Rafael Gómez-Jordana Moya
International researcher and analyst of FAES
The health crisis will have a major economic impact on Africa. The blow to economies was already evident even before the first case of COVID-19 was reported in Africa. More than 80% of its exports go to the rest of the world, the highest proportion of any major region except Australia. About half of these are commodities. As commodity prices have collapsed, so have growth prospects and tax revenues. In many countries on the continent, a decline in per capita GDP is to be expected, unsustainable debt will make budget execution impossible, civil service salary payments will be significantly reduced and public services, especially education and health, will be severely affected.
For Africa, the main medium-term lesson from the coronavirus crisis is that the continent will remain vulnerable to external shocks until it finds a structural response to its development challenges. One thing is clear, the perpetuation of the continent’s basic integration into international trade – namely, merely exporting raw materials to the rest of the world and passively waiting for the volatile financial resources to fuel income economies – is indeed deadly. A more structural reason is that national budgets limit the capacity to respond to the crisis. Overall, the debt-to-GDP ratio for sub-Saharan economies increased from 30 per cent in 2012 to 95 per cent by the end of 2019. This is further hampered by the increasing share of commercial debt in total debt. More than half of African countries are above the IMF recommended limit for public debt. The World Bank says that 29 out of 47 African countries need to tax more than they spend just to keep their debt constant as part of the economy. But their tax revenues are about to fall and the cost of borrowing is rising as investors flee to safety.
Ghana’s finance minister, Ken Ofori-Atta, and the IMF’s head of Africa, Abebe Selassie, warn of the economic impact the continent faces: “It could wipe out 5-10% of the continent’s GDP in one fell swoop, as falling commodity prices are compounded by a slowdown in trade, tourism and also the arrival of remittances. This decrease in the continent’s growth forecasts is due to the fall in the GDP of its main partners, China, the European Union (EU) and the United States.
Africa’s oil-exporting economies, which were already reeling from an oil war between Saudi Arabia and Russia, must now take account of falling barrel prices amidst a wild fall in global demand. So they will simply be unable to meet the budgets as planned.
Africa consumes what it does not produce and produces what it does not consume. It is therefore the strong dependence of the continent on both production and consumption that is responsible for the negative consequences of COVID-19 on African economies. To address this, African governments must promote intra-African value chains to replace imports from other continents. The entry into force of the Continental Free Trade Area (FTACA) next July will be a first step to promote local value chains.
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