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Coronavirus may trigger Africa debt emergency

Abu-Bakarr Jalloh
June 24, 2020

Many African countries could default on debt payments due to increasing repayment costs, precipitated by weak currencies, a ripple effect of the pandemic. But it may also spark digitalization across the continent.

A man in South Africa walks down an empty street next to a building which reads Stay Home if You Can during the coronavirus lockdown
Image: Reuters/M. Hutchings

A new study projects many African countries are likely to suffer from a shrinking economy as a result of the coronavirus outbreak. In 2020 alone, African governments are estimated to lose US$45 billion (€39.7 billion) in revenue — due in part to the pandemic but also as a result of a fall in oil prices.

Released by the Institute for Security Studies, Gordon Institute of Business Science (GIBS Business School) and the Frederick S Pardee Center for International Futures, the study has found that the costs of repaying debts and interest rates already increased to roughly US$40 billion (€35.3 billion) annually, caused by the depreciation of many African currencies.

Although the continent's economy had been projected to grow by more than 130%, Africa is now falling further behind according to the study, with projected average economic growth at just 4.3% from 2020 to 2040.

The pandemic also pushed as many as 12 million Africans into extreme poverty, and this figure could climb to 26 million by 2021. According to the study, almost 570 million Africans were projected to be living in extreme poverty by 2030, however the pandemic could push this number even further up to 631 million.

Read more: Coronavirus across Africa

Economic growth set to falter

"The biggest challenge is basically growth," Jakkie Cilliers, the founder and former Executive Director of The Institute for Security Studies (ISS), told DW. "COVID-19 is going to have a huge impact on growth in Africa and while we have to deal with the health and the mortality impact in the short term, this accentuates the importance of restructuring African economies for much more rapid growth. That is the only thing that is going to allow us to eventually recover from COVID-19."

"The study comes at a very important time and is the first comprehensive long-term forecast of the health and economic impact of the pandemic on Africa up to 2030," said Markus Ferber, Member of the European Parliament and Chairman of the German Hanns Seidel Foundation (HSS), one of the financial backers of the research project.

"Africa will be extremely hard hit, but the crisis also offers an opportunity for a sustainable economic transformation," Ferber explained.

The report, which is titled: "Death, debt and opportunity — the cost of COVID-19 in Africa," has urged lenders and investors to suspend or cancel Africa's debts to help the continent recover from the aftermath of the outbreak.     

Workers unload aid from a plane in Nigeria
Many African countries have accepted international aid in the wake of the coronavirus crisisImage: Getty Images/AFP/K. Sulaimon

Read more: COVID-19: South Africa's social divide and economic woes exposed

Feeling the pinch

Many in Africa are currently dealing with the immediate impact of the pandemic, with essentials such as food becoming increasingly expensive. For those already struggling to make ends meet, the situation is particularly difficult.

"We need help, food is so expensive, everything is expensive, where are the poor going to get something to eat?" Mary Nanyonga, a mother of three living in Uganda's capital Kampala told DW.

Nanyonga's husband abandoned her because he could not afford to take care of their children. A video showing her boiling banana peels to feed her children went viral on social media. She says she had waited for government relief, but to no avail. So, she had no choice but to feed her children banana peels.

Small-scale traders like motorcycle taxis have also been hit hard by the pandemic. Known in Uganda as boda boda, motorcycle taxis were banned for three months as the rider and passenger were unable to keep a safe distance. But a plastic shield, placed between the rider and the passenger, have now been installed in many motorcycle taxis as a temporary fix.

"These activities are hand to mouth," Ugandan economist Ramathan Goobi told DW. "Most of the people who are engaged in the informal sector did not have savings and, also more interestingly, the government is planning to bail out the rich and not the poor. The kind of capital being invested in the development bank of Uganda is mainly targeting the rich, especially to engage in import substitution industrialization."

A man sitting on a motorcycle taxi in Uganda
Motorcycle taxis in Uganda were forced to stop operating at the height of the coronavirus pandemic, leaving many without an incomeImage: Uganda Christian University

While Cilliers believes African governments responded appropriately to the crisis overall, the economic fallout is now the biggest concern. 

"[African leaders] followed the example of what had happened previously in China in then in Europe in terms of trying to delay the rapid spread of the disease," he said. "Now the big challenge of course is trying to deal with the economic consequences of that, because we cannot sustain lockdowns indefinitely in Africa."

Africa's healthcare sector could become even weaker as governments divert resources towards to the fight against COVID-19, impeding the ongoing fight against other dangerous diseases on the continent.

The study points to an increase in rates of malaria, HIV/AIDS, tubercolosis and maternal mortality during the Ebola outbreak in Guinea, Liberia and Sierra Leone between 2014 and 2016. If resources are similarly diverted towards the containment and treatment of COVID-19, the death rate of HIV, tubercolosis and malaria may increase by up to 36% across the continent over five years, according to the reasearch.

Read more: World Bank: 'No African country can face this crisis alone'

Light at the end of the tunnel

However, the study also highlights a potentially bright future for African economies if governments don't just rely on emergency measures to fight the pandemic and instead focus on building resilience and focusing on prospects for long-term growth by putting more resources towards health and basic infrastructure. 

"I think [the coronavirus crisis] underlines the importance of using the fourth industrial revolution, digitalization, the digital economy and accelerating that move," said Cilliers. "Africa was already in a sense embarking upon that journey. And coming from a low base we can advance quite rapidly. And we seerapid improvements happening in East Africa. But we need to speed that up."

The report found that the coronavirus crisis may actually help accelerate a digital transition in Africa and facilitate new technologies, effectively fast-tracking Africa towards a more sustainable economy. Modern renewable energy technology used alongside big data and the internet of things, for example, could be used to establish smart grids, solar home systems and water access points, while also helping to manage waste.

A man in Kenya looks down at his smartphone
Many African countries are looking to make the switch to the digital economy — including mobile banking — as a way of encouraging economic growth in the years aheadImage: Getty Images/AFP/T. Karumba

Read more: Digitalization in Africa: 'We aren't thinking any more in the conventional way'

Fintech key to bridging financial gap

Financial technology or fintech solutions like Safaricom's M-Pesa mobile money transfer in East Africa presents tremendous opportunities for business transactions.    

A surge of easy-to-use, data-light apps could help traders and consumers bypass long-waiting hours in queues at the banks, according to Ebehijie Momoh, MasterCard's West Africa general manager.

At the launch of The Economist Intelligence Unit's report titled: "State of play: Fintech in Nigeria" last week, Momoh claimed that mainstream banks that are traditionally slow to react to tech advancements are now quickly adapting to offer apps and tools in areas like loans. Telecom companies and retailers such as supermarkets are now also integrating this technology into their business models.

Nigeria is home to one of the few vibrant tech hubs in Africa that is currently thriving on the growth and affordability of internet connectivity. However, if they want to become competitive, fintech in Nigeria needs heavy capital investment.

"While venture capital investment is forthcoming, the majority comes from abroad with Nigerian investors currently playing a small role," Momoh explained. "The Fintech in Africa story is already one of the world's greatest tech-success stories," she added.

An Ecobank research revealed Africa's fintech industry will worth more than $3 billion this year. 

Looking ahead, Cilliers is optimistic when it comes to Africa's economic future. But he cautions that it won't be an easy road.

"There is no magic ball that can take Africa into a more prosperous future," he explained. "It is in actual fact the same road that other countries have travelled, and it is very dependent on appropriate leadership and policy." 

Alex Gitta in Uganda contributed to this report.


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