-term losses particularly countries that rely on tourism and commodity exports, and those with limited policy space to respond.

In Africa, the AfDB estimates that real GDP in Africa contracted by 2.1% in 2020 with projected to growth at 3.4% in 2022. The divergent impact was seen between countries in that although all economies in Africa have been affected by the pandemic, tourism-dependent economies, oil-exporting economies and other-resource intensive economies were the most significantly hit by the pandemic. Within countries, the sectoral impacts of COVID-19 have been varied, and women continue to be disproportionately affected by the socio-economic effects of the pandemic. This has led to divergent impacts at sector, firm and household levels. Many African households have had to resort to coping mechanisms such as reducing food consumption, dipping into savings, selling assets, looking for new forms of work, and accruing debt; with millions falling into poverty.

Snapshot of the trends in the use of coping mechanisms by Kenyan households over the past year(World Bank)

  • May- June 2020:Households relied on their savings and reduced their food consumption in May–June.

  • July- September 2020:As the pandemic continued, the reduction of food and non-food consumption became more prevalent with over half of households reducing their non-food consumption in July-Sept; an increasing share of households also sought additional income generating activities in July–Sept.

  • October–November 2020:Fewer households relied on reducing food and non-food consumption.

  • Jan- March 2021:Relying on savings became the most common coping mechanism in early 2021likely facilitated by increases in employment; households also sought additional income generating activities.

The continued use of coping mechanisms by the vast majority of households into 2021 indicates that

households are still coping with the consequences of the pandemic.

Divergent recovery in 2021 in Africa will continue to be seen at the macro, meso and micro levels of the economy. Macroeconomic divergence will be defined by the composition of the economy (resource/ tourism dependence, export performance etc); differences in sectoral recovery (e.g. upticks in the ICT/ mobile money sectors), the ability of government to effect additional fiscal and monetary stimuli, and the ability of governments to secure additional debt on reasonable terms (in terms of cost and tenure) given the AfDB estimates that African governments need additional gross financing of about $154 billion in 2020/21 to respond to the crisis.

Meso-level recovery will be driven by firm (and value chain) performance across the spectrum of firms from Micro, Small and Medium Enterprises (MSMEs) where the bulk of African labour sits, to large firms which are larger employers per capita and often offer higher quality jobs. COVID-19 has hit MSMEs in multiple ways including a significant drop in customer demand with a corresponding fall in revenue; erosion of savings and assets dampening prospects for recovery; scant support from the government; and the burden of propping up households who rely on incomes generated by MSMEs, and the goods and services they supply. Divergent firm recovery seems to be emerging with 3 broad pathways: 1) Businesses that shut down and have not re-opened; 2) Businesses operating at a revenue less than of pre-COVID-19 levels; and 3) Businesses that have recovered fully. Recovery at meso-level will be driven by firm recovery, the restoration of value chains, as well as strategic and intentional support by the government.

At the micro or household level, recovery will be informed by three factors: 1) The extent to which household income was hit by COVID-19; 2) The extent to which household income levels recovered (seen in ending the use of coping mechanisms); and 3) the capacity of the households to restore income levels without external support. The World Bank estimates that 40 million Africans were pushed into extreme poverty in 2020 due to COVID-19. This impact was felt at the household level with some homes hit far more deeply than others.

The divergent recovery from COVID-19 will require different scales and types of government support depending on the severity of impact on the sector, firm and household. The image below provides ideas on the categories of recovery and the type of government support that could be useful:

Relieve Support
  • Deep deterioration in household welfare due to COVID-19
  • Deep reliance on coping mechanisms for survival
  • Low capacity for income recovery without external support
  • Potential Government Support: Direct cash transfers
  • Focus impact level: Households (micro)
  • Timeframe: Short term, immediate action
  • Households in the poor and lower middle-income bands (including new entrants)
  • Moderate deterioration in household welfare due to COVID-19
  • Continued use of a coping mechanism to maintain welfare
  • Low capacity for income recovery without external support
  • Potential Government Support: Direct cash transfers
  • Focus impact level: Households (micro)
  • Timeframe: Short term, immediate action
Sustain Catalyse
  • Households just above the lower middle-income bands
  • Low to moderate deterioration in household welfare due to COVID-19
  • Limited use of a coping mechanism to maintain the welfare
  • Capacity for income recovery without extensive external support
  • Potential Government Support: Firm level support such as tax incentives/ relief/deferrals; Guarantee Schemes; loan restructuring provisions etc
  • Focus impact level: Firms and supply chains (meso)
  • Timeframe: Medium term action over 1-3 years
  • Households in the middle and upper-income bands
  • Household welfare improved/ did not deteriorate due to COVID-19
  • Scarce/no use of coping mechanisms to maintain the welfare
  • Demonstrated capacity for independent income growth
  • Potential Government Support: Sector-specific policies to support job growth and economic development; focus on building manufacturing capacity; economic transformation etc.
  • Focus impact level: Economic sectors (macro)
  • Timeframe: Medium to long-term action over 3-5 years

Divergent recovery from COVID-19 clearly requires different types of support in terms of scale, composition and tenure. African governments have the opportunity to ensure that sector-specific fiscal, monetary policy responses are targeted so that each layer of the economy is addressed as detailed above. However, governments will have to navigate the two tensions. The first tension is that on one hand African governments require more resources to cope with the current economic downturn and lay a foundation for stable economic recovery, yet high debt levels and debt repayment obligations will make this difficult for two reasons: i) High debt means the scope for additional borrowing is limited, and ii) A large portion of the revenue raised already goes to servicing debt rather than economic recovery. The second tension is that African governments need to prioritise spending to economically productive areas that can drive growth, but also allocate money to support household income and prevent the reversal of more than two-decades of progress on poverty reduction.

The long-run effects at macro, meso and micro levels of the economy in terms of raised poverty levels, poor firm performance and decimated household incomes will likely lead to sustained drags to economic recovery and growth if coverage in social protection is not expanded. African governments may therefore find it useful to model the following: i) The fiscal costs versus multiplier effects of expanded cash transfers and social protection to key households; and ii) The economic costs linked to raised poverty levels and reduction in firm and household welfare if expanded cash transfers and social protection programmes are not effected. Doing this exercise could serve as a useful step in prioritising short, medium and long-term action that not only fosters economic recovery but deliberately ensures no one is left behind.

 

This article was first published by the Organisation for Economic Co-operation and Development (OECD). Read the original article here on the OECD’s Development Matters blog platform.

TAGS

CATEGORIES

Our partners

Stay informed with monthly updates from FSD Kenya

Subscribe to our mailing list