The Covid-19 pandemic is one of the most devastating global health and economic crisis in modern history. The crisis has affected virtually every facet of socio-economic functioning, including public finance, which is concerned with the capacity of governments to mobilize resources, primarily for building institutions to promote security, competition, and market development, as well as for redistributive purposes.
The pandemic compromised Africa’s state of public finance significantly. Firstly, it led to an unprecedented contraction of tax revenue. Secondly, it placed extreme stress on public spending as governments struggled to respond to the health crisis, including increased funding for: the health sector, social and business relief, measures to reduce and combat the spread of the virus, and various other related needs. COVID-19 poses tremendous challenges for Africa. However, it also offers opportunities for constructive change as well. The discussion below outlines some such considerations.
COVID-19: Challenges for Public Finance In Africa
- Amplification of weaknesses: The onset of the viral outbreak exposed and amplified existing weaknesses in public finance management in African countries. Inefficiencies and inequalities in the delivery of public services were magnified. The crisis also revealed a lack of preparedness when it comes to the ability to weather economic shocks and manage resources effectively.
- Poor GDP Growth: The African Development Bank projects that real GDP growth could reach -3% in Africa due to the Covid-19 pandemic – a collapse of about 7 percentage points from the growth rate achieved in 2019, the worst outcome in the region since the 1990s. Reduced GDP growth means reduced mobilization of taxes, adding fuel to macro-economic instability and burden of debt. Given the weakened macro-economic stability in Africa prior to COVID19, trade restrictions, regional lockdowns and other COVID-19 measures impeding economic activities further compromise fiscal sustainability in the wake of the crisis.
- Rising Debt Levels: Despite a recent rise in debt levels, the COVID-19 crisis forced many African countries to borrow even further to cope with the increased demands. According to the World Bank², public debt in emerging markets has surged to levels not seen in 50 years. Not only has the crisis worsened fiscal deficits for African countries, but it limits future borrowing capacity. This puts increased pressure on macro-economic stability and fiscal sustainability, especially due to the need to continue dispensing large amounts of funds to combat the virus. The debt burden is further heightened by often high borrowing interest rates, exchange rates for foreign loans, and other influential economic factors.
- Increased Poverty & Social Needs: High levels of African populations across all sectors suffered a loss of earnings as a result of the pandemic. The World Bank estimates that the COVID-19³ pandemic will set back global poverty reduction goals by 3 years. The African Economic Research Consortium’s (AERC) recent work in five African countries showed that policy responses to contain the spread of the virus, such as lockdowns, closing down of some businesses, travel and mobility restrictions; and so forth, led to an increase in poverty levels that washed out gains that had been made in the past decade. Most importantly, inequality worsened in the five countries as the burden of economic slowdown fell disproportionately on low wage earners, small business owners, and casual labourers.
Opportunities & The Way Forward For Africa
Despite the dire situation, it is not all doom and gloom for Africa. This crisis has also revealed opportunities for positive change. There are some measures that can help move the continent forward:
- Fast-track reforms in public finance management aimed at tackling future debt burdens. Citizen participation and support are also key to transformative solutions
- Use the pandemic as an opportunity to recognise the importance of having strong healthcare systems, including financing and access to resources
- Appreciate healthcare workers and the resilience they have shown during this period, and look at ways to improve earnings and benefits aimed at retaining skilled healthcare workers
- Improve ICT mechanisms relating to both the health sector and overall public services for enhanced communication and service delivery to citizens for both emergency and day-to-day needs
- Develop cross-country peer exchange systems that will allow countries to share information on response efforts with each other in real-time, thus pooling knowledge resources and working together to help with COVID-19 reduction, as well as other healthcare, social or economic crises that may occur in the future
- Stimulate local and intra-African trade to reduce the shocks of global crises felt by the continent. As highlighted by the Organisation for Economic Co-operation and Development (OECD), a high dependency on imports in areas such as food, drugs, machinery, and equipment over-exposed African countries to the economic consequences of the COVID-19 pandemic. Hence, we need to build infrastructural and trade frameworks to boost in-country and pan-African economic capabilities and reduce our level of reliance on imports
- Explore the scope for instituting effective, comprehensive social programmes in Africa
- Foster better transparency and governance to improve trust in rule of law, strengthen business conditions, and encourage external support as key elements for developing a better future. Transformative domestic reforms to improve revenue mobilization, digitalization, trade integration, competition, social safety nets and climate-change mitigation will be critical for the Africa’s resilience, growth and job creation (IMF)
While the sheer destructive impact of the COVID-19 pandemic continues to resonate across the continent, we should not ignore the lessons learned and the uplifting stories that have risen up through the crisis. Never have Africans come together the way that we have during this catastrophic situation – we have seen the best of humanity through this trying period.
International aid organisations, local charities and normal citizens alike showed compassion and care in helping out their fellow citizens. Healthcare and essential workers rose to the title of “hero” for the sacrifices they made to keep country processes going. African countries were lauded by our Western counterparts for the way we responded to the pandemic, including our swift action in imposing lockdowns. African governments did well overall when it came to educating the population on COVID19 prevention measures, and hence helped save lives on a large scale.
The road ahead for Africa is difficult, and the challenges undeniable. But for us to overcome, rebuild, and move forward stronger than ever, we need to take an inspired and solutions-focused stance and work together for the benefit of the continent and its people as a whole.
- International Monetary Fund Regional (IMF) Economic Outlook for sub-Saharan Africa, October 2020. Click here for more: IMF Regional Economic Outlook (https://www.imf.org/en/Publications/REO/SSA/Issues/2020/10/22/regional-economicoutlook-sub-saharan-africa)
- View: The World Bank factsheet May 2020 – Debt Service Suspension & Covid-19. (https://www.worldbank.org/en/news/factsheet/2020/05/11/debt-relief-and-covid-19-coronavirus)
- View article: The World Bank – Updated Estimates of The Impact of Covid-19 on Global Poverty: The Effect of New Data by Christoph Lakner, Nishant Yonzan, Daniel Gerszon Mahler, R. Andres Castaneda Aguilar, Haoyu Wu & Melina Fleury. (https://blogs.worldbank.org/opendata/updated-estimates-impact-covid-19-global-poverty-effect-new-data)
Dr. Abebe Shimeles is the Director of Research at the African Economic Research Consortium (AERC)