The COVID-19 pandemic, which has already infected almost 35,000 people in 52 African countries, resulting in more than 1,500 deaths, is undoubtedly a grave humanitarian challenge. As COVID-19 spreads around the globe, its adverse impact on human productivity is becoming as worrying as its impact on health. The crisis is an economic and labour market shock, impacting not only supply (production and movement of goods and workers) but also demand (consumption and investment). The economic slowdowns, and in particular the expected recession in sub-Saharan Africa, augers poorly for the quick resumption of normality and traction in improving the social and economic wellbeing of Africans.
The free movement of persons and of goods, as the European Union example has proved, are important drivers of growth in liberalised markets. Free movement has also enhanced business and investment in Africa. According to an African Development Bank report, tourism in Seychelles increased by 7% annually between 2009 and 2014 when the country abolished visas for African nationals. By 2015, thanks to increased revenues, it had become a high-income country with thriving real estate, aviation and service industries. The same report also states that African travel to Rwanda has increased by 22% since it eased its visa requirements in 2013. Since then Rwanda’s cross-border trade with Kenya and Uganda has increased by 50%. This is evidence that free movement of labour and capital, boosts economic activity.
This article, therefore, seeks to analyse the impact of COVID-19 on the movement of goods and labour across the African continent with the aim of assessing how regional cooperation can help states recover.
Balancing Health against Economic Precautions
While the World Health Organisation (WHO) discouraged travel restrictions in the early stages of the coronavirus pandemic, this position has since been disregarded by African countries that have resorted to closing their borders. WHO notes that restricting the movement of people and goods during public health emergencies is ineffective in most situations and may divert resources from other interventions. Furthermore, restrictions may interrupt needed aid and technical support, disrupt businesses, and may have negative social and economic effects on the affected countries.
The coronavirus is seen as an imported disease, and consequently, the closure of land, sea and air borders is increasingly being considered as an effective measure of preventing the introduction of new cases. This position has been increasingly unpopular as African countries have opted to slow down the spread of the pandemic through border closures and travel restrictions, such as that seen at the Mozambique-South Africa border. However, maintaining the economic benefits of cross-border movements whilst limiting the spread of COVID-19 is an enormous task. Attempts at balancing these two policy goals have resulted in partial closures barring non-essential travelling but allowing cargo trucks to cross borders.
Social containment measures caused disruptions to production, initially in Asia, that have now spread to supply chains across the world. In the tech sector, for example, the shutdown in operations of the Chinese industries weakened the market values of some of the world’s largest tech companies, such as Apple, Microsoft and Google, who have sought to move at least some of their production out of China. Apple warned its investors that worldwide iPhone supply would be temporarily constrained due to production and supply line closures, but smaller companies may yet suffer more due to lesser capacity to relocate production sites and absorb losses.
All businesses, regardless of size, are already facing a real threat of significant declines in revenue, insolvencies and layoffs. Shutdowns and job losses are more likely in specific sectors dependent on travellers, such as aviation, tourism and hospitality, which accounted for as much as 7.3% of SSA GDP in 2012. In Seychelles, where freer movement has been enormously successful at spurring economic development through growth in such sectors, tourism contributed 67.1% of the nation’s GDP in 2018. Beyond tourism, restrictions related to controlling the spread of COVID-19 are currently the biggest challenges to mobility. This is according to the International Organization for Migration which has a tracker illustrating travel restrictions across the globe.
Sustaining business operations will be particularly difficult for Small and Medium Enterprises (SMEs). Following travel bans, border closures and quarantine measures, many workers cannot move to their places of work or carry out their jobs, which has knock-on effects on incomes, particularly for informal and casually employed workers. Consumers in many economies are unable or reluctant to purchase goods and services. Given the current environment of uncertainty and fear, enterprises are likely to delay investments, purchases of goods and the hiring of workers.
These stark realities have led to the development of economic plans to complement the stay-at-home directive, such as South Africa’s ambitious $26 billion plan. As it is highly unlikely that governments will completely ease off on quarantine measures enough to avert economic catastrophes, it is likely that more countries will strive to reconcile their protective health policies with similar economic stimulus policies. This is, however, fundamentally unsustainable in the long-term but also presently very expensive and out of reach for many African states.
The Domino Effect of COVID-19 Shutdowns
The COVID-19 outbreak affects how economic agents behave from lifestyle and socialisation to the productive activities of individuals and firms. Although the predicted outcome of continued adverse economic impacts might be a long-lasting recession, the effect mechanism will differ from other economic shocks such as the debilitating 2008 – 2009 financial crisis owing to the approach administered and unique challenges posed by the epidemic.
