- Expectations of a swift exit from the pandemic were always misplaced, full recovery will be measured in years, not quarters.” – Frederic Neumann (HSBC Holdings Plc in Hong Kong)
Many economists and policy makers made ‘ambitious’ claims about a global economic recovery this year. Majority of these statements were driven by the world economy’s reaction to fiscal and monetary policies by governments including international financial institutions like the International Monetary Fund (IMF). The model of using fiscal interventions to correct/suppress the excessive repercussions of the Covid-19 pandemic on our economies is proving to be somewhat ineffective.
There has been continuous increase in energy and food prices on the world market, including a disruption of the global supply chain. Close to 90% of trade globally occurs by sea, and just when there were issues of container shortages at the beginning of the year, the aftermath of the blockage at the Suez Canal caused freight rates to sky rocket.
According to The Economist, as at 16th September 2021, the average cost of a 40-foot container had increased by 323% from its price last year. A container which was once approximately $2,500 now cost as high as $10,000-$15,000. In some cases obtaining a late booking on the busiest trade route (China to the west coast of America) could cost as much as $20,000. Such spiraling prices have adversely affected many companies, especially SMEs who are already struggling to surmount the economic fallout from the pandemic.
High energy prices
Although the continuous increase in fuel prices may be hitting African economies the hardest, it becoming a major cause for concern worldwide. The cost of coal, gas and electricity benchmarks are making records. Bloomberg details that, for the first time in three years, oil prices surpassed $80 a barrel and natural gas is also at an all-time high in 7 years.
According to Patrick Pouyanne, the CEO of TotalEnergies SE, the gas crisis affecting Europe will potentially last all winter. Moreover, the Bank of America has also made projections that the price of oil could reach $100 a barrel. Jeff Currie the global head of commodities research at Goldman Sachs has stated that the global supply chains are not only severely depleted but energy prices will remain high. This according to him is expected to accelerate the energy transition into renewable energy.
High food prices and inflation
In a Bloomberg report titled “Headwinds Mount for World Economy Into Final Stretch of 2021” China is currently experiencing an energy crisis which is triggering a surge in world agriculture and food prices. Beijing has imported a record amount of agricultural products because of domestic shortage. It has been predicted that China is set for a challenging harvest season of vital grains like maize, soy and peanuts including, critical agricultural commodities like cotton. Such occurrences are all leading to global food costs reaching multiyear highs.
Presently, food commodity prices have shot up by nearly 33% and are higher today than most of modern history. According to the Food and Agricultural Organization (FAO), it is currently harder to purchase food on the international market than in almost every other year since the United Nations (UN) record keeping started in 1961. The World Bank report on “Food Security and COVID-19” states that, “an increasing number of countries are facing growing levels of acute food insecurity, reversing years of development gains.”
It has been estimated that food insecurity globally will continue through 2021 into 2022 and most likely beyond, as the Delta variant continues to spread. In Ghana for example, a bag of maize which previously sold at GHS 160 in 2020 is now GHS 375. Prices of other agriculture produce have also increased. Research by the UN shows that, food prices hit six-year highs in emerging markets earlier this year.
There has been over 5% increase in the cereal price index, sugar price index and vegetable oil price index. World Bank data further details that, “as of July 16, 2021, Agriculture Commodity Price Index was approximately 30% higher than in January 2020.” Maize, wheat, and rice prices were about 43%, 12% and 10% respectively, above their January 2020 levels. Typically, food prices increase alongside the price inflation of non-food products. A report by Reuters Nigeria revealed that, Nigeria hit a double-digit inflation on food prices this year. Angola also saw its annual food inflation spike to 25% while that of Seychelles hit 15%.
Further research by the World Food Program projects that such increases in food prices globally will exacerbate food insecurity around the world.
Emerging economies like Brazil and South Africa (all part of the BRICS) have also seen their fair share of the harsh impact of the Covid-19 pandemic. South Africa for one had already been experiencing economic turmoil before the outbreak of the virus. The pandemic simply happened to be the straw which broke the camel’s back.
According to a Reuter’s article, unemployment rate in Brazil is at a historic high of 14.7% and less than 50% of the working population has a job. While in South Africa it’s at a record high of 34.4%. Data by PricewaterhouseCoopers (PWC) shows that, South Africa lost a net of 1.4 million jobs in 2020 and close to 300,000 jobs have been lost during the first half of the year.
