African economies are being hit hard by the economic crisis triggered by the COVID-19 pandemic. According to the UNDP, almost a decade of human development progress is at stake. Although the numbers of reported infections, hospitalisations and deaths on the continent remain much lower than in other regions, the crisis is taking a heavy toll on Africa’s growth and development prospects. The 2020 recession – the first in 25 years – will trigger increases in poverty and food insecurity across the continent. The World Bank estimates that sub-Saharan Africa will see the second largest increase, after South Asia, in the number of extreme poor due to the COVID-19 crisis . The contraction in economic activity will slowdown the much-needed (and already insufficient) job creation for the 29 million African youths that join the labour force every year. African governments are confronting this crisis with much lower fiscal buffers than during the 2008-09 crisis. Commodity prices have collapsed, exports and tourism have been heavily curtailed, the domestic contraction will reduce already low tax revenues, and government spending will have to increase to mitigate the impact of the crisis on households and firms. Moreover, liquidity problems could affect the ability to service sovereign debt and – if not properly addressed – could eventually trigger solvency and financial sector crises.
The magnitude and nature of the crisis call for a bold response at national, continental and international levels, going beyond emergency interventions. Africa’s youth population, its experience from the management of the Ebola outbreaks and lessons from countries hit earlier by the pandemic may help the continent mitigate its exposure to the COVID-19 pandemic. But persistent structural vulnerabilities overexpose African countries to the social and economic consequences of COVID-19. In particular, the high dependency on imports – including for basic food and medical supplies – and limited capacities of local supply chains and production systems, characterised by high levels of informality and micro firms, compound with the continent’s large digital divide. With about 86% of total employment being informal, survival for many African workers may be threatened not only by COVID-19, but also by an inability to work due to lockdowns that force them out of work. Confronted with these vulnerabilities and a limited fiscal space, African governments see their room for implementing policy responses to the crisis curtailed.
African governments reacted swiftly to confront the pandemic, coordinating their responses within the framework of the African Union. In many respects, they have been remarkably successful. Africa accounts for 17% of the world’s population but for just 3.5% per cent of the total COVID-19 deaths recorded globally (a caveat is of course in order concerning the reliability of the data). South Africa recorded almost half of those and has brought the daily infection number from a peak of almost 14,000 in July to less than 2,000 just two months later. African governments imposed travel restrictions, border closures and social distancing – from bans on mass gatherings to curfews and lockdowns – at an earlier stage in the epidemiology curve than many European countries. Several governments implemented public health campaigns, digital education initiatives and unblocked large financial packages to mitigate the consequence of the pandemic. On April 21, South Africa’s President Ramaphosa announced a USD 25 billion support programme to assist the vulnerable and sustain SMEs – this is significant for South African standards, amounting to 10% of GDP or a third of the annual budget. The African Union (AU) adopted a Joint Continental Strategy to tackle gaps in testing capacities by promoting actions such as pooled procurement, warehousing and standardisation, and channelling financing where it is most needed. African finance ministers have also called for an immediate emergency economic stimulus of USD 100 billion, including a waiver of all interest payments on public debt and on sovereign bonds for 2020. The G20 responded to this call with a Debt Service Suspension Initiative (DSSI) for low-income countries, encouraging private creditors to participate on comparable terms. This is a Net Present Value (NPV)-neutral, time-bound suspension of principal and interest payments for countries that make a formal request for debt relief from their official bilateral creditors.
Despite these remarkable steps to limit the direct human losses from COVID-19, the deteriorating development prospects in Africa are a cause of great concern and call for a more active response by the international community. Current estimates vary between -2.1% and -5% growth in the continent’s 2020 Gross Domestic Product (GDP). The AfDB projects a return to positive 3% growth in 2021. The pace and shape of the African recovery are uncertain. If uncertainty due to the pandemic continues to affect investment sentiment and further clouds the global recovery, commodity exports, tourism and foreign investment may not rebound swiftly. In this case, it would be hard to imagine a V-shaped rebound in GDP growth for most African economies. For some countries, in the short term, the economic crises could evolve into a humanitarian and security one. For instance, the SWAC warned that “nearly 17 million people are in need of immediate assistance for the period June-August 2020. Fifty-one million, currently under pressure, could fall into crisis phase under the combined effects of insecurity and the consequences of the health crisis”. In the medium-term, a deeper development crisis could unfold, halting Africa’s on-going transformation, underpinned by demographic dynamism, growing urbanisation and expanding domestic markets. The editorial board of the Financial Times lamented in July the insufficient scale of the global response to support African countries. They noted that while the cost of action is relatively small, “the consequences of not acting are all too predictable: hunger, violence, political instability and migration”. Indeed, tensions could increase, intertwine with upcoming elections and political transitions and fuel violence and instability. Moreover, as Ethiopia’s prime minister stressed back in March, only a global victory can end this pandemic: if COVID-19 is not beaten in Africa, it will return to haunt us all. However, it would be a mistake to base the call to action for global engagement with the continent on scary narratives about rising emigration and conflicts. If not addressed, the unfolding crisis risks derailing Africa’s remarkable development transition. This would be a blow for Africans but also a major missed opportunity for the world economy as a whole to restore growth.
