covid-19: economic impact on african economies and policy...

Highlights

1. Despite its late arrival on the continent, COVID-19 is already taking a toll on African economies.

2. The COVID-19 pandemic will lead Sub-Saharan Africa to its first recession in 25 years.

3. COVID -19 is also likely to have large negative impact on household welfare.

4. The region could face a severe food security crisis, with a contraction in agricultural production and lower food imports.

5. A differentiated policy response, customized to reflect Africa’s structural features and peculiar policymaker’s constraints is much needed.

6. Sub-Saharan African governments do not have much wiggle room in deploying fiscal policy to address the COVID-19 crisis.

7. The “Debt Standstill” called for by WBG & IMF and African governments should be an important part of the global response to soften the impact of COVID-19 on Africa’s poor.

Outline of the Presentation

I. COVID-19 and the Global Outlook

II. Impact of COVID-19 on the near term outlook

III. Growth and Welfare Impact of the COVID-19 Virus: A CGE Simulation

IV. The Policy Response to COVID-19

I.

COVID-19 and the Global Outlook

Late arrival of COVID-19 to Africa..

Source: Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU). Note: Last observation is May 15, 2020

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China Rest of the world Sub-Saharan Africa

Confirmed cases (log scale)

… but spreading rapidly

COVID-19 Cases across regions COVID-19 Cases in Sub-Saharan Africa

Source: Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU). Note: Last observation is May 15, 2020

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The COVID-19 Pandemic

• COVID-19 Pandemic: Implications for aggregate demand and supply

• Aggregate supply: Virus can affect workers

• Reduction in the supply of labor

• Reduction beyond number of infected: Workplace closures, travel bans

• Digital technology as mitigator of these effects?

• Work from home? Not all tasks can be performed remotely: 34% of jobs in the U.S. (Dingel and Neiman 2020)

• E-commerce? Not all retail firms have on-line platforms/internet connection

• Aggregate demand: Virus exposes individuals who purchase goods

• Reduction of private consumption

• Reduced access to goods and services: Store shutdown/reduced hours, (partial) suspension of home delivery services.

• Consumers/firms: Defer spending when facing Knightian uncertainty.

Sharp decline in commodity prices and Global Recession in view in 2020

Collapsing PMIs in major economies Declining commodity prices (YTD % change)

Source: Haver Analytics, Bloomberg, and World Bank. Commodity prices as of mid-April, 2020.

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Eurozone Global

II.

Impact of COVID-19 on the near-term outlook

Growth in Sub-Saharan Africa set to weaken in 2020

Source: World Bank staff estimates based on simulations with the MFMOD model.

Illustrative COVID-19 Scenarios in Sub-Saharan Africa

Note: These charts were generated on the basis of specific assumptions about the inherently uncertain progress of COVID-19 and the policy responses to it. As

such, they should be interpreted as illustrative rather than predictive. Source: World Bank staff estimates based on simulations with the MFMOD model.

The Downside Scenario illustrates the adverse impact on growth

Note: These charts were generated on the basis of specific assumptions about the inherently uncertain progress of COVID-19 and the policy responses to it. As

such, they should be interpreted as illustrative rather than predictive. Source: World Bank staff estimates based on simulations with the MFMOD model.

III.

Growth and Welfare Impact of the COVID-19 virus: A CGE Simulation

Why a CGE model?

• Comprehensive evaluation framework: capturing direct and indirect effects as well as second-round effects;• They rely on input-output tables and assume behavioral functions for agents (firms

and households);

• Flexibility to capture shocks: CGE models are sufficiently flexible and detailed to deal with the wide variety of transmission channels of shocks (labor market, capital, FDI, trade, productivity)

• Flexibility to capture the effects along several dimensions —including national accounts (GDP) the fiscal framework, the external account, industries, factors of production, and household.

Methodology and Data • Model: ENVISAGE – The World Bank global computable general

equilibrium (CGE) model to assess global issues (trade, FDI, migration, environmental, etc…)

• Global model : • Countries’ individual CGE models are incorporated

• In addition key linkages among countries are captured • Trade,

• Migration, and Investment ( exogeneous in this case)

• Data: Improved version of GTAP 9 data base for this exercise• GTAP data base version 9 ( 141 countries, 57 sectors)

• + 4 Central African countries ( Chad, Congo, Gabon, CAR) + DRC+ Burundi

• + Special treatment of tourism sector to reflect latest numbers available

• A dynamic CGE model : over 2019-2030

3 Scenarios to assess the potential impact of COVID-19

Main assumptions to calibrate the shocks

Calibrating the shocks:% deviation from 2010-13 during the 2014-16

Ebola Crisis

Growth determinants in the CGE model

•Productivity: exogenous shocks

•Labor supply: exogenous shocks , wage endogenous

•Capital accumulation -Investments: • Exogenous FDI

• Endogenous domestic savings (government, households, firms)

Continent-wide effect: Sharp reduction in GDP

Source: Authors’ construction using the CGE model

(ENVISAGE)

• Scenario 1: - 5.4 % reduction in 2020 compared to a no-COVID base case. • Growth in the region could

then drop to -2.5% in 2020 from 2.4 percent in 2019.

