What we see in Africa is a remarkable paradox where the economic shock is outpacing the dreaded health crisis. The peak of Covid-19 infections has probably not yet been reached, yet recession and unemployment are very much present, resulting in serious consequences for the already hard-hit private sector.
The transmission chain of this economic contraction is actually quite simple. It starts with falling commodity prices- like oil, copper and rubber- and disruptions in supply chains heavily dependent on the Chinese and European markets.
The abrupt suspension of tourism and flying is also a huge hit for African economies. Health prevention measures and the automatic decline in the purchasing power of a large majority of consumers are naturally slowing the momentum of domestic markets. The informal sector, which accounts for an average of 80% of employment on can’t survive without daily business.
Without downplaying the strategic value of the health response and the funds allocated, the emergency is both economic and social, since mortality on the continent is so dependent on the growth curve. With demographic trends at less than 3%, Africa is creating poor people, yet the International Monetary Fund (IMF) forecasts economic growth of -1.6% in the sub-Saharan zone in 2020 and a drop in real per capita income of 3.9% on average. The African Union (AU) expects the loss of at least 20 million jobs.
This challenge puts the private sector in the frontline. It is being impacted today but it is the prerequisite for a recovery tomorrow, provided that it hasn’t collapsed by then. The battle for jobs and against poverty is therefore being fought on the corporate front.
All stakeholders have to be fully mobilised to tackle this unprecedented challenge. It’s not about helping the continent – a bygone notion – it is about investing and continuing to finance the changes that have been successfully undertaken since the early 2000s.
From this point of view, under the impetus of the African Union, the United Nations Economic Commission for Africa (UNECA) and bilateral and multilateral donors, the macroeconomic policies undertaken in recent weeks to, first and foremost, restore budgetary room for manoeuvre to African States, are obviously moving in the right direction. Whether it is the debt moratorium, the massive provision of liquidity, or the use of Special Drawing Rights, everything must be put on the table, and quickly.
However, we also need to go deeper into the micro-economy to save SMEs and safeguard regional and continental champions. They are the stalwarts of African resilience. To achieve this, a two-pronged approach is needed to facilitate the flow of the promised funding to economic players, through targeted supply-side policies and innovative pooling of intervention tools.
One of the key priorities is to channel funding from international donors to the private sector through the rapid introduction of ad-hoc financing vehicles that can both identify the companies to support and manage these public funds efficiently and accountably. Institutional donors will have to rely on players in the field with strong operational capacity.
Given the urgency of the situation, conventional capital investment tools may not be the most appropriate due to the time required for due-diligence and other negotiations with shareholder groups with differing interests. It makes sense then to give preference to debt, quasi-equity and guarantee instruments to provide breathing space for companies with high potential in the medium and long term, but that are threatened in the short term by the effects of the Covid-19 pandemic.
The second priority concerns rapidly increasing bank liquidity levels and refinancing capacities to meet current requests for maturity extensions, as well as to prepare for the post-Covid recovery, which is going to need significant financing in order to be as reparative as possible. While States, Central Banks and donors are on the frontline in this respect, it goes without saying that managers and their shareholders must be fully involved.
For the first time in the history of humankind, all the engines of the global – and therefore African – economy are being hit by a pandemic. The response cannot be classical and orthodox. It must be strong, massive and inclusive. Only then will we be able to save jobs and avert the threat of a setback for Africa, which is at the epicentre of all the economic, social, demographic and climatic challenges of the 21st century.
Vincent le Guennou, Co-CEO of pan African investment fund Emerging Capital Partners (ECP)