Sub-Saharan Africa’s gross domestic product is expected to shrink by 3.2% this year due to the impact of the COVID-19 pandemic, the International Monetary Fund said in its June 2020 Global Economic Outlook, more than a previous estimated contraction of 1.6%. In its World Economic Outlook update, the IMF projected a significant economic contraction for Nigeria, with GDP seen falling by 5.4% this year after an earlier forecast for a 3.4% contraction and recovering to 2.6 in 2021. Nigeria faces economic distress not only from the coronavirus outbreak but also from a sharp fall in crude prices. Nigeria’s government has said it expects its economy to contract by 3.4% this year. However, last month Nigeria’s finance minister said the economy could shrink by as much as 8.9% in 2020 in a worst-case scenario. Meanwhile, the cost of living in Nigeria has risen steadily. Annual inflation rose for the ninth straight month in May, to a two-year high of 12.4%.
IMF said GDP in South Africa, the continent’s most advanced economy, would shrink by 8% in 2020, a bigger contraction than the 5.8% forecast in April but recovers to 3.5 % in 2021. South Africa’s strict nationwide lockdown, imposed in late March to curb the spread of the novel coronavirus, sharply curtailed production across key sectors such as mining and retail, further hobbling an economy already in recession. The lockdown remains in place, but some restrictions have been eased to allow key sectors to resume operations. According to the IMF On the positive side, the recovery is benefitting from exceptional policy support, particularly in advanced economies, and to a lesser extent in emerging market and developing economies that are more constrained by fiscal space. Global fiscal support now stands at over $10 trillion and monetary policy has eased dramatically through interest rate cuts, liquidity injections, and asset purchases. In many countries, these measures have succeeded in supporting livelihoods and prevented large-scale bankruptcies, thus helping to reduce lasting scars and aiding a recovery.
This exceptional support, particularly by major central banks, has also driven a strong recovery in financial conditions despite grim real outcomes. Equity prices have rebounded, credit spreads have narrowed, portfolio flows to emerging market and developing economies have stabilized, and currencies that sharply depreciated have strengthened. By preventing a financial crisis, policy support has helped avert worse real outcomes. At the same time, the disconnect between real and financial markets raises concerns of excessive risk taking and is a significant vulnerability.
Given the tremendous uncertainty, policymakers should remain vigilant and policies will need to adapt as the situation evolves. Substantial joint support from fiscal and monetary policy must continue for now, especially in countries where inflation is projected to remain subdued. At the same time, countries should ensure proper fiscal accounting and transparency, and that monetary policy independence is not compromised.
A priority is to manage health risks even as countries reopen. This requires continuing to build health capacity, widespread testing, tracing, isolation, and practicing safe distancing (and wearing masks). These measures help contain the spread of the virus, reassure the public that new outbreaks can be dealt with in an orderly fashion, and minimise economic disruptions. The international community must further expand financial assistance and expertise to countries with limited health care capacity. More needs to be done to ensure adequate and affordable production and distribution of vaccines and treatments when they become available.
In countries where activities are being severely constrained by the health crisis, people directly impacted should receive income support through unemployment insurance, wage subsidies, and cash transfers, and impacted firms should be supported via tax deferrals, loans, credit guarantees, and grants. To more effectively reach the unemployed in countries with large informal sectors, digital payments will need to be scaled up and complemented with in-kind support for food, medicine, and other household staples channeled through local governments and community organisations. In countries that have begun reopening and the recovery is underway, policy support will need to gradually shift toward encouraging people to return to work, and to facilitating a reallocation of workers to sectors with growing demand and away from shrinking sectors. This could take the form of spending on worker training and hiring subsidies targeted at workers that face greater risk of long-term unemployment. Supporting a recovery will also involve actions to repair balance sheets and address debt overhangs. This will require strong insolvency frameworks and mechanisms for restructuring and disposing of distressed debt.
Policy support should also gradually shift from being targeted to being more broad-based. Where fiscal space permits, countries should undertake green public investment to accelerate the recovery and support longer-term climate goals. To protect the most vulnerable, expanded social safety net spending will be needed for some time. The international community must ensure that developing economies can finance critical spending through provision of concessional financing, debt relief and grants; and that emerging market and developing economies have access to international liquidity, via ensuring financial market stability, central bank swap lines, and deployment of a global financial safety net. This crisis will also generate medium-term challenges. Public debt is projected to reach this year the highest level in recorded history in relation to GDP, in both advanced and emerging market and developing economies. Countries will need sound fiscal frameworks for medium-term consolidation, through cutting back on wasteful spending, widening the tax base, minimising tax avoidance, and greater progressivity in taxation in some countries.
