Light at the end of the tunnel for Africa’s economic recovery

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Editorial: SOEs need bitter sanction
Photo: Ken Ofori Atta, Minister of Finance
Real GDP is projected to grow by 3.4% in 2021 after contracting by an estimated 2.1% in 2020
Africa is set to recover from its worst recession in half a century. Real GDP is projected to grow by 3.4% in 2021 after contracting by an estimated 2.1% in 2020, mainly due to COVID-19-related disruptions, according to the African Development Bank’s recently released African Economic Outlook (AEO).

The pandemic also caused deep scars in the financing and debt landscape of the continent which may linger on if not quickly addressed.

At the AEO launch, Nobel laureate Joseph Stiglitz rightly explained how the COVID-19 pandemic caused both demand- and supply-side shocks in the continent. “It affected the demand for exports of African countries…but it also affected the willingness of people to work in some of the more exposed sectors, and its effects were very disparate across different sectors.”

Following Stiglitz’s train of thought, Africa’s projected recovery will be subject to an unusually high level of uncertainty and risks – as is also pointed out in the AEO analysis.

Recovery prospects and risks

The most obvious risk to recovery is the disease itself. The emergence of more contagious strains of the COVID-19 virus could derail the recovery process. Furthermore, if progress in deploying safe and effective treatment is slower than expected, governments will have to reinstate restrictions. On the upside, if COVID-19 therapeutics and vaccines become accessible on the continent earlier than anticipated, the growth projection for 2021 could be exceeded; leading to a more robust recovery.

Another risk factor relates to financial inflows to the continent. Although commodity prices have recovered somewhat from the low levels seen in mid-2020, they remain subdued compared to their pre-pandemic levels. Remittances are estimated to have dropped by nearly 10% in 2020, while tourism, foreign direct investments and portfolio investments were halted in many countries. If these sources of inflows do not rebound, public finances in many African economies will remain suppressed…jeopardising the projected recovery.

Social and geopolitical tensions in the region are also major sources of risk. The number of conflict-related events on the continent, including political violence, rose in 43 countries during 2020. If these tensions are not properly defused they could result in policy uncertainty, dampening investor confidence; and could ultimately derail growth prospects.

Policies to sustain the recovery

In the end, government policies can make or break the recovery. For example, governments’ containment measures have helped accelerate digitalisation in Africa, with more people adopting digital transactions, virtual meetings, e-medicine, e-commerce and other electronic platforms. If digitalisation is sustained in the pandemic-recovery era, it will accelerate productivity and foster rapid and quality growth.

Furthermore, policymakers must not prematurely withdraw the current fiscal and monetary stimulus packages which have supported recovery. Support for the health sector should continue to consolidate gains in the fight against the virus. Effective policies to retool Africa’s labour force for the future of work must also be aggressively pursued. The African Continental Free Trade Area agreement should be used to strengthen regional and multinational trade and cooperation so as to stimulate shared prosperity. New public investment projects should focus on pandemic- and climate-proof infrastructure to help build economic resilience.

The impact of school closures on human capital development and the inequalities it creates between the rich and the poor, and between girls and boys, must be mitigated through targetted policies. Whenever in-person learning is possible, schools should open with the appropriate safety protocols in place. Otherwise, learning should continue using traditional media – print, radio, TV – and digital technologies such as smartphones and computers. Social safety nets, including cash transfers and in-kind support, should be expanded to include previously neglected groups in slums and informal businesses; thus taking advantage of the accelerated digital penetration.

Policies to strengthen good governance and structural reforms should be aggressively implemented as part of efforts to mitigate the COVID-19 crisis and avoid a looming debt crisis. African countries must eradicate all forms of ‘leakages’ in public finances and pursue an all-out effort to harness digital technologies to propel the continent into the fourth industrial revolution – and into a future that is far more resilient to economic shocks.

About the Authors:
Chuku Chuku is OIC Division Manager for the Macroeconomic Policy, Debt Sustainability and Forecasting Division of the African Development Bank; Adamon Mukasa is a Senior Research Economist with the Macroeconomic Policy, Debt Sustainability and Forecasting Division; and Yaye Betty Camara is a Research Analyst and Environmental Economist with the Macroeconomic Policy, Debt Sustainability and Forecasting Division.

 

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