Economic growth in Africa is projected to drop drastically to negative 4.1% before making a strong comeback in 2021 at 5% growth, the UN Economic Commission for Africa (ECA) said in a new report on Tuesday.
The report, dubbed, ‘Innovative finance for private sector development in Africa’, highlights the economic vulnerability of African countries to imported pharmaceutical products in the middle of a pandemic and estimates that US$44 billion would be required for the testing, personal protective equipment for frontline medical staff, equipment and treatment of the coronavirus (COVID-19).
Economic recovery in Africa would be supported by effective response to the COVID-19 pandemic and the measures taken globally to aid economic recovery.
In 2020, spending on health will increase as governments set aside funds to sustain their health systems and absorb costs related to the COVID-19 lockdowns. In a best-case scenario, US$44 billion would be required across Africa for testing, personal protective equipment and treatment of COVID-19 patients requiring hospitalisation and intensive care treatment, the report said.
The report further said that due to the resources being redirected to COVID-19, Africa’s existing health challenges will face spillover costs, as happened in the Ebola crisis. It calls on countries to look into investments in non-COVID-19 health issues which should be kept in view.
The impact of the pandemic will push between 5 million and 29 million people below the extreme poverty line of US$1.90 per day, compared with a baseline 2020 African growth scenario, according to ECA projections.
Moreover, reduced demand due to COVID-19 has depressed the prices of agricultural commodities such as coffee, tea and cocoa, which is expected to affect vulnerable small-scale farmers in Africa.
The report advocates for investment to build key infrastructure and foster innovation. Despite Africa’s growth, many economies remain unsophisticated or undiversified, due to low levels of innovation, limited productive capabilities, low investment and poor quality of education.
Building capabilities will require investments in human and physical capital.
The report digs into the estimated financing gap of US$2.5 trillion for all emerging and developing countries and US$200 billion–US$1.3 trillion for Africa.
Because Africa’s population is expected to grow by 43% over 2015–2030, the gap could reach US$19.5 trillion by 2030.
Meanwhile, climate change is increasing seasonal variability, frequency and intensity of droughts and floods, and shifting habitats and agro-ecological zones due to climate change can cause food insecurity, lower trade balances, raise inflation pressure and fiscal imbalances.
For instance, cyclone Idai, which hit Mozambique in March–April 2019, weakened the economy, took 1,000 lives and caused US$700 million–US$1 billion in damages to property and other losses.
African economies remained the second fastest growing region in the world with growth estimated at 3.4% in 2019. The COVID-19 pandemic will impact growth to decelerate to between 1.8% and -4.1% in 2020.
In order to promote the recovery from the COVID-19 impact, the report calls on African countries to regulate their bank sector to limit the possible harm from banking crises or from more general system-wide misallocation of resources.
For the sake of private sector development, the regulation of banks and other sources of capital for funding private industry—such as equity and debt capital markets and digital platforms— needs to be strengthened.
The report noted that the regulations that concern the banking sector alone may be insufficient to safeguard the financial system against some of the risks fintech services pose, such as data privacy, money laundering, mismatched risk and return, and systemic risk.
Africa needs to rethink its financial services regulation so that innovation is fully functional, the environment enables innovation, transparency is enhanced, and financing for private sector development is delivered, the report stated.
These new risks call for financial regulation to be reviewed to provide a flexible environment for fintech to develop that is strict enough to limit the risks. Some African countries have limited fiscal space and international reserves and thus lack the necessary resources to implement COVID-19 responses.
According to IMF data, African countries will record fiscal deficits averaging 5.8% in 2020 and 4.4% in 2021, compared with 3% in 2019.
However, African policymakers’ and regulators’ experience with the 2008–2009 financial crisis and use of various measures to cushion its impact give them an advantage in rapidly responding to the COVID-19 crisis.