In other large African economies like Nigeria, unemployment is at 33.3%. For young people within the age bracket of 15 to 34 years it’s as high as 42.5%. Ghana is also faced with 12% youth unemployment and 50% underemployment which are both higher than unemployment rates in sub-Saharan Africa. A report by Brookings reveals that, 1 in 3 young people in Ghana are self-employed in the nonagricultural sector and are own-account workers in vulnerable jobs.
According to an article published by Bloomberg on the 12th of April titled “Europe Is Heading toward a New Financial Crisis” the Covid-19 pandemic aggravated already lingering financial discrepancies within the Eurozone. The IMF’s data indicates that, general government debt in the euro-region will surpass 98% of gross domestic product by the end of 2021. Likewise, a report posted by Bloomberg on the 1st of September 2021 revealed the news of the fastest euro-area inflation in 13 years.
In the US, its prolonged Covid-19 programme of providing stimulus packages is noted to be leading the country’s inflation to hit the highest rate in over a decade. The US Federal Reserve officials are spending close to $120 billion in bond purchases a month on a massive bond buying program to provide liquidity to the economy. At the same time, the US central bank cut the benchmark lending rate to zero.
However, the key question is what the long-term effects of having the ‘luxury’ of using monetary policy to slow down an economic crisis will be. Many developed states have resorted to using fiscal and monetary policy to facilitate an economic recovery in their countries and this is leading to the biggest debts since the 1970’s. According the IMF’s Gita Gopinath, low and middle income countries will not be able to afford “a tantrum of financial markets originating from major central banks” once the US is forced to tighten its monetary policy due to inflation caused its pandemic monetary policy. Hence, there will be an inevitable aftermath of the normalization of the US monetary policy and African countries are expected to be one of the most affected.
The way forward for Africa: agriculture and food production
Africa’s informal sector which constitutes over 70% of most economies in the region has been severely affected by the Covid-19 pandemic. Governments due to increased debt and low revenue, lack the fiscal allowance to offset the repercussions of the global supply chain disruptions, climate shocks and increase in fuel and food prices. This puts many countries in the region at risk of unrest, and socio-economic interferences.
According to Josef Schmidhuber, an FAO economist, most of the population in low-income countries are inclined to spend over 60% of their income on food. Hence, the present global food price climate puts such countries at a higher likelihood of food insecurity. Another FAO economist Abdolreza Abbassain, reiterated this point in his comment, “all you need is a little spark, it can be foods prices, or energy prices, or simple rain” for social unrest to ignite.
All the same Africa, has the opportunity to turn this crisis into an advantage for accelerated growth and development. The key will be agriculture. Africa has 60% of the world’s uncultivated arable land. Yet the continent is a net importer of food. In a time of global food insecurity, where supply cannot meet demand, it is imperative for African heads of state, private sector, investors etc. to intensify their focus on improving agriculture investment and expansion in the region. Today, half of Sub-Saharan Africa’s population is under 25 years and 20 million enter the job market each year. FAO data shows that 65-75% of African Migrants are youth in search of employment opportunities.
Agriculture and food production have the capacity to provide several work opportunities for the unemployed population. Aside farming, areas like, engineering, marketing, research, logistics, business administration and several others are all potential employment opportunities within the agriculture sector if well developed and invested in.
African nations need to explore through the African Continental Free Trade Area (AfCFTA) deeper collaborative opportunities with each other to enhance advanced farming techniques like mechanized farming and cross border agriculture value chain development. For example, a country like Benin which is the leading cotton producer in West Africa and be the source of cotton for a West African clothing factory established in Ghana or Togo.
Nations like Ethiopia, Uganda, Rwanda and South Sudan which are some of the highest producers of cattle and dairy products in the continent can partner to produce for the entire continent. Nations in Southern African region like Zimbabwe, South Africa etc. can collaborate to be the major suppliers of fruits for the continental market and the list goes on. Economic models like comparative advantage and specialization can be used as tools to ensure agriculture and food processing yield ample results.
Most importantly, many African rural communities have indigenous practices farmers use to ensure soil fertility and combat soil erosion. In Lesotho, such a practice is known as “Likoti.” Local practices of this nature can be improved through research and investment in various communities to be reproduced on a much larger scale. Thus giving more meaning to the phrase “African solutions to African Problems.” Effective farming methods also have the capability to reduce deforestation and overall issues of climate change.
The world economic crisis is giving the African continent an opportunity to play a vital and lead role for a quicker global recovery. Though we may be behind in the ‘new technological revolution,’ we have the capacity to not only feed ourselves but ensure the rest of the world has a meal on their plate too. Agriculture was the past, it is the present and will be the future.
The writer is an International Trade Consultant, Blackbridge Consulting Group