As African economies catch COVID-19 cold, World Bank warns against ‘copycat’ remedies

Informal traders on a crowded Bulawayo street. Picture credit: ZimSentinel

The COVID-19 pandemic will drive sub Saharan Africa into its first recession in 25 years, a World Bank paper says, but the region’s ‘copycat’ responses, which include lockdowns as well as some monetary and fiscal measures are unlikely to work in highly informalised economies.

Several African countries have shut down their borders and large parts of their economies in response to the pandemic, which has, as of April 14, led to 815 deaths from 15,074 confirmed cases, according to WHO data. 

The paper, authored by a group of economists and published by the World Bank’s chief economist for Africa, projects the sub-region’s economic growth to contract by as much as 5% this year, from 2.4% growth in 2019, as the COVID-19 crisis disrupts the global economy.

“It will cost the region between US$37 billion and US$79 billion in terms of output for 2020,” reads the paper.

“The downward growth revision in 2020 reflects macroeconomic risks arising from the sharp decline in output growth among the region’s key trading partners, including China and the euro area. The fall in commodity prices, reduced tourism activity in several countries, as well as the effects of measures to contain the COVID-19 global pandemic.”

With the price of crude oil and industrial metals having fallen by 50% and 11%, respectively, between December 2019 and March 2020, the region’s largest economies – Nigeria, South Africa and Angola – are seen taking a huge hit.

Growth in metals exporters such as Zimbabwe is seen falling by 7 percentage points, compared to no-COVID-19 base scenarios.

‘Lives versus livelihoods’

The paper notes that African countries, for the most part, responded quickly and decisively to impose measures to contain the pandemic. But it questions the sustainability of lockdowns.

Zimbabwe, which has 17 confirmed coronavirus cases, imposed a 21-day nationwide lockdown on March 30, only allowing essential services, including retailers, some mines and manufacturers to operate.

“Several African countries have reacted quickly and decisively to curb the potential influx and spread of the COVID-19 virus very much in line with emerging international experience,” the World Bank paper says.

“As the situation evolves, there are more questions about the suitability and likely effectiveness of some of these policies, such as strict confinement. The large size of the informal sector (89 percent of total employment); the precariousness of most jobs; the limited coverage of pensions and unemployment insurance schemes; and the predominance of micro, small, and medium-size enterprises in business activity (90 percent) all need to be factored in, as they may make aggressive containment measures less effective. 

“Protecting vulnerable groups, ramping up testing, and promoting the wearing of masks may be better options.”

Also important is the need to differentiate the monetary policy response due to the weak monetary transmission in countries with underdeveloped financial markets. Because of the reduced monetary policy effectiveness, the policy response will be mostly fiscal, the paper adds.

But given the limited fiscal space in most regional economies as well as narrow policy options, Sub Saharan Africa requires international assistance. The International Monetary Fund has said it is ready to put up US$50 billion in flexible and rapid-disbursing emergency funds for developing countries, with up to US$10 billion of that at zero interest rate.

The World Bank has also set up a US$1.9 billion fast-track facility for COVID-19 response, with a first round of projects targeting 25 countries, about half of which are from Sub Saharan Africa.

“Finally, African policy makers need to think ahead about the exit strategy from COVID-19. Once the containment and mitigating measures are lifted, economic policies should be geared toward building future resilience,” the economists say.

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