By Andrew Mold, Head of Regional Integration and the AfCFTA, Economic Commission for Africa, Office for Eastern Africa, Kigali, Rwanda
This blog is part of a series on tackling COVID-19 in developing countries. Visit the OECD dedicated page to access the OECD’s data, analysis and recommendations on the health, economic, financial and societal impacts of COVID-19 worldwide.
A hitherto rapidly growing but vulnerable region
The best-laid plans of mice and men often go awry. Prior to the announcement of a global pandemic on 11th March by WHO, our office was about to a release a report which spoke of the fairly rosy prospects for East Africa in 2020, after a decade of solid growth. That report recognised the persistence of serious developmental challenges but highlighted major improvements not just in economic growth (the region has been the fastest growing sub-region in Africa since 2014), but also in human development. One simple statistical illustration of this – life expectancy over the last decade has risen by an unprecedented 6.7 years on average.
Just a few months later we are now presented with a quite different panorama, both for the global economy and East Africa. For the region, 2020 – and quite possibly 2021 – is no longer going to be characterised by a continued economic dynamism, but rather a sluggish economic malaise, as countries wrestle with ballooning fiscal deficits, deteriorating trade balances, and a serious disruption to normal economic activity.
East Africa is different
Yet there are still grounds for guarded optimism over the capacity of East Africa to bounce back from the current crisis. First, thus far the region seems to have been spared the worst consequences of the health crisis, with relatively few confirmed cases of COVID-19 in East Africa (13,017 as of the 27th May). This is the lowest in the continent and in per capita terms one of the lowest rates of infection in the world.
Secondly, without underestimating the severity of the current crisis, there are several key reasons why East Africa may not be so heavily impacted long-term by this pandemic. Ironically, this is because of structural characteristics usually considered as reflecting developmental weaknesses. Four structural reasons stand out:
- Still predominantly rural economies Unlike the heavily urbanised economies of Northern Africa, the diversified economy of South Africa and the oil-dependent nations of Central and West Africa, East Africa is still heavily dependent on its agricultural sector and rural economy. In terms of GDP, agriculture contributes around a third of GDP, and still accounts for about 70 percent of employment. In a crisis such as this, this could turn into a blessing – most farming is small-scale or subsistence, and hence relatively isolated from the main impacts of the economic lockdowns.
- A region of net commodity importers The impact of the sharp decline in commodity prices is hitting key regional exports like cash crops and minerals. But overall the effect will be more ambiguous. It will hit certain export earnings hard, but the majority of economies – including the two largest in the East Africa region (Ethiopia and Kenya) – are in fact net commodity importers, importing large quantities of oil and food. Hence the impact of the commodity price decline may be more ambiguous for them.
- A low share of the population living in urban areas Although there is a recognition that rural areas may well be susceptible, thus far the disease has impacted hardest on urban areas. East Africa is one of the least urbanised regions in the world – less than a third of the population, against a global average of 55 percent, lives in an urban environment.
- Demographics Though still mired in uncertainty, the long-term health consequences for East Africa may also be starkly different. Arguments that demographics of the African continent may play in the continent’s favour take a special relevance in East Africa. With under-20s making up around 50 percent of the regional population, the impact is likely to be very different from that of a country like Italy, where around half the population is over 50 (the most vulnerable group).
Signs of resilience
Some of these structural reasons may help explain why, in the IMF’s forecasts released in April, the East African economy is expected to be less negatively impacted than other parts of the world. Despite enormous uncertainty around forecasts at the present time, the IMF believes the East African economy will continue to expand by 1.4% in 2020 (although with a large degree of variation around the average). At one end of the spectrum, four economies – Ethiopia, Rwanda, South Sudan, and Uganda – are each still expected to grow by over 3%. At the other end, five economies are expected to contract (Table 1).
Table 1: Estimated and Forecasted GDP Growth Rates (%), 2010 to 2021
Source: IMF Regional Economic Outlooks, April 2020; UNECA calculations
Note: Average weighted by GDP
It is true that, precisely because of the high demographic pressures mentioned above, per capita incomes will stagnate in the region, while falling in the most negatively impacted countries. In a region where poverty is deeply engrained this is serious. Nonetheless, growth rates for East Africa are expected to rebound by 2021, conditional of course on the success of efforts to contain the virus locally, regionally, and globally.
The gravity of the crisis
Despite this potential resilience, there is clearly no room for complacency about the severity of the challenges and threats posed by the pandemic. Firstly, most countries in the region have become highly dependent on their services sectors, contributing nearly half of GDP. Some branches of services (e.g. air transport, restaurants) have been badly impacted by the crisis and, as in the rest of the world, there is great uncertainty about when demand for these services will recover. Secondly, within services, some countries (Seychelles, Kenya, Tanzania, Uganda, Rwanda) have a very high economic dependence on tourism. Thirdly, the crisis has exposed the vulnerability of the region’s insertion into the global economy, with a major negative impact on industrial parks, horticultural and floricultural exports, etc. Fourthly, even prior to the crisis, debt levels were rising quite sharply in several countries in the region (e.g. in Kenya and Ethiopia) and could now become quickly unsustainable in light of the collapse in fiscal revenues and rise in crisis-related expenditures. Finally, even prior to the COVID-19 crisis, the food security situation was already quite precarious in parts of East Africa (particularly in the Horn), due to both severe climatic events and the current locust plagues which are affecting a large number of countries.
Light at the end of the tunnel?
In conclusion, the region has hitherto been spared worst health consequences, and has capacity to bounce back but going forward, there will have to be a profound re-examination of some of the basic tenets of the strategy for economic and social development in East Africa. A few examples: i) more investment will need to be self-financed (domestic resource mobilization); ii) greater investment will be required into public health (which has until now been relatively neglected as a regional priority); iii) social protection measures should be expanded with a better coverage of urban poor and the informal sector; iv) finally, the region will need to look again at its model of insertion into the global economy…and strengthen regional integration.
This final point merits some elaboration. China is a major supplier to the East African market, accounting for around 20 percent of all imports into the region. China-Africa trade contracted by 14 percent in the first quarter of 2020. That is hitting both consumers and firms dependent on imported inputs and capital goods coming from China. But there is also a double-whammy effect at play, because the European market – the other major source of imports, responsible for another 20 percent of the regional total – is also now being hit by major disruptions to its supply chains.
However, all of this may have a silver lining over the mid-to-long term. Dependency on imports from China and elsewhere has become excessive for the region. An interruption to the surge of imports will oblige countries to find alternative strategies. Regional manufacturers will need to rise to the challenge and fill the void left by reduced Chinese and European imports, not just for this period of crisis but for the future. In this context, the crisis is underpinning the importance of the African market and urgency of implementing the African Continental Free Trade Area.
 Of course, agricultural exports from the region to high income markets have been negatively impacted (e.g. horticultural and flower exporters in countries like Ethiopia, Kenya and Rwanda), but the majority of farming in the region is not in cash crops.
 It is no coincidence that the country with the highest economic dependency on tourism in the region – Seychelles- (contributing around 66% of GDP) is forecast by the IMF to be most negatively impacted by the crisis, with a fall of GDP in excess of -10%.