African economy to decline by $189.7bn

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African Development Bank (AfDB) has forecasted that Nigeria and the rest of the continent will suffer a Gross Domestic Product (GDP) loss of $189.7 billion in 2020.

AfDB, in its African Economic Outlook report released on Tuesday, stated that Africa could suffer GDP losses in 2020 between $145.5 billion (baseline) and $189.7 billion (worst case).

The report noted that pre-COVID–19 estimates of African GDP had predicted a growth of $2.59 trillion for 2020.

According to the AfDB, “some losses are carried over to 2021, as the projected recovery would be partial.”

For 2021, the projected GDP losses the AfDB said “could be from $27.6 billion (baseline) up to $47 billion (worst case) from the potential GDP of $2.76 trillion without the pandemic.”

The continental bank said the most affected economies will be countries “with poor healthcare systems, those that rely heavily on tourism, international trade, and commodity exports, and those with high debt burdens and high dependence on volatile international financial flows.”

The pandemic the report stated has triggered a sudden uptick in inflation, in some cases by more than 5 per cent in the first quarter of 2020. This the bank said “has mainly been caused by disruptions in the supply of food and energy, the bulk of which are imported.”

According to the AfDB, “overall, although headline inflation, which includes food and basic energy prices would be expected to rise, core inflation might remain stable until demand picks up after the pandemic.”

To the governments, the AfDB cautioned that “expansionary fiscal spending could double already high fiscal deficits. “In 2020, deficits are projected to increase twofold, to 8 per cent of GDP, in the baseline scenario, and to go as high as 9 per cent in the worst-case scenario.”

This worsening fiscal position the AfDB said “would be the result of above-the-line increases in budgetary outlays on COVID–19 related health spending, unemployment benefits, targeted wage subsidies and direct transfers, and tax cuts and deferrals.”

On the debt side, the AfDB predicted that COVID–19 will “add to sovereign debt burdens as COVID–19 heightens the likelihood of a widespread and far-reaching sovereign debt crisis if the debt is not properly managed.”

According to the bank, many countries in Africa entered the crisis period with high debt-to-GDP ratios, which are projected to increase further by up to 10 percentage points beyond the pre-COVID trajectory in 2020 and 2021.

The sovereign debt buildup the bank lamented “is particularly worrisome because of its changing risk structure in Africa as a result of the increasing share of commercial debt Eurobonds and other private creditors and the high foreign currency denomination of Africa’s debt.”

Remittances which grew to $86.2 billion in 2019 on the back of a pickup in global economic growth and rising migration has now been threatened by COVID-19 and exposed countries which rely heavily on remittances to shocks “especially in high-income economies where migrant jobs and incomes are threatened.”

Foreign direct investment which picked up in 2018 by 10.9 per cent, reaching $45.9 billion, and improved further to an estimated $49 billion in 2019 is also expected to fall in 2020 as investors reduce or postpone their investments amid uncertainties.

Official Development Assistance (ODA), which has risen since 2016 (by 1.2 per cent in 2018), could be constrained by the impact of the crisis on advanced economies.

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In 2021, the number of extremely poor, the AfDB said: “could increase by 34–49.2 million due to the pandemic as GDP growth continues to fall below population growth rates.”

Specifically, Nigeria being and Africa’s most populous country “would record the largest increases 8.5 in the baseline scenario in 2020, and 11.5 in the worst-case scenario. There will be an estimated job loss in the tens of millions.

The AfDB advised African governments that “given the global scale of the COVID–19 pandemic and its repercussions, governments and development partners must respond in a coordinated, targeted, and rapid manner to be effective in limiting its impacts.”

According to the bank, “across Africa, the response must be well-sequenced and multipronged, involving: a public health response to contain the spread of the virus and minimize fatalities.”

It called for “monetary policy response to ease liquidity constraints and solvency risks, a fiscal response to cushion the economic impacts of the pandemic on livelihoods and to assist businesses, labour market policies to protect workers and their jobs, and structural policies to enable African economies to rebuild and enhance their resilience to future shocks.”

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