The disparity of the COVID-19 case as compared to the financial crisis is that the denouement to the pandemic remains uncertain. As a rider to the following discussion, pandemics are by their nature rare and unique events for which we have little data—and what little data we have itself tends to be difficult to apply to new scenarios. The direst economic consequences are likely to manifest later on if not stopped soon as the overall impact could spread out over successive economic shock waves triggered by:
- A weakened labour force due to mortality and morbidity
- Lost human capacity due to bankruptcies and long unemployment spells
- Changes in risk behaviour and preferences
- Trade disruptions
- Risks to public and private debt sustainability
Economic shocks triggered by pandemics occasion through three main entry points—supply, demand and financial shocks—as illustrated below. In sum: households own capital and labour, which they sell to businesses, who use it to make things that households then buy with the money businesses gave them, thereby completing the circuit and keeping the economy growing. Economies are analogous to living creatures in the sense that their health and sustainability depend on the health and sustainability of the sum of their parts. Therefore, a flow disruption at any point can trigger slowdowns everywhere else.
Figure 1: COVID19’s multiple strikes in the circular flow of income diagram
The First Wave: Supply Shocks
The immediate and direct impact of the COVID-19 outbreak is a temporary shutdown of factories and businesses leading to an immediate drop in productivity. The shock then might be amplified by a simultaneous supply chain disruptions of necessary production inputs and immediate drop by demand. Demand for goods and services declines as consumers opt to ‘saving for emergency’, ‘wait and see’, and ‘hoarding’ during the crisis.
Also, as pandemic spreads across the continent, as is the case now, foreign demand for an economy’s goods may slump substantially, which consequently depresses production and limits future demand further still in a situation christened the supply-demand doom loop.
At the heart of each and every economy is the clear distinction between essential goods and non-essential goods. A pandemic as disruptive to every-day life as COVID-19 induces panic buying behaviours by consumers resulting in different demand shocks for essential goods. Demand for essential goods like food and medicine goes sharply up, while that for non-essential goods sharply decline as people exercising prudence tend to save lots of money for health emergencies. To worsen things, lower production as a consequence of demand drops and manufacturing slows down. This results in chain disruptions which transmit some effects to the worldwide supply chain. This is particularly true in scenarios where there is considerable trade dependence (such as Africa’s on Chinese manufacturing) for production inputs.
Moreover, the suspension of domestic and international transport and logistics channels in an attempt to prevent the pandemic’s spread further disrupts supply chains. And if the affected economy may be a world’s major manufacturing-supply hub like China, a continued disruption could eventually breakdown or collapse in economies whose supply chains are dependent on external manufacturers.
The Second Wave: Demand Shocks
The second wave occurs as a result of the initial shock to the country’s production, demand, supply chain, lead to a reduction in international trade flows of products and services. Reduced supply, transport routes closures, lower demand for imported goods, and lesser movement of individuals from one country to the opposite, all reduce exports and imports of both goods and services. Furthermore, these disruptions increase costs of operations as value chains for obtainable alternative options tend to not be as developed or affordable. Altogether, this dries up the kind of widespread investment that would be needed to reopen closed chains or explore new ones. Without a doubt, this affects typically poor economies the toughest owing to their heavy reliance on underdeveloped value chains and foreign investment inflows for economic development.
For labour, efforts to contain the spread of COVID-19 through, for instance, stay-at-home, social distancing, lockdowns and quarantines scale back both the availability of and spending on labour. Additionally, the restrictions on the movements of individuals will interrupt several value chains, such as availability of food and agricultural products, which will, in turn, affect prices. When agricultural production is grounded, deeper shortfalls on food availability emanate with higher prices and overall severe hardships of food security at household and national levels. As an illustration, if the planting season is missed or delayed thanks to movement restrictions to contain the spread of the virus, current and subsequent year’s production will likely suffer, causing persistent supply shortage and unmet food demand which would need to be met through food imports. There are multiple ways through which reduced supply affects the economy.
These setbacks disproportionately affect poor people in SSA who have limited flexibility to explore new income opportunities during and after the pandemic and little hope for far-reaching government intervention. If left unmitigated, the combined effects of those shocks could exacerbate social crises stemming from income disparity.
The Third Wave: Financial Shocks
Financial shocks occur due to the slowdown in economic activity and business closures. Various enterprises will experience a liquidity crunch and subsequently are unable to repay bank loans, especially, small and medium enterprises, which don’t have too long before defaulting or having to reschedule bank loans. When a substantial number of companies are unable to pay their bank loans, the financial sector begins to crumble and if not supported by appropriate schemes, will likely collapse.
