Africa's economic response to Covid-19: another missed opportunity?

The Covid-19 pandemic has had an impact on every corner of the planet, forcing countries everywhere to adopt measures to contain the spread of the pandemic.

As in other parts of the world, African governments have had to respond in various ways, ranging from full lockdowns and distribution of food parcels to poor households, to a variety of economic stimulus packages aimed at mitigating the disruptions caused by the containment measures. Governments are aware of the devastating impact these restrictions can have on the livelihoods of people and on the economy in general.

So far, the focus of most of the expert commentaries has been on how African states lack fiscal space to provide an effective response.

While the lack of resource is a genuine concern which requires attention, it is equally important to look at whether the scarce resources available are being used to support the most affected sections of the population.

Supporting the most vulnerable groups during this time presents an opportunity to close the inequality gap by adopting measures that lead to a redistribution of income and wealth.  This is important in a continent which has become the second most unequal in the world after Latin America.

Pandemics like these which induce economic shocks are known to present an opportunity to redistribute income, wealth and welfare. But a quick look at the economic measures adopted across Africa, suggests that the continent is missing this opportunity.

An overview of African countries’ economic packages

Let us look first at some of the economic measures undertaken by African governments, to get an idea of the general trends.

In Nigeria, the