Which factors will shape the future of sub-Saharan African economies?

According to the World Economic Forum, three emerging mega trends will shape Africa’s economic future in a post-COVID-19 world: de-globalisation, digitalisation and debt sustainability [1]. When looking at the market and policy responses across the continent, it becomes clear that the COVID-19 pandemic is already changing the economic landscape in sub-Saharan Africa. However, it is not yet clear how the effects will differ across countries and what that means for policymakers and the development community tasked to shape the adaptation of the economy.

In August, Cenfri – in conjunction with Access to Finance Rwanda, Future Advisory, the Overseas Development Institute and the UN Economic Commission for Africa [2] – hosted a webinar to discuss context-relevant policy options for Africa to adapt, not just respond, to a post-COVID-19 world. The webinar introduced Cenfri’s COVID-19 policy response framework, which aims to assist in thinking through how countries will be affected and ascertaining what will condition the policy and market responses for immediate mitigation, medium-term recovery and long-term adaption. It maps countries in SSA across three dimensions:

• The susceptibility of each country’s economy to changes in the global economy
• The country’s fiscal ability to respond to the crisis
• The ability of the domestic economy to bounce back

The panel discussion considered how the dimensions play out in different country contexts and debated the corresponding imperatives and choices for adaptation from the respective perspectives of government, industry, development partners and the financial sector.

Five key themes stood out from the perspectives shared by the panellists:

• Private sector companies are being forced to downsize, localise and digitalise. Global demand declined sharply, and supply chains are disrupted, accompanied by a massive loss of disposable income among consumers. Thus, private sector companies are in trouble, yet not all to the same extent. There has been a big swing to essential products and services, and the telecommunication sector and mobile money have been on the rise. In contrast, industries like mining, fashion, beauty, restaurants, advertisement and travel have been heavily hit and have devastated whole value chains. The funding for start-ups has evaporated, and prospects for private sector debt forgiveness by international investors are poor. These disruptions and trends force companies to shed debt, downsize and restructure, and to localise and digitalise to keep their businesses alive. Not all impacts are bad: Those companies that adapted already may reap emerging opportunities, while market consolidation and the adaption of businesses may bring the private sector into the position to kickstart economies by becoming nimbler, more digital and innovative.
• The crisis is reversing trends towards formalisation. The trends witnessed in the formal sector have created a big surge towards the informal economy, as people who were previously formally employed are now joining the informal sector. Beyond cushioning the shock on livelihoods when formal sector jobs were interrupted or discontinued, the informal economy has helped to keep up the provision of essential goods in sub-Saharan African economies during lockdown. However, this informalisation of sub-Saharan African economies is not by choice. Governments need to have a differentiated understanding of the role of the informal economy in rebuilding their economies and capacitate informal businesses to adapt to the new normal.
• The financial sector is struggling too, which is limiting its ability to support. Looking beyond the real economy impact, in which way has the financial sector been hit? Financial institutions are hampered by a severe decline in borrowing, difficulties in debt collections and a significant surge in non-performing debts. As a result, we are likely to see a credit crunch with no escape from the squeeze as financial service providers across the board seek to rebuild their positions. This implies that the financial sector is not going to support recovery for some time and, in fact, is likely to add to the recessionary forces. Currently, a full-blown financial crisis does not seem likely; however, the impact of the COVID-19 crisis on the financial sector is most likely yet to peak.
• COVID-19 is narrowing the already limited fiscal space of sub-Saharan African governments. With the real economy struggling and the financial sector being unable to help, sub-Saharan African governments are showing up as prime agents in this crisis. They provide fiscal stimulus to the economy and provide household and business relief. Being able to act, however, requires funding. Before COVID-19, the fiscal space of most countries was already stretched. The impact of COVID-19 exacerbates these fiscal challenges by leading to a significant drop in revenue. This leaves sub-Saharan African countries with little fiscal space to provide a robust response or to lead economic recovery, and it provides significant challenges regarding debt repayment. A clear need for debt forgiveness arises, as illustrated by the “debt standstill initiative” championed by UNECA [3].
• The quality, trust and credibility of government and public institutions matter. Sound government structures are fundamental to ensure an efficient and effective use of the limited government budgets and multilateral aid and will be integral for the success of collective action to restart economies. The example of Rwanda underlines this – even though its high foreign sector exposure puts Rwanda in a vulnerable position, there has been a robust, timely and concerted crisis response, with the Government utilising the imperative for digitalisation to pivot the economy in line with its longer-term goals.

What will the future look like?

The webinar discussion highlighted that the integration with the global economy, the competitiveness of the private sector and the resilience of the informal sector will matter. Above all, policy decisions will shape the future of sub-Saharan African economies. The effectiveness of fiscal measures to drive mitigation and recovery will depend on how well a country is managed. Governments now have the opportunity, the imperative in fact, to look beyond the immediate crisis to make the structural changes necessary to drive market innovation and adaptation in a post-COVID-19 world.

The discussion suggests some cross-cutting themes that will drive this adaption: Will we see a localisation and a drive for pan-African trade? A move of the private sector from high-touch, low-tech towards low-touch, high-tech, leading to a digitalisation of economies? A reverse of the formalisation of economies? MSMEs, most of them informal, account for up to 90% of businesses [4] in sub-Saharan Africa and thus form the backbone of sub-Saharan African economies. Understanding how these different trends will pan out for them and how they can be capacitated to adapt to the new normal will be critical for reimagining the future.

[1]       https://www.weforum.org/agenda/2020/06/how-africa-manage-post-covid-economy/
[2]       Panellists were Jean Bosco Iyacu (Director of Programs at Access to Finance Rwanda), Herman Singh (CEO at Future Advisory), Judith Tyson (Financial sector and capital markets expert at ODI) and Hopestone Kayiska Chavula (Macreconomic policy division at UNECA)
[3]       UNECA, together with the African Finance ministers, called on the IMF, WBGM EU, AfDB and the G20 leaders to endorse a temporary debt standstill package for two years for all African countries. The G20 finance ministers agreed on a debt service standstill for 2020 from all official bilateral creditors for the 73 poorest countries.
[4]       https://www.ifc.org/wps/wcm/connect/REGION__EXT_Content/Regions/Sub-Saharan+Africa/Advisory+Services/SustainableBusiness/SME_Initiatives/