Divergent recoveries from COVID-19 in Africa require intentional action

By Anzetse Were, Senior Economist FSD Kenya

Accra, Ghana, during regional lockdown, March 2020. Photo: Shutterstock

The COVID-19 pandemic has had divergent impacts within and between economies. 2021 is already being defined by multispeed and divergent recoveries. Rich economies with USA in the lead, and China, are set for a strong recovery, mainly linked to their willingness to support incomes and deploy unprecedented fiscal and monetary support and quick COVID-19 vaccine rollouts. Low-income countries however face grimmer economic prospects due to limited access to COVID-19 vaccines and weak public finances; they will suffer more significant medium-term losses, especially affecting countries that rely on tourism and commodity exports, and those with limited policy space to respond.

In Africa, the AfDB estimates that real GDP contracted by 2.1% in 2020 with projected growth at 3.4% in 2021. Although all African economies have been affected by the pandemic, tourism-dependent economies, oil-exporting economies and other-resource intensive economies have been hit especially hard. Within countries, the sectoral impacts of COVID-19 have been varied, and women continue to be disproportionately affected by the socio-economic effects of the pandemic. This has led to divergent impacts at sector, firm and household levels. Many African households have had to resort to coping mechanisms such as reducing food consumption, dipping into savings, selling assets, looking for new forms of work, and accruing debt, with millions falling into poverty.

“African governments need additional gross financing of about $154 billion in 2020/21 to respond to the crisis.” #DevMatters

Divergent recovery in 2021 in Africa will continue to be seen at the macro, meso and micro levels of the economy. Macroeconomic divergence will be defined by the composition of the economy (resource/ tourism dependence, export performance etc.); differences in sectoral recovery (e.g. upticks in the ICT/ mobile money sectors) and government capacity to effect additional fiscal and monetary stimuluses. This includes capacity to secure additional debt on reasonable terms (with regards to cost and tenure) given the AfDB estimates that African governments need additional gross financing of about $154 billion in 2020/21 to respond to the crisis.

Meso-level recovery will be driven by firm (and value chain) performance across the spectrum of firms from Micro, Small and Medium Enterprises (MSMEs) where the bulk of African labour sits, to large firms which are bigger employers per capita and often offer higher quality jobs. COVID-19 has hit MSMEs in multiple ways including a significant drop in customer demand with a corresponding fall in revenue; erosion of savings and assets dampening prospects for recovery; scant support from government; and the burden of propping up households who rely on incomes generated by MSMEs and the goods and services they supply. Divergent firm recovery seems to be emerging along three broad pathways: 1) businesses that have shut down and not re-opened; 2) businesses operating at a lower revenue than pre-COVID-19 levels; and 3) businesses that have fully recovered. Recovery at meso-level will be driven by firm recovery, the restoration of value chains, as well as strategic and intentional support from government.  

At the micro or household level, recovery will be informed by three factors: 1) the extent to which household income was hit by COVID-19; 2) the extent to which household income levels recover (seen in ending the use of coping mechanisms such as cutting food consumption); and 3) the capacity of households to restore income levels without external support. The World Bank estimates that 40 million Africans were pushed into extreme poverty in 2020 due to COVID-19. This impact was felt at the household level with some homes hit far more deeply than others.

The divergent recovery from COVID-19 will require different scales and types of government support depending on the severity of impact on the sector, firm and household. The image below provides some ideas of the categories of recovery and the type of government support that could be useful:

RelieveSupport
Households in the extreme poor and poor income bands (including new entrants)
Deep deterioration in household welfare due to COVID-19
Deep reliance on coping mechanisms for survival Low capacity for income recovery without external support
Potential government support: Direct cash transfers
Focus impact level: Households (micro)
Timeframe: Short term, immediate action
Households in the poor and lower middle-income bands (including new entrants)
Moderate deterioration in household welfare due to COVID-19
Continued use of coping mechanism to maintain welfareLow capacity for income recovery without external support
Potential government support: Direct cash transfers
Focus impact level: Households (micro)
Timeframe: Short term, immediate action
SustainCatalyse
Households just above the lower middle-income bands
Low to moderate deterioration in household welfare due to COVID-19
Limited use of coping mechanism to maintain welfareCapacity for income recovery without extensive external support
Potential government support: firm level support such as tax incentives/ relief/ deferrals; guarantee schemes; loan restructuring provisions etc
Focus impact level: Firms and supply chains (meso)
Timeframe: Medium term action over 1-3 years
Households in the middle and upper-income bands
Household welfare improved/ did not deteriorate due to COVID-19
Scarce/no use of coping mechanisms to maintain welfare
Demonstrated capacity for independent income growth
Potential government support: Sector-specific policies to support growth drivers; strategic focus on building manufacturing capacity; economic transformation
Focus impact level: Economic sectors (macro)
Timeframe: Medium to long-term action over 3-5 years

“The divergent recovery from COVID-19 will require different scales and types of government support depending on the severity of impact on the sector, firm and household.” #DevMatters

Divergent recovery from COVID-19 clearly requires different types of support in terms of scale, composition and tenure. African governments have the opportunity to ensure that sector-specific fiscal, monetary policy responses are targeted so that each layer of the economy is addressed as detailed above. However, at a time when countries need more resources than ever, for some governments, high debt levels and debt repayment obligations will make it difficult to borrow more and a large portion of the revenue raised will have to go to servicing debt rather than economic recovery. Governments will also have to navigate the tension between the need to prioritise spending in economically productive areas that can drive growth and allocating money to support household income and prevent the reversal of more than two-decades of progress on poverty reduction.

The long-term effects at macro, meso and micro levels of the economy in terms of raised poverty levels, poor firm performance and decimated household incomes will likely lead to sustained drags to economic recovery and growth if coverage in social protection is not expanded. African governments may therefore find it useful to model the following: i) the fiscal costs versus multiplier effects of expanded cash transfers and social protection to key households; and ii) the economic costs linked to raised poverty levels and reduction in firm and household welfare if expanded cash transfers and social protection programmes are not effected. Doing this exercise could serve a useful step in prioritising short, medium and long-term action that fosters economic recovery and deliberately ensures no one is left behind.