The three shocks reinforce one another and exacerbate business closures and job losses, leading to wider social problems discussed above. The pandemic could lead on to recession when there’s a protracted slowdown in economic activity due to a widespread drop in spending arising from the adverse demand shock. The adverse effects cannot be avoided altogether but governments can act expeditiously to mitigate the overall reverberation of the pandemic.
Coordinating Balanced Responses
COVID-19’s domino effect will be qualitatively different in Africa than it will be in other parts of the world. The realisation that African nations are faced with unique circumstances is key in developing an effective response strategy. African nations need to stand together now more than ever and collaborate in tackling the humanitarian and economic fallout of the COVID-19 pandemic.
Despite this, African countries are not at all homogeneous in their social, economic, political and financial structures. A unified approach might not be ideal or even feasible, but a coordinated response, with the involvement of all African nations, remains as the best solution.
The health emergency has put a brake on the trade talks to launch the African Continental Free Trade Area (AfCFTA) as planned on 1 July 2020. This is understandable in the short term as resources and attention have to be ploughed into dealing with the pandemic. The longer-term challenges to global trade referred to above, however, make it even more essential that the AfCFTA is not left to loiter in the lobby. Not only is it an example of self-interested regionalism and cooperation but it is also necessary if Africa is to break out of the cycle of external economic dependency in a world where globalisation will contract. Now is not the time to give up on the AfCFTA as the pandemic makes a strong case for the need to have collaboration drive economic development within African nations.
The COVID-19 pandemic has shown again that transnational challenges need collective action and a pooling of sovereignty to make far-reaching decisions with the support of similarly situated neighbours. To this end, certain policy priorities emerge:
- Establishing and maintaining a robust supply chain for critical commodities in African states. This has been a long-running goal for pan-African economic development. What COVID-19 adds is perspective on how far away our critical trade partners are and therefore how difficult it is to cooperatively develop and mount mutually-beneficial responses to emergencies. Although they may be less lucrative and more challenging to establish than the extant outward value chains, exploring and developing value chains for inward African production, supply and consumption is unambiguously a necessary cost. Progressive incentives for economic actors to carve out this space, rather than the regressive closure of outward value chains, can help the move occur more organically and sustainably rather than as a disruptive ‘jump’.
- Structuring border closures and travel bans to allow commodity movements. Commodity movements avail goods essential to the survival of the population, but are also critical for the availability and affordability of discretionary purchases that improve the quality of life. In this case, however, food security is paramount. Uninterrupted agricultural commodity exchanges– farmers to farmers exchange, and primary (farmgate), secondary and tertiary agricultural commodity aggregation and distribution systems—should all be ensured. Imported food commodities fill a significant gap in the national food balance sheet while exports allow farmers to access income streams that cannot be supported locally. As chains reaching beyond the continent are subject to completely uncontrollable disruptions, having networks for regional supplies is critical for safe trade within the continent.
- Prioritising the support for core and multiplier domestic activities. Governments need to plan on how to survive potential import deficits, and local solutions should be considered where possible. Agriculture is currently Africa’s largest employer but is plagued by supply uncertainties such as droughts and famines and logistical inefficiencies that greatly increase the cost of moving produce to market. A focus on supporting the expansion of agricultural value chains will help improve outcomes for African agricultural households, absorb displaced workers, and generate wealth that can be spent on other areas of the economy. Agriculture is, in this way, not just a core but a multiplier sector in the African economy. Other major sectors that are currently afflicted by COVID-19, such as tourism, retail, and commercial services, depend on a populace that is economically empowered and willing to spend.
- Buttressing the financial market. Incentivising and facilitating measures such as rescheduling loan repayments and writing off interest payments for severely affected entities will prove necessary to allow African businesses to recover. Commercial lenders undoubtedly have an interest in seeing their business go on as usual but the strict adherence to lending contracts in the context of an economic crisis might lead to a roving financial crisis of defaults. Furthermore, central banks need to consider reserve rate relaxation to enhance banking liquidity and reduced interest rates to stimulate the economy. Finally, the various financial institutions should aim to support exporters by increasing foreign trade credits, deferring loan payments and extending debt rollovers.
In the current context, the humanitarian cost of COVID-19 is a primary consideration, but economic considerations are just as important to recovery. It is difficult to have an economically anxious population comply with economically detrimental health guidelines. More difficult still is the inevitable humanitarian crisis that broken supply chains will bring through food insecurity, unemployment and stagnated development.
As evidence of economic adversities emerges, it would be wise to commit to the design and implementation of innovative policy actions with a long-term perspective on how Africa will not just survive COVID-19 but move forward with a positive prognosis.