People & Money

Covid-19: Africa Risks Severe Debt Crisis – UN Warns

Elevated public debt is limiting the capacity to boost spending across the continent and meagre growth prospects mean less capacity to sustain debt levels, as foreign reserves, remittances, and capital flows falter and depreciations constrain the capacity to service foreign currency-denominated debts. African countries need further support from the international community and strong national efforts in averting a debt crisis, which would not just cause further economic deterioration, but also force painful fiscal adjustments” – United Nations

Noting that elevated public debt is limiting capacity to boost spending across Africa, the United Nations (UN) has said that countries in the continent need strong policies and further support from the international community to avert a debt crisis and protracted period of low growth.

In a statement jointly signed by Devi Palanivelu, UN Department of Global Communications; and Helen Rosengren of the Department of Economic and Social Affairs, on Wednesday, the United Nations warned of the devastating socio-economic impact of the new coronavirus pandemic.

It said that the impact of the pandemic would be felt for years to come unless smart investments in economic, societal, and climate resilience were made to ensure a robust and sustainable recovery of the global economy.

Despite the relatively few number of cases compared to the number of cases in other continents, the pandemic is expected to strongly impact living conditions and development in Africa. The health cum economic crisis is already increasing unemployment, poverty, and inequality as countries struggle to bring the pandemic under control while mobilising financial resources to support health systems, protect vulnerable groups, and support the recovery.

Nigeria’s GDP is projected to expand by 1.5 percent in 2021, after a contraction of 3.5 percent in 2020, according to the UN report.  Tighter foreign exchange liquidity, mounting inflationary pressures, and subdued domestic demand cloud the medium-term outlook for the Nigerian economy. 

Also Read: Amid Pandemic, Africa Shows Resilience

In South Africa, GDP is projected to expand by 3.3 percent in 2021, after a contraction of 7.7 percent in 2020.

The UN also projected that a strong and sustained recovery of the South African economy remains uncertain, amidst power shortages, elevated public debt, and policy challenges.

Egypt’s GDP was estimated to have grown by 0.2 percent in 2020 and the Egyptian economy is projected in to grow by 5.4 percent in 2021, buoyed by a strong recovery of domestic demand and unhindered by the absence of severe balance-of-payments constraints.

Also, after a contraction of 0.5 percent in 2020, the Ethiopian economy is projected to expand by only 2.3 percent in 2021.

The UN noted that while agricultural exports were showing resilience, the tourism sector would remain restrained throughout 2021. Generally, after a contraction of 3.4 percent in 2020, Africa is projected to achieve a modest recovery, with regional GDP expanding by 3.4 percent in 2021.

However, the UN report said this recovery was predicated on the rise of domestic demand and the pick-up of exports and commodity prices because external financing and high debt levels posed major risks.

The United Nations said elevated public debt was limiting the capacity to boost spending across the continent.

Also Read: Nigeria: Outlook on Key Industries in 2021

Also, meagre growth prospects mean less capacity to sustain debt levels, as foreign reserves, remittances and capital flows falter and depreciations constrain the capacity to service foreign currency-denominated debts.

The UN also said that African countries needed further support from the international community and strong national efforts in averting a debt crisis, which would not just cause further economic deterioration, but also force painful fiscal adjustments.

Against such a backdrop, the report warned that social unrest and political tensions may easily escalate, which could, in turn, worsen food insecurity, violence, internal displacement, and migration pressures.

Hamid Rashid, Chief of the Global Economic Monitoring Branch at the UN Department of Economic and Social Affairs, and the lead author of the report, said that Africa was in need of a sustained revival of growth.

“While a focus on the short term is essential, African countries need to lay the groundwork for a strong and inclusive development path in the medium term, which entails the creation of decent jobs at a large scale.

“As countries will emerge from the crisis with higher levels of debt, a careful rebalancing of policy priorities will be required to build resilience and boost productivity. This includes unlocking growth opportunities and accelerating technology adoption and bridging digital divides, enhancing climate resilience and boosting domestic revenue mobilization,” Rashid said.

The report also highlighted the need for African countries to prioritise the diffusion of digital technologies; supported by the expansion of affordable and universal digital infrastructure.

It added that an effective framework for the implementation of the African Continental Free Trade Area (AfCFTA) could also become a major tool for promoting intra-African trade, food security, and productivity.

“We are facing the worst health and economic crisis in 90 years. As we mourn the growing death toll, we must remember that the choices we make now will determine our collective future,” said UN Secretary-General António Guterres, who addressed the Davos Agenda on Wednesday.

“Let’s invest in an inclusive and sustainable future driven by smart policies, impactful investments, and a strong and effective multilateral system that places people at the heart of all socio-economic efforts,” Guterres said.

The report, however, underscored that sustained recovery from the pandemic would depend not only on the size of the stimulus measures, and the quick rollout of vaccines, but also on the quality and efficacy of these measures to build resilience against future shocks.

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