• The First Recession in 25 Years in SSA

• Scenario 2: - 8 % in 2020 compared to a no-COVID base case. • Growth in the region could

then drop to -5.1% in 2020 from 2.4 percent in 2019.

Sources of impact:International vs. Domestic shocks


(ENVISAGE)

• A failure to rapidly contain the spread of the virus will significantly intensify the economic impact of domestic restrictions

GDP impact by Sub-Regions

➢The impact differs across sub-regions, according to commodity dependence, as well as trade openness, reliance on tourism, and epidemiologic preparedness• Oil dependent countries

of Central Africa are by far the most affected

• Best-prepared Eastern and Southern African countries are the least affected.


(ENVISAGE)

Fiscal impact: Continent-wide effect


(ENVISAGE)

➢The COVID-19 pandemic is likely to cause a devastating loss of revenue in Sub-Saharan African budgets

Fiscal impact: Revenue loss by selected groups in Sub-Saharan Africa(% deviation from No Covid-19 scenario)

Source: Authors’ construction using the CGE model (ENVISAGE)

Household Welfare: likely large impact on household welfare due to income loss and price increases


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Scenario 1: Severe crisis Scenario 2: Catastrophic crisis

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Impact of COVID-19 on Sectoral GDP

Effect of COVID-19 on Sectoral Activity

(% deviation from reference scenario)


➢ Poorest are likely to be heavily impacted: decline in agricultural; and services

➢ Opportunity for local manufacturing

The COVID-19 crisis has the potential to create a severe food security crisis in Africa

Effect of COVID-19 on Sectoral Activity

(% deviation from reference scenario)Imports of Agricultural and Food

products in Sub-Saharan Africa in 2020

Scenario 1 Scenario 2 Scenario 3

Agriculture

-13.08 -12.62 -21.03

Food

-13.31 -14.24 -25.28


Non-cooperative response to COVID-19

➢A disorderly, non-cooperative response to the pandemic that result in sub-regional trade blockages would accentuate the negative impact on growth and household welfare


(ENVISAGE)

Long Term effect: the growth effect of COVID-19 could remain significant in the long term


➢ Long term effect due to potential deterioration in health systems, in the level of human capital (school interruptions) more generally and in infrastructures

III. The Policy Responses to COVID-19

Are African health systems prepared for a pandemic?

Source: NTI & JHU (2019) Global Health Security Index: Building Collective Action & Accountability

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Global

Security Index 1 1 1 1 1 1 2 1 1 1 1 1 1 2 1 2 1 1 1 1 2 1 1 2

Prevention of

Pathogens 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 2 1 1 1 1 3 1 1 2

Detection &

Reporting 1 1 1 2 1 1 2 2 1 1 1 1 1 2 1 2 3 2 1 1 3 1 1 2

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Response 1 1 2 2 1 2 1 1 1 1 1 2 1 2 1 2 1 2 1 1 2 2 2 3

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Systems 1 1 1 1 1 1 1 2 1 1 1 1 1 2 1 2 1 2 1 1 2 2 2 1

Compliance w/

Intl. Norms 1 1 2 2 2 2 2 3 2 3 2 1 1 3 1 1 2 2 1 1 3 3 2 3

Risk

Environment 1 1 1 1 2 1 1 1 1 1 1 3 1 1 1 1 1 1 1 1 1 1 1 1

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Global

Security Index 1 1 1 1 1 2 1 2 1 1 2 2 1 1 1 1 1 1 1 2 2 3 1 2

Prevention of

Pathogens 1 1 1 1 1 2 2 1 2 2 1 1 1 1 1 2 1 1 1 2 2 2 1 2

Detection &

Reporting 1 1 2 2 1 2 2 2 2 1 1 1 1 1 1 1 2 2 2 2 2 3 1 3

Rapid

Response 1 1 1 2 1 1 1 2 2 1 1 1 1 1 1 1 1 2 1 2 3 3 1 1

Health

Systems 1 1 1 1 1 1 2 2 2 1 1 1 1 1 1 1 2 1 1 1 1 2 2 1

Compliance w/

Intl. Norms 2 2 1 1 2 2 2 3 1 1 3 1 1 1 1 2 2 2 2 3 3 2 1 2

Risk

Environment 1 1 1 3 1 2 1 1 1 1 1 1 1 1 1 1 3 1 1 1 1 2 1 1

Pre-COVID-19 Policy Space in Sub-Saharan Africa

Source: World Development Indicators, World Bank; World Economic Outlook, International Monetary Fund

