YPO Event: Economic recovery for Africa - The way forward
16 September 2020
The pandemic induced economic crisis has gravely wounded growth prospects in developing countries, especially in Africa. Globally, trade will decline by 20% and FDI year by 40% in 2020. With the global economy on track for a 4-5% decline, COVID-19 will drag African economies into a fall of about 1.4% in GDP, with smaller economies facing contraction of up to 7.8%. COVID-19 has had a devastating impact on Africa’s tourist industry, as international arrivals contracted by 47% during the first five month. Across the continent, the private sector is under the threat of destruction and disruption caused by the pandemic.
Business surveys suggest more than half of Small and Medium Enterprises worldwide have suffered from severe revenue losses and one third of them fear to be out of business within one month after the outbreak. In Africa four fifths of the surveyed SMEs are significantly affected and the rate of capacity utilization ranges from 30-40% for small businesses compared with 50-60% for large enterprises. Another survey of about 490 Ethiopian SMEs, three fourths of which are micro and small businesses, revealed that 37% had been closed by April alone.
Beyond business failure, there are immediate consequences to this duress, including job loss, drying up of foreign remittances, and hurried migrations of workers back to rural communities amidst the lockdowns provoked by the health emergency. These are very real consequences for the hundreds of millions people falling back into poverty – for whom notions like “essential workers” or “tele-working” have little or no meaning.
Redressing this situation first requires fast action: lowering the costs of sending and receiving remittances; increasing support to relief efforts; prioritizing public financing for jobs and income support, esp. for vulnerable women and the informally employed. The first month of the crisis alone caused a 60% drop in the income of the informally employed worldwide. In Africa, informal economy workers lost four fifths of their income in the first month -- the most severe among developing regions.
Many developing countries, especially in Africa, will also need significant sovereign debt relief . This includes not just the half of all LDCs that had pre-existing high debt burdens, but also concerns many developing countries with hitherto sustainable debt burdens across the developing world. To offer governments and private sectors in these countries adequate breathing room to move towards recovery, such debt relief must have wide coverage of creditor types and cover private creditors, as well.
Africa’s pathway to economic recovery is likely to be bumpy. With reduced trade and investment flows, and an uncertain epidemic situation in many countries, the region’s largest economies, such as Nigeria and South Africa, will not see their real GDP growth back to the previous level until 2023. The private sector will continue to face major challenges, including demand and supply disruptions, cash flow issues and significant market uncertainties. Sowing the seeds for recovery and sustainable reconstruction requires global coordinated action for joint trade and investment promotion.
We need to work on smart solutions for longer-term recovery, and we need to start doing so now. Nowhere does the need for this become clearer than in the area of private investment, where the pandemic has only augmented an already ongoing dramatic transformation in global value chains brought about by the new industrial revolution, growing economic nationalisms and the sustainability imperative of greening the economy.
The private sector must play a leading role in the recovery. However, this requires a significant adaptation of firms to pivot their businesses towards the new normal to build stronger agility and resilience. On the demand side, many consumers remain cautious and the market may pick up gradually. On the supply side, supply chain disruptions will continue to affect the production of goods and the delivery of services. For small businesses, the reduced supply of goods and services can be as severe as the shrinking market demand for their products. This happens in both national and international contexts, as trade disruptions lead to escalating effects across countries.
Companies should try to capitalize on opportunities emerging from the pandemic. Short-term opportunities have appeared with increased market demand for certain products and services during the pandemic, such as personal protection equipment (PPE) and certain medical products and services. More importantly, the COVID- induced economic transformation may present some important, long-lasting opportunities.
Businesses can also take advantage of the accelerated shift to the digital. Since the outbreak of the pandemic, a rapid “COVID-driven digitalization” is underway, highlighted by spikes in online B2C sales, particularly for medical supplies, household essentials and food products. This provides chances not only for specific ICT products and services, but also for the digitalization of traditional businesses. As more and more activities shift online and new business models emerge, big companies and SMEs alike find new channels to reach more customers with lower costs. In Africa, as the value of e-commerce and contactless payments accentuated during the pandemic, both private and public sectors have taken actions to embrace digitalization.
The private sector, particularly SMEs, are the spine of African economy and must be front and centre in our COVID-19 response and recovery strategies. They are the first responders to our societal needs. They create the jobs that offer hope to the most vulnerable in our communities. With proactive support, Africa’s private sector could come out of the crisis better and stronger. For the upcoming post-COVID recovery, policy makers need to help the new generation of entrepreneurs thrive by tapping in to new opportunities and tackling new challenges in the post-COVID era.
