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COVID-19: Balancing the Recovery Approach for an African Economy

COVID-19: Balancing the Recovery Approach for an African Economy

As economies in Africa were gradually exposed and had to begin dealing with the current COVID-19 crisis, there were several responses introduced to counter the primary threat of COVID-19.

Some of these ongoing interventions are focused on:

    • Reducing or containing the spread of the virus and ensuring that daily infections are on a declining trend (immediate and possible responses included banning of both incoming and outgoing international flights to countries).
    • Lockdown of cities for a period to ensure zero movement leads to better containment of infections.
    • Creating awareness to ensure that citizens are leading the fight from the ground.
    • Creating a delivery infrastructure for interventions which clearly links National, Regional, and local governments to reduce redundancies and improve on speed of implementation.
    • Strengthening health systems, including procurement of much needed medical supplies and leveraging of digital technologies

While there was a definite need to introduce the measures mentioned above, a residual impact of both the virus’s spread across the World and indeed the primary interventions required to contain its spread induced an economic shock. Economic output has been on a decline across the World
due to the spread of the virus and the primary interventions to contain its spread are exacerbating
the situation as a whole. Therefore, there must be a parallel and equally robust effort to think about and deploy economic interventions that seek to reduce the pressure on economies due to shock points arising from the current crisis.

While more experts have called for a “wait-and-see” approach on economic interventions by leaders and market partners, the inherent vulnerability of African economies means there is a pressing need to consider the mild but growing exposure to sectors as transactions reduce in number and overall output declines bringing the threat of a slowly grinding halt increasingly
apparent.

As such this analysis seeks to chart out the possible interventions that can be put in place to mitigate and contain the economic shocks, building a modicum of resilience in the period where freedom of movement, production and transactions will be constrained with the primary interventions put in place. Overall the considerations for leaders should be coordinated through a plan with progressive modules of implementation. This is to mean that interventions are developed in preparation for various scenarios that could arise in the immediate outlook (3 months), short term outlook (6 months) and medium-term outlook (12 to 24 months).

Considering a Recovery plan

The overall understanding of economic interventions and stimulus to recover economic activity is premised on the idea of transactions. The greater the number and value of transactions the more multipliers generated, the aggregate of which form the basis of domestic product. Any economic intervention, demand-side or supply side, is geared at increasing the overall number and value of transactions. This is the broad lens through which economic interventions must be thought about and the fundamental question should be: how is this crisis affecting the number and value of transactions at each given point in time?

Immediate Outlook (3 months)

The main objective of the primary interventions by the Government in response to COVID-19 is focused on containment of the virus and seeking to reduce community transmission and spread as much as possible. Following suit from their counterparts across the World, African countries have introduced various response today to reduce the spread of COVID-19 infections.

Unlike many other jurisdictions across the World, one of the immediate challenges that developing countries must seek to overcome is the vulnerability of low-income citizens who operate within the informal sector and casually employed workers earning a living on a daily basis. The primary interventions immediately and directly affect the livelihoods of this demographic and thus the health crisis soon mutates into a humanitarian one. The principal focus in the immediate period for most Governments is avoiding a humanitarian crisis by cushioning those in the most vulnerable sections of society. Of immediate importance is protecting and sustaining utilities, provision and assurance of availability of food, assurance of existence of a framework for rapid response in case of scale infections. This humanitarian response can be coordinated by the Government through various means and it is herein opined that the capacity to deal with humanitarian issues in Africa is fairly adequate.

While the current measures to address the spread of COVID-19 could sustain humanitarian pressure, it is very likely that economies would start to experience real economic shocks with the decline in transactions. Transactions in the immediate outlook will be constrained substantially and in some sectors such as hospitality, tourism and floriculture will grind to a virtual halt but with demand for essential goods strong and in some cases artificially high due to reactionary purchases, spending will still go on and maintain a modicum of stability in the formal economy. It is as incomes and income buffers (savings, borrowing, family support, diaspora remittances etc.) begin to be stretched with progressive increases in redundancies, inflation and reduced movement of goods and services (thus less transactions) as a result of the primary interventions placed to contain the human spread of the virus, that the real economic impact will be felt. This is likely to happen in the middle of the immediate period.

For the immediate outlook, the most significant interventions that the Government can put in place are those focused on buttressing the liquidity of businesses and households. This is because a reduction in the number of overall transactions is a definite phenomenon that is induced by the primary interventions put in place to curb the spread of the virus. It will be virtually impossible and impractical to seek interventions that boost the number of transactions. The focus in the immediate and short-term should be on trying to help businesses and households weather the storm. For the latter, household cash transfers or a basic goods voucher system could be introduced and for the former, an MSME Emergency Fund could be put in place. Beyond fiscal relief measures around tax and regulation, there needs to be a concerted effort to establish and begin operating mechanisms that provide short-term support to businesses to buttress their liquidity.

Short-Term Outlook (6 months)

The next six (6) months are the most critical and during this time, we expect that scientists will have moved closer to identifying a vaccine for COVID-19. With successful human trials, leaders will be expected to progressively lift the lockdown on economies. What this could mean is that economies would start moving from negative to medium-normal value creation. This could also mean that interventions for economies progressively move from humanitarian and cushioning based to mild economic stimulus programs for medium-large scale economic transformation within the current framework of economies.

Our projection for this phase of response is largely dependent on a successful human trial of COVID-19 vaccines. In its absence, leaders would have to deal with declining economic performance as economies face continuous periods of constrained movement, transactions and activity with extended primary interventions.

In the first scenario where a vaccine is confirmed, leaders could progressively unlock economic segments based on the speed of recovery and volume of value drawn. The focus could remain on sectors that directly impacts citizens, wading off a humanitarian crisis and industries where demand for goods from the value-chain and base consumers would be strong. Within this scenario, essential sectors are expected to resume back production activity, reinvigorating transactions with a resumption of income generation and economic activity. While domestic household income will be still constrained and overall spending power greatly reduced, demand for export products will likely resume and progressively increase as foreign countries resume some normalcy in economic activity. It is recommended that fiscal relief interventions such as tax reductions and rebates are maintained to prop up disposable capital and transactions. Beyond these fiscal interventions, value-chain and market systems development strategies can be adopted to unlock and build value in strategic sectors. The challenge in this scenario will be reviving sectors such as hospitality and tourism which are unlikely to witness any demand with reduced overall spending power and post-crisis trauma on travel. Beyond deploying solutions akin to experience from declines in tourism and hospitality following terrorist incidents, relief in the form of waivers on tax, regulatory/licensing fees and the like.

In the alternate scenario, where the vaccine is not confirmed in the next six (6) months, one could expect that economies continue to operate within real economic shock, increasingly constrained transactions and limited liquidity. As such, leaders would have to maintain and prioritize interventions of a humanitarian nature and seek to maintain support to household and business liquidity with mild economic stimulus programs whose outcomes directly impact the wellbeing of citizens. This scenario would inherently require economies to prepare for significant shocks that could lead to job losses, failure of businesses, and increased need for relief programs targeting the working class in the informal and formal economies. The biggest challenge to any interventions under this scenario will be the fiscal space to maintain humanitarian interventions and basic economic stimulus.

Medium-Term Outlook (12-24 months)

The most significant structural impact on economies arising from the COVID-19 crisis will become clearer in the next 12 to 24 months as economic activity across the World begins to resume to a form of normalcy. During this time, there will be fundamental questions on whether COVID-19 has changed the value proposition of the economies in question.

We expect that on the overall, most economies will have to diversify and domestically deepen their supply-chains, sectors of operation and value proposition so as to better absorb shocks and recover. For instance, it should be clear now for transit-based economies that there could be a time where value creation is not drawn by being a centre for human and cargo transfer only. This diversification could be driven by the ability to achieve resilience of economies by drawing on real value and progressively investing in areas that assure resilience.

Given the fluid nature of COVID-19 today, a 12 to 24 months projection could be seen to be ambitious and projections would have to take into consideration multiple scenarios. To a large extent, performance of economies and their response during this time would largely be dependent on whether a vaccine is found or not. In addition, nature of treatment of infections and resulting recovery rates could also significantly impact markets and their responses. The impact of the virus on strategic thought, however, is patently clear with numerous thought pieces being published attempting to ascertain how the current globalised economic system will be changed. The argument of diversifying supply lines and sources of key raw materials is already an established one gaining significant traction at the highest level of policy and business.

This change will be more incremental and must be dynamic and responsive to wider changes in the global economic system necessitated from the crisis. With the longer-term strategies targeted at structural change, there will be a global trend towards ensuring economies are more resilient and buttressed to maintain domestic stability. It is expected that there will be a concerted move by the international community development partners to reorient support to developing countries focussed on building new forms of resilience. This will be accompanied by a plethora of ideas, resources and strategies towards achieving this goal. To this end, there must be an equally concerted effort on the part of domestic leaders and decision-makers to explore areas of economic diversity, deepening domestic value-chains, broadening overall value propositions and fundamentally building economic resilience to shocks.

We project a scenario in the worst-case where African countries whose economies will be hardest hit by the pandemic face downgrading in their sovereign credit rating due to continuing deteriorating fiscal strength and structurally weak growth. This will have an adverse effect on the economies with countries not being able to service their debts and hence making them unattractive and prompting significant capital outflows.

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Mungai Munene