So far, the international community has reacted to the African crisis with insufficient strength and ambition, mainly focussing on emergency measures. A new multilateral approach, putting global investment at the centre, is needed to overcome the crisis and put Africa on a stronger development trajectory. The G20’s DSSI is certainly a welcome response. As Joseph Stiglitz has emphasised, forcing developing countries to pay hundreds of billions of dollars in debt service when they suffer a major exogenous shock and must increase spending to save lives and safeguard livelihoods, “is tantamount to squeezing water out of stone”. This relief measure can prevent a “cascading debt crisis” and save the world significantly greater amounts in humanitarian assistance in the future. However, the DSSI is not providing African governments the room for manoeuvre they need to contain and overcome the crisis. Some governments – such as Kenya’s – have even decided not to ask for the DSSI, fearing that the request for private sector involvement could trigger a rating downgrade and curb their access to international capital markets and their ability to finance growing deficits.
Africa is part of the solution to the global crisis but its partners need to engage more and differently. A new approach to cooperation should focus on strengthening regional integration and endogenous sources of growth, reducing vulnerabilities and addressing systemic issues, including the provision of global public goods. Investment in Africa’s development should be seen and designed to boost prosperity for all, not to provide assistance. A strong African leadership is needed to make this happen. The African Union’s Agenda 2063 and the process of continental integration – notably through the Continental Free Trade Area – set an ambitious path for the continent over the next decades. The AU response to the pandemic, including the recent establishment of the Africa Centres for Disease Control and Prevention (Africa CDC), is an example of the growing continental, coordinated approach to Africa’s challenges. Nevertheless, these efforts also require a different partnership from outside the continent. It should transcend the traditional North-South approach in favour of a partnership of equals. It should be open to all Africa’s partners – including the emerging economies, whose role has grown considerably in specific areas such as infrastructure delivery. Participants should be ready to accept and support that African governments experiment with a similar dose of unorthodox or unconventional policy solutions as their peers in OECD and emerging economies have been doing. It should also put at the centre of the global agenda the need for a global investment push and for mechanisms that would help address in an orderly fashion the larger debt legacy of the crisis. The debt-to-GDP ratio already in 2020 is likely to increase further in some countries – such as Sudan (295%), Angola (132%), Cabo Verde (137%), Mozambique (125%), and Congo (120%). Although FDI flows to Africa have increased by more than four times between 2000 and 2019, reaching USD 45.4 billion, policies need to attract much more. In 2017-19, Africa attracted less than 3% of global FDI flows, compared to Asia (31%) and Latin America and the Caribbean (LAC) (10%) [AUC/OECD, forthcoming 2020].
Four action areas are key to forging a new deal for development:
- Industrial policy and productive investment: the response to the pandemic showed the risks of excessive import dependence and weak local and regional production structures, which could not rapidly re-purpose production to confront shortages in protective personal equipment and medical supplies. Industrial policy is on the table in many advanced economies. It does not equate revenue seeking with inefficient subsidies. It requires an open and functioning multilateral trade and investment system that grants market access to crucial inputs, facilitates the smooth functioning of supply-chains and ensures a level playing field. If designed coherently with the process of the continental free trade area, intelligent industrial policy can foster entrepreneurship and the green production transformation needed to generate jobs for the African youth
- Technological partnerships to harness the digital transformation and support the transition to a low-carbon development path: productive transformation requires that countries mainstream, facilitate, and enforce the use of technologies. Only three countries are close to 1% of GDP in R&D spending (South Africa, Kenya and Senegal, at around 0.8%). Increasing R&D, including for health research, would help facilitate the absorption of technology. This is particularly important for intermediary cities that will increasingly drive Africa’s development dynamics and the response to climate change. Almost three quarters (73%) of Africans will continue to live in rural areas and intermediary cities by 2040 [AUC/OECD, forthcoming 2020]. African countries are responsible for less than 3% of global CO2 emissions but suffer huge human costs due to air pollution and global warming. Moreover, despite large extractive resources and huge renewable energy potential, energy provision is among the top constraints to industrial development and overall growth.
- Investment in health and social protection: treating health as a public good, and supporting the expansion of fiscal space to finance social protection. The African region suffers from more than 22% of the global burden of disease but has access to only 3% of the world’s health workers. Moreover, the ILO estimated that 82% of Africans are without social protection, and only a small part of the economically active population is covered by statutory social security schemes, most of which are old-age pension schemes. Expanding access to health care and social protection is key to reducing vulnerabilities and incentivising investment in human capital. This is particularly important for girls and women, who suffer from discriminatory norms and institutions.
- Building fiscal space to finance sustainable development: the response to the pandemic and crisis shows the central role of public sector services and infrastructure. However, African governments face growing fiscal scissors. Tax collection remains low and the capacity to borrow limited. A new development partnership should support African governments in collecting more taxes, including through a supportive multilateral approach to taxing multinationals, and address tax challenges from the digitalisation of the economy. It should also promote a systemic approach to deal with sovereign debt restructuring. The crisis is a systemic shock to debt sustainability. It requires a systemic response involving both public and private creditors to reduce the likelihood of future debt crises. The design of better debt contracts and of predictable and rules-based sovereign debt restructuring mechanisms should be part of the solution.
The Italian presidency of the G20 in 2021 and its leading role in the COP are important opportunities to lay the basis for a new development deal with Africa. The G20 needs to more forcefully put sustainable development at its core and invest in a truly global and inclusive recovery. Listening to African governments and institutions and engaging with them as equals is the first, much needed step to design such an ambitious and shared development agenda. Italy has the opportunity to shape the future engagement of the G20 with the African continent and should not miss this train.
The opinions expressed and arguments employed are solely those of the authors and should not be reported as representing the official views of the OECD, the Development Centre, or their respective member countries.