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Inflation, EOP (%) 1 2 3 3 3 3 3 3 2 3 2 3 1 3 2 2 2 3 2 2 1 2Reserve Coverage of

Imports 3 1 0 0 3 3 0 3 1 1 3 3 1 1 1 1 1 0 1 2 0 2Fiscal Balance (%

GDP) 3 1 2 2 1 3 2 2 2 3 2 2 2 3 1 2 2 1 3 1 1 1General Government

Gross Debt (% GDP) 1 1 2 2 3 2 1 2 3 1 3 1 1 1 1 2 1 1 2 1 2 2PPG External Debt (%

GDP) 1 3 1 2 3 3 2 2 3 1 3 1 1 1 2 3 1 2 0 1 2 2PPG External Debt

Service (% Exports) 1 2 1 2 3 3 1 1 3 2 3 1 1 1 1 3 1 3 3 1 2 2Fiscal Space (# tax-

years) 1 1 2 3 3 1 2 2 3 2 3 1 1 1 1 2 1 1 1 2 2 3

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Inflation, EOP (%) 3 3 3 3 3 1 3 3 1 2 1 3 1 2 3 3 3 3 3 3 1 1Reserve Coverage of

Imports 2 0 2 2 3 1 2 0 3 2 0 0 1 1 1 1 0 3 2 3 1 1Fiscal Balance (%

GDP) 2 2 2 3 1 1 1 2 1 1 1 1 2 2 1 2 3 2 1 1 1 2General Government

Gross Debt (% GDP) 2 2 1 1 1 1 1 1 3 2 1 1 1 1 2 2 1 2 2 1 1 3PPG External Debt (%

GDP) 2 2 1 1 3 2 0 1 3 1 1 1 2 1 3 2 2 2 2 2 1 3PPG External Debt

Service (% Exports) 3 1 1 1 2 2 3 1 3 2 2 1 2 2 3 2 1 1 1 1 1 3Fiscal Space (# tax-

years) 2 2 1 2 2 2 3 2 1 2 0 2 1 1 3 1 2 2 2 3 1 2

Much needed: A differentiated African policy response

The Policy Response: Need to be tailored to reflect Africa’s structural features and peculiar policymaker’s constraints:

1. Informal employment (89% of total employment). No health / unemployment insurance, and paid leave. Subsistence threaten by prolonged lockdown

2. Precariousness of jobs – temporary, low remuneration, no social security, great risk of injury and ill health.

3. Predominance of small, and medium-size enterprises (SMEs)

4. Effectiveness of monetary policy stimulus• Prevalence of supply effects at height of containment measures (Guerrieri et al. 2020)• Weak monetary transmission —e.g. underdeveloped domestic financial markets (Mishra, Montiel,

and Spilimbergo 2012) and informality (Alberola-Ila and Urrutia 2020).• Needed: A different type of central bank policy response. Liquidity support (through direct credit

lines or guaranteed commercial loans)

Policy Framework: The 3 P’s

• 3-Pronged Strategy• Protecting lives• Protecting livelihoods• Protecting the future

• Protecting Lives• Strengthening health systems• Securing food

• Protecting Livelihoods• Income support to (formal and informal) workers• Liquidity support to viable (formal and informal) businesses• Guaranteeing provision of public and government services

• Protecting the future• Policies geared to build future resilience, economic diversification and inclusive growth• Redoubling efforts on trade and digital agenda

• Policy response to COVID-19 largely rests on fiscal policymakers.

• How African countries will find the fiscal space to fund the policy measures?• Mounting fiscal pressures and heightened debt vulnerabilities• International assistance required: Debt standstill

Protecting Lives: Strengthening Public Health Capacity

• Ebola lessons in the areas of: • Community engagement (e.g. effective communication)• Community-level problem solving (hand washing and social distancing in Liberia).

• Networks of public handwashing stations (West Africa, 2014-16)• Comprehensive care even in difficult environments. • Call for volunteers to participate in medical response teams (Guinea, 2014-16)

• Strengthening the (human and technical) public health capabilities and infrastructure• Earmark funds for epidemiological/biological surveillance (testing kits, free call centers, rehabilitation/set-up of

laboratories)• Acquisition of protective personal equipment (PPE) and other medical supplies• Scaling up testing, tracing, implementing surveillance testing (including rural areas)• Financing for research on the virus. • Scientist-led national-level command center: Coordination within government and with private sector

organizations.

