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How will Africa manage the post-COVID economy?

How will Africa manage the post-COVID economy?

 

It is too early to say that the global economy is entering the recovery phase after the humanitarian and economic damage inflicted by COVID-19. However, there are already three mega-trends emerging, which will also shape Africa’s economic future – the three ‘Ds’ of the new world order.

1. De-globalization

The world is no longer converging but rapidly diverging in an alarming manner. Simple proxy indicators are air travel and shipping volumes, both of which have all but collapsed in the face of shutdowns and imposed travel restrictions.

With the global shutdown having impacted countries that account for over 80% of global GDP, the World Trade Organisation (WTO) recently warned that, as a worst case, trade could collapse by as much as a third this year. Even considering its most optimistic scenario, the WTO forecasts that trade could fall by 13% in 2020, a similar drop in trade as recorded in 2009 after the financial crisis.

The demand shock is being exacerbated by protectionist sentiment. Countries are clearly not actively promoting liberalized trade, seeking economic solace through protectionism. Multilateralism is now unfortunately on the backburner. Rising trade frictions will result in increased trade polarization, especially targeted at China, which is likely to respond in a similar fashion. We are likely to see a rapid erosion of the principles of free trade that could delay the global economic recovery.

Another trend is the increased significance of Asia as a trading bloc with China at its centre. In light of China’s demand for commodities, both for its infrastructure roll-out and its industry, this will have strategic geo-economic consequences for developing countries, which have primary commodities as their main exports.

Already a minor player in global trade terms, African economies are in danger of even further marginalization as a result of these macro trends. It is unfortunate that the African Union has decided to postpone the implementation of the Africa Continental Free Trade Area (AfCFTA) to next year, perhaps the most ambitious free trade project since the WTO itself. It is envisioned that, through reducing barriers to trade, the economic prospects of a continent of over 1.3 billion people with a combined Gross Domestic Product (GDP) of $2.5 trillion – almost identical to India’s – will be boosted. It has been calculated that if Africa was to increase its share of global trade from 2% to 3%, the one percentage point increase would generate approximately $70 billion of additional income per year for the continent.

The continent can do little to counter the global forces inclining toward de-globalization, but it can itself embrace a self-supportive regionalism through enhanced intra-African trade. Almost counter-cyclically, actively promoting trade liberalization to encourage new areas of growth would be a pragmatic response to the reduction in global trade, not to mention promoting Africa as an enhanced destination for investment from multinationals.

2. Debt and the fiscal sustainability of countries

The outflow of capital from the emerging world has been huge in recent months and has left deep holes in developing countries’ finances. Facing rising fiscal deficits, over 100 countries have applied to the International Monetary Fund (IMF) for emergency funding. In addition, the G20 has called for a debt moratorium from bilateral sovereign creditors to provide payment relief to highly indebted African countries. Private creditors, however, have been less forthcoming, choosing to review debts on a case-by-case basis. It is imperative that multilateral financial institutions move rapidly to alleviate the dire financial situation in many capital-constrained African countries.

Among Africa’s largest creditors are China’s so-called “policy banks” that have been extensive lenders to African countries over the course of the past decade or more. It is to be expected that the continent’s debt will increasingly become politicized between Western creditors and China.

Most importantly, African states can only remedy the growth-suppressing burden of debt through renewed growth in their own economies. It is imperative that Africa’s aspiring emerging economies embrace true structural reform in order to unlock growth and enhance their competiveness for the longer term. Ultimately this should become the tangible legacy of the COVID-19 crisis.

3. Digitalization

COVID-19 is acting as an accelerant for the adoption of digital technologies, as companies seek to boost competiveness by slimming down and reducing established costs in their business. Embracing remote work could impact many economies that are ill-prepared for rapid change driven by technology and behaviour. This shift could delay an economic recovery in many developing African states. But there are exceptions. Rwanda is seeking to set itself up as a tech-enabled services economy that is better able to leverage innovation in a post-COVID economy.

The current crisis will leave lasting scars in a new but challenging world order. The crisis has undoubtedly revealed the fragility of the growth models of developing countries and threatens to deepen the divide between advanced economies and the Global South. Rwanda’s president Paul Kagame has said that it could take “a generation or more” for many African countries to recover from the pandemic.

How African states respond and adapt in the coming months to these destabilising forces will have significant implications for their future economies and societies. The future appears to be one of increasing divergence between the advanced and developing world. The ability to counter the crisis and adapt will require a change in many stagnant political systems of African states that continue to impede change, now more than ever before. If this shift does not take place, then the quest for structural reform and inclusive growth will remain unachievable.
Source: World Economic Forum

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