African countries need to work together to stop GDP plummeting

As Covid-19 stalls business, various scenarios show continent will not escape economic contraction in 2020

The Covid-19 pandemic has already taken hundreds of lives in Africa, and the number of recorded cases is growing rapidly. Action to stem the spread and care for the sick is the immediate health-care priority. However, the crisis is also stalling business activity and disrupting millions of people’s livelihoods — and could push Africa into a deep economic contraction unless bold action is taken by governments, the private sector and development institutions.

New analysis by McKinsey & Company finds that the crisis could reduce Africa’s collective GDP growth by three to eight percentage points in 2020, in the absence of major fiscal stimulus.

We modelled four scenarios for how differing rates of Covid-19 transmission — both globally and within Africa — would affect the continent’s economic growth. And we factored in the effect of the oil price, which has fallen by about 50% in the past month.

Even in the most optimistic scenario, in which the pandemic is contained globally and in Africa, we project that Africa’s GDP growth would be cut to just 0.4% in 2020. Unfortunately, this scenario is looking less and less likely by the day.

In all other scenarios we project that Africa will experience an economic contraction in 2020. In the worst-case scenario, Europe and the US would continue to face significant outbreaks as East Asia faces a surge of reinfection. If significant outbreaks were to occur in Africa too, this would lead to a serious economic downturn. Africa’s average GDP growth in 2020 would be cut by about eight percentage points, resulting in a negative rate of 3.9%.

The outlook for Africa’s largest economies will require big and bold action. Across all scenarios, Nigeria and SA face a likely economic contraction. In scenarios in which the outbreak is not contained, Nigeria’s GDP growth rate in 2020 could fall to -8.8% and SA’s to -8.3%, representing a reduction in GDP of $35bn-$40bn in each country. Though Kenya is more likely to sustain growth through the crisis, its economy would contract by 5% in the worst-case scenario — representing a loss to GDP of $10bn.

Of course, leaders have already taken decisive action to limit the spread of the pandemic and safeguard economies and livelihoods in Africa. Several countries have already acted to inject liquidity into their economies, reduce interest rates, help businesses survive the crisis, and support households’ economic welfare — in many cases with the active involvement and support of the private sector.

But more must be done — and many African countries are still in the early stages of marshalling their responses into focused, prioritised efforts that make the most of the limited time and resources available. An immediate step for governments is to set up or build out national nerve centres to co-ordinate and accelerate their response to the crisis.

These nerve centres can bring together crucial leadership skills, organisational capabilities and digital tools to enable governments to anticipate and manage the health crisis, secure food supply and essential services, ensure support for most vulnerable populations, and anticipate and manage the effect on the economy.

Large firms and business associations should work hand-in-hand with governments to build and staff the nerve centres.

There are already encouraging examples of business stepping up, including the Nigerian Private Sector Coalition Against Covid-19 and the work of Business Unity SA to galvanise private sector involvement in tackling the crisis.

Development institutions, too, have already begun to step up to support African governments in their response to the crisis.

For example, the African Development Bank has created a new $3bn Fight Covid-19 Social Bond to alleviate the economic and social effect of the pandemic.

But such institutions can build on these steps by supporting ideas for bigger and bolder initiatives. For example, they can find creative ways to repurpose existing 2020-2021 funding towards Covid-19 response and recovery efforts. And they can help governments design effective fiscal and business stimulus packages — a key challenge given Africa’s limited fiscal capacity.

COLLABORATION OPPORTUNITIES

There are many more opportunities for African governments and their partners in the private sector and development institutions to collaborate to create big, bold solutions for the continent’s economies and its people’s livelihoods. These might include:

● An Africa Recovery Plan that combines efforts for an extensive stimulus package or economic development plan, modelled on the Marshall Plan that helped Europe rebuild after 1945.

● An Africa-wide Solidarity Fund, modelled on those already established in SA and other countries, allowing businesses and individuals to contribute to relief for the most vulnerable households and small enterprises.

● A private sector liquidity fund that could offer grants, loans or debt for equity swaps to support businesses and limit job losses.

● A common, Africa-wide procurement platform for medical supplies and equipment.

● An Africa Green Programme, a get-to-work effort that plants billions of trees across the continent, providing jobs for the now out-of-work labour force while helping combat climate change.

Leaders across sectors can translate their already proven resolve into imaginative solutions and targeted, collaborative action in the coming weeks. If they do so, they could save many lives and make progress in mitigating the economic effect of the Covid-19 pandemic across Africa. ●