The Covid-19 outbreak has set off the first recession in the Sub-Saharan Africa region in 25 years, with growth forecast at -5.1% for 2020 from a modest 2.4% in 2019; this is according to the latest Africa’s Pulse, the World Bank’s bi-annual analysis of the state of the region’s economies.
“Due to deteriorating fiscal positions and increased public debt, governments in the region do not have much room for wiggle in deploying fiscal policy to address the COVID-19 crisis,” said Albert Zeufack, Chief Economist for Africa at the World Bank. Zeufack added that Africa alone would not be able to contain the disease and its impacts on its own. “There is urgent need for temporary official bilateral debt relief to help combat the pandemic while preserving macroeconomic stability in the region,” he said.
The Sub-Saharan Africa (SSA) region paid $35.8 billion in total debt service in 2018, 2.1% of regional gross domestic product (GDP), of which $9.4 billion was paid to official bilateral creditors, about 0.7% of the regional GDP, the report says.
The Word Bank says given that the region may need an emergency economic stimulus of $100 billion including an estimated $44 billion waiver for interest payments in 2020, a debt moratorium would immediately inject liquidity and enlarge the fiscal space of African governments.
The World Bank Africa Pulse report estimates the pandemic could cost the region between $37 billion and $79 billion in terms of output losses for 2020. The impact on household welfare is expected to be equally dramatic with welfare losses in the optimistic scenario projected to reach 7% in 2020, compared to a non-pandemic scenario.
Additionally, World Bank says COVID-19 has the potential to create a severe food security crisis in the region, with agricultural production contracting between 2.6% and 7% in the scenario with trade blockages. Food imports would decline substantially as much as 25% or as little as 13% due to a combination of higher transaction costs and reduced domestic demand.
These fallouts result from a combination of influences, including the disruption in trade and value chains affecting commodity exporters and countries with strong value chain participation; the reduced foreign financing flows of foreign direct investments, foreign aid, remittances, tourism revenues, and capital flight. The disruptions also stem from containment measures imposed by governments and the response of citizens.
However, the report highlights health risks due to the region’s unique challenges especially the limited access to safe water and sanitation facilities, urban crowding, weak health systems, and a large informal economy. The Global lender says regional governments also lack sufficient room for maneuver on the policy side as a result of dwindling revenues, compounded by the larger and riskier debt positions and an increase in external borrowing costs, which will further worsen debt sustainability prospects.
“Short-term fiscal policy should aim at redirecting government expenditure to increase the capacity of the health system to protect and equip the already scarce medical personnel, and to provide adequate and affordable medical attention to the people affected by COVID-19 pandemic,” said Cesar Calderon, World Bank Lead Economist and lead author of the report.
He further added: “But at this time it is also important to consider that most workers in the region are engaged in the large informal sector where they lack benefits such as health insurance, unemployment insurance, and paid leave. They usually need to work every day to earn their living and pay for their basic household necessities. A prolonged lockdown would put their basic survival at great risk.”
Calderon further suggested that African countries urgently need to take on a customized short-term policy approach that takes into consideration the structural features of the region: Being the Sub Saharan Africa‘s size of informal employment which accounts for 89% of total employment; the precariousness of most SSA jobs, the predominance of small and medium-sized enterprises which constitute 90% of business units and are the drivers of growth in the region.
Furthermore the ineffectiveness of monetary stimulus due to the reduced labor supply and closed businesses, and in the recovery phase due to weak monetary transmission in countries with underdeveloped financial markets.World Bank recommends that a fiscal-policy approach with two primary objectives, to save lives and protect livelihoods. Immediate actions to consider include, focusing on strengthening health systems.
“The availability and allocation of financing for the health sector is still a major concern in Sub-Saharan Africa. The medical personnel in the region should be protected and properly equipped” recommends World Bank Economists in the report. The Bank has also highlighted the need for implementing robust social protection programs to support workers, especially those in the informal sector.
“This calls for cash transfers, in-kind transfers , food distribution social grants to disabled people and the elderly, wage subsidies to prevent massive layoffs, and fee waivers for basic services e.g. electricity tariffs and mobile money transactions,” reads the Africa’s Pulse
The report further suggested that Sub Saharan Economies need to minimize disruptions within countries and in the critical intra-African food supply chains, and keeping logistics open to avert a looming food crisis in the region.
The report also encourages African policymakers to think about the exit strategy from COVID-19. “Once the containment and mitigating measures are lifted, economic policies should be geared towards building future resilience,” the report says. “Economies still need to design policy pathways to achieve sustainable growth, economic diversification and inclusion.”
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”