How the Post Covid-19 Economic Recovery Will Look Like in Africa

As the world prepares to open up and begin work again, the discourse on the Coronavirus is now shifting to debates on the extent of damage the virus caused and the different possibilities of economic recovery.

There are still a lot of uncertainties which clouds the horizon because the bottom of the health and economic hazards of the Coronavirus pandemic is not defined as yet and fundamentally a recovery doesn’t begin until a crisis period is over. However since economic activities would begin again after a time of lock-downs, we can begin to count our economic and financial losses and visualize prototypes of how humanity will recover from a short stint at social idleness and economic redundancy.

Certainly the world is headed for a recession as a result of the Coronavirus pandemic, and seemingly the Covid-19 recession will be a bizarre one. The severe setbacks to supply-chains have been prolonged and the rebirth of globalization could still take a little more time, because even though social restrictions have begun to ease and businesses are been allowed to start operating again, there are still a lot of restrictions in place that limit travel and movement of goods and therefore supply-chain issues will persist.

The Covid-19 economic crisis is driven mostly by fear of an invincible enemy that we couldn’t envisage the extent of its cruelty. Its unlikely restrictions will come be re-instated even if there is resurgence of new infections because we have learnt that strict social restrictions have not slowed the rate of new infections but destroyed the economies of countries and wrecked un-told havoc on businesses.        

The recovery of most African economies from the post Covid-19 economic crisis is directly reliant on the shape of recovery of the global economy and also heavily dependent on internal factors. One key reason why the recovery of the global economy will deeply affect African economies is the direct impact of commodity prices on local economies in Africa. Will commodity prices recover quickly before the fourth quarter of 2020? or will deflationary pressures push gold and precious metals prices to a dive? These and many more questions will give us insights into the picture of the recovery we intend to visualize and form the foundations of our expectations for the post Covid-19 economic recovery.

The extent to the damage that has been done to businesses and economies in the African continent cannot be quantified as of yet, the shocks to the economy are not just supply side risks, they include risks to output and demand. Household poverty could also have risen by up to 100% because of loss of income, collapse of the informal sector which accounts for employment of over 70% of Africans and spiraling inflation. Inability of businesses in Africa to keep up with capital formation, disruption to credit inter-mediation and depreciation of capital stock are major risks situation that may continue for a prolonged period of time and make the Covid-19 recession in Africa a structural one.

The global economy is expected to recover lost indices sharply as fast and as much as it lost out to the Coronavirus economic crisis, considering that before the crisis reached a bottom, equities have gained about 35% of lost value. This kind of recovery is called a V- shaped recovery – a situation where the economy recovers as fast as it collapsed. However there is more to an economy than equities. Will commodity prices and consumer demand pick up as fast as it declined? Will pre Covid-19 employment levels also return? Shops in Germany are opened but consumers are not buying yet. This situation nullifies the scenario of the V- shaped recovery and suggests a U-shaped recovery. The U-shaped recovery is a situation when certain economic measures experience a gradual rise to the levels before the economy was hit by a crisis. In a U-shaped recovery scenario, economic indices measures may never get to the pre-crisis levels. Commodity prices have dived considerably because of dormancy in economic activities as we have in the case of crude oil and we expect prices to pick up with resumption of economic activities. However the uncertainty is how long it will take for Brent to reach $50 or if it will ever get to such price levels again in our lifetime.

Another important economic factor that will determine the kind of recovery the global economy will experience post Covid-19 is employment. In few weeks, tens of millions of jobs were lost because of Covid-19 related lock-downs and restrictions. We can easily postulate that all the lost jobs will be restored but this can only happen if the process of capital formation is stimulated adequately. The fiscal responses by government which gave hope to financial markets in the course of the crisis have been mainly stabilizing programs as we saw in the case of the US Federal Reserve interventions. For employment to pick up to pre-Covid-19 levels there would be need for additional stimulus programs. Stimulus programs would also quicken growth and return the world to pre-crisis GDP levels.

However the biggest risk to global GDP is uncertainty about the future of globalization. We are not sure what individual country policies would be on the movement of goods and people and if protectionism would grow. The lessons we learnt from the Coronavirus pandemic are different and how different countries would adapt could also vary. If restrictions to international trade and travel do not grow significantly then we should expect a faster-paced recovery.

While we are looking at the possibilities of a V-shaped recovery for the global economy, African economies might take longer to recover, because the recovery of most African economies is heavily reliant on the recovery of the global economy. The recovery of most of Africa is largely dependent on when commodity prices begin to rise. There are also internal issues that the Covid-19 economic crises would amplify. The possibility for a much slower paced recovery is very likely in Africa. One of the biggest risks to African businesses is the possibility of a currency crisis. We would talk extensively about the looming African Currency Crisis in our next newsletter.

Easing of the lock-downs in Africa is taking a slow and gradual approach; Governments are not doing enough to stabilize the economic polity, even though the options of individual governments are not much in responding to a large scale economic crisis like the Covid-19 crisis, the few options available to them were not employed optimally. Corruption is consuming the major proceeds of major government stimulus programs and external interventions. The economic recovery in most African

economies would most likely be an L-shaped recovery. An L-shaped recovery is a situation when an economic recession is characterized by steep and continued decline in economic growth and the recovery of economic variables and indices is sluggish. 

The United Nations Economic Commission for Africa projects that African countries would lose half of its projected growth, they project a 5.1% loss in GDP for 2020. There is also an estimate that shows 30 million Jobs have been lost to the Coronavirus crisis. This do not include majority of jobs that are derived in the informal sector which have been collapsed by restrictions related to the Coronavirus pandemic. Employment is not expected to pick up quickly to pre Covid-19 levels because most sectors of African economies like tourism and banking will be stabilized sluggishly. We are also of the view that the Coronavirus economic crisis would create currency market shocks that will result in a currency crisis across Africa.

Definitely there would be a recovery and it might occur faster and stronger than our presumptions