• Actions:• Development of effective preventive communication strategies• Improved surveillance at ports of entry• Enhancement of medical logistic platforms• Construction of mobile hospitals and health centers in remote areas• Deployment of surge staff for contract tracing, rapid response and training (Liberia)

Protecting Lives: Securing Food Access

• The COVID-19 crisis contributing to increased food insecurity as currencies are weakening and prices of staple foods are rising in many parts of Africa.• Compounded by other existing crises in many countries (e.g. the desert locust emergency,

droughts, climate change, fragility, conflict, violence and underdeveloped food markets). • While global food stocks are plentiful and many commodity prices are stable, the prices of other

staples (such as wheat and rice) are rising when many countries’ currencies are weakening.

• Local agri-food supply chains are already experiencing disruptions, including reduced access to inputs and services, labor movements, transport and roadblocks, and credit or liquidity. • Minimizing disruptions in critical intra-African food supply chains and keeping logistics open to

avert a looming food crisis in the region. • Reduce international and domestic trade barriers.• Ensure that food system workers can go to work without problems.• Protecting funding for agriculture and agribusiness • Digital technologies can help anticipate problems and smooth temporary shortages as well as

build the resilience of food chains.

Protecting livelihoods: Workers

• Short-term fiscal policies geared to provide income support to the most affected/vulnerable workers to COVID-19.

• Most governments worldwide have relied on cash transfer programs —71 countries having a program in place, 36 of them an initiative to cope with COVID-19 (Gentilini et al. 2020).

• 15 countries in Sub-Saharan Africa have introduced social protection responses to COVID-19 (as of April 3, 2020)

• Income support to vulnerable segments of the population • On-line payments, mobile money transfers• Cash payments, in-kind payments (food distribution), take-home meals for schoolkids

• Actions taken:• Support to wage-earning individuals —70% of their gross salary (CPV)• Cash transfers to the elderly, orphans, disabled and other vulnerable people (ZAF, KEN)• Sick-leave payments to workers affected by lockdown or becoming ill during pandemic (ZAF)• One-time grants to formal/informal workers losing their jobs (NAM)• Unemployment insurance benefits (ZAF)• Taxpayers can borrow 1/12 of tax payments in the previous tax year (NAM)• Waivers on electricity tariffs, (full/partial) waivers on mobile money transactions (KEN, GHA)• Measures to boost the use of electronic payment tools (BEN, BFA, CIV, GNB, MLI, NER, SEN, TGO)

Protecting Livelihoods: Firms• Most SSA firms: Small, informal, few paid employees, highly-dependent on community-based

financing, women entrepreneurs

• Support functioning and expansion of individual transaction accounts• On-line systems for account enrollment• No-charge policy for mobile money transactions (up to a threshold)

• Liquidity support to community-based financial institutions (if within perimeter of regulation/supervision).

• Partnerships between bank and mobile network operators to provide loans

• Mobile phone customer data to identify women entrepreneurs vulnerable to COVID-19 crisis and target them with relief payments.

• Stimulating bank lending to firms to continue paying workers/suppliers• Commercial bank emergency loans to SMEs with flexible repayments (Malaysia). • Partial credit guarantee schemes for loans provided by banks to SMEs for working capital –backed by Central

Bank (Peru).• Central Bank direct line of credit to banks for on-lending to MSMEs under well-defined pre-conditions.• Funding from State Development Banks –including concessional loans (Brazil). Transparent eligibility criteria.

Second-tier lending to crowd-in private lenders.• Fintech solutions for SME financing. Simplification of loan application process, alternative methods/data to

expedite credit decisions. • Leveraging banks’ online platforms for reverse-factoring transactions that ease supply-chain financing for

MSMEs and shorten the maturity of the payments involved (Mexico).

Protecting the Future

• Shorten the recovery time and put Africa on a path of economic transformation with more, better and inclusive jobs.

• Policies that build greater resilience and boost productivity• Address human capital crisis, especially in the health sector

• Leverage digital technologies for trade and government effectiveness during confinement and beyond• Investments in “analog complements,” e.g. electricity

• Boost water and sanitation

• Regional coordination can enhance the policy response• Redouble efforts on existing pre-COVID priorities like implementing AfCFTA, increasing

intra-regional trade, building regional markets in energy, digital and financial inclusion.

Finding the Fiscal Space to Fight Covid-19 Amid Heightened Public Debt Vulnerabilities

▪ Sub-Saharan African governments do not have much wiggle room in deploying fiscal policy to address the COVID-19 crisis. ▪ The region may need emergency economic stimulus of around US$100 billion

(including an estimated US$44 billion waiver for interest payments in 2020).

▪ Temporary debt relief will be necessary for fighting COVID-19 while preserving macroeconomic stability in the region. ▪ External debt service paid by the region to all creditors in 2018 amounted to US$ 35.8

billion (2.1 percent of the regional GDP), of which US$ 9.4 billion was paid to official creditors (0.6 percent).

▪ The “Debt Standstill” called for by WBG & IMF and African governments should be an important part of the global response to soften the impact of COVID-19 on Africa’s poor.

covid-19: economic impact on african economies and policy...

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