Op-Ed: Why now is not the time for Africa to mimic rich countries over COVID-19

By Mark Doumba, Managing Director, Enovate Capital

It has become evident, over the past few weeks, that not all countries have the same financial muscle to respond to the public health, economic and social crisis that has put the world on hold. In just one round of reforms, the United States, the United Kingdom, France, and Germany; which are some of the world’s most indebted countries, have managed to mobilise over US$3 trillion to keep both demand and supply sides of their economies afloat for the next couple of months. This is equivalent to 10% of their combined GDP, and almost twice (175%) the size of Sub-Saharan Africa’s GDP which stands at US$ 1.7 trillion.

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Further south, governments in low-income economies of Sub-Saharan Africa (SSA) also face substantial challenges to not just mitigate the viral spread of COVID-19 and the potential loss of lives, but to also maintain economic activity and income streams to businesses, individuals, and to the treasury. The region needs to mobilise US$150 billion of new debt that it can’t print, and that it doesn’t have carrying capacity for, in order to respond the COVID19 crisis. With the ratings agencies on the prowl, many of these economies face a high probability of credit downgrades and of sovereign defaults despite having much lower levels of debt than higher-income economies do. Sub-Saharan African economies carry an average debt load equivalent to 49% of their GDP in current dollars, while the United States, eurozone countries, and Japan’s debt to GDP ratios were 102%, 88%, and 238% in 2019[1] respectively.

Capital markets and the world of finance applies differential treatment to high-income and low-income economies. Because of this, it is essential that decision makers of SSA governments don’t try to mimic the policy response of high-income economies; as they will fall short. Instead, SSA countries need to be smarter with their policy choices since they don’t have the same fiscal muscle. What they have, however, is the ability to leverage the extra policy space that their more centralized institutional political arrangement provides in order to enact effective policy actions swiftly and decisively. Ultimately, it is policy space and adaptive leadership that was instrumental for Singapore, South Korea and China to flatten the curve early, and less so, fiscal space.

With over 80% of the region’s working population employed in small medium enterprises (SMEs), across the formal and informal economy, mainly in retail and commerce, the crisis creates a perfect opportunity for governments to stimulate the supply side of the economy by pushing online commerce, digital government, and mobile payment services. The current structure of Sub-Saharan economies makes it near impossible for merchants and small and medium business owners to stay at home and to respect social distancing measures.  It is equally difficult for citizens to seek government services without having to step out and interact with government agents, who themselves should be able to work from home.

Governments in Sub-Saharan Africa must accompany social distancing policies with concrete alternative solutions for economic agents to pursue their income-generating activities while they comply with public health directives. This can be done by using e-commerce marketplace companies as instruments to provide economic relief in the short term (as they can help maintain a certain level of commercial transactions), and to spur much needed structural transformation in the medium to long term. In pre-pandemic period, e-commerce and mobile payments businesses mainly failed to change consumer and supplier behaviour on the continent as the cash economy and traditional retail market proved to be immovable features of social patterns. With social distancing and cash as a potential conduit for virus infections, demand for such services is likely to surge.

This type of smart policy action should help policymakers across the continent turn challenges into opportunities to create new market innovations. Now is the time for governments and economic agents to abandon less efficient business models and practices in favour of novel, resilient and more productive ones. In some countries, this crisis might even reform the local development agenda in support of more local private sector participation and smarter import substitution policies of goods, services, technology and skills.

By helping consumer facing businesses digitalize some of their activities through the intermediation of e-commerce marketplaces, governments can stimulate segments of value chains that are currently dormant or that have historically been under-developed at a low cost. With e-commerce, for example, there would be an uptick in the economic activity of logistics and transport companies, with an inflow of more motorbikes and better GPS tracking technology. With mobile payments, there is an opportunity to reduce information asymmetry between merchants and lenders which would in turn, improve the quality of banks’ loan books at a time when the credit profile of their loans is deteriorating at record speed. With digital government, countries can empower local technology companies to learn by doing, and to become local and regional champions that export their know-how to other countries with similar needs.

On the demand side, governments could provide basic subsidies to the most vulnerable segments of the population, but through the medium of mobile payment wallets that would limit consumption possibilities to essential necessities such as food and health care. A push towards e-commerce and mobile payments would also help governments formalise a large share of financial flows as the foundation for expanding the tax base and the much-needed fiscal space that low-income countries lack so often in both good and bad times.

With consumer spending expected to reach US$2.1 trillion by 2025 and with 65% of the population expected to earn income above US$5,000 (lower limit to allow for discretionary spending)[2], there are both short-term and medium-term factors to support government intervention today, amid the crisis, to organise the supply chains and digital transformation of Africa’s post-pandemic era; rather than mimic the subsidy model of the status-quo that richer countries are currently on: stay home, receive an income, keep workers, maintain production, and don’t pay taxes.

While COVID-19 may disrupt economic activity for a short time, its implications in terms of policy making will be long-lasting. For policymakers, a key takeaway from these trying times is to design policy responses that prioritise smart actions, that minimises the need for capital, and spur market creating innovations by organising local demand in a way that makes sense for local investors to take on new business activities in counter-cyclical times.

Such an approach would leave debt as a solution of last resort only, and not first as we have been observing. Money doesn’t solve all problems. For wicked problems such as those posed by COVID-19, adaptive leadership is what is really needed for African government and business managers to emerge from this crisis with positive momentum.

 


[1] https://tradingeconomics.com/country-list/government-debt-to-gdp

[2] McKinsey Report: Lions still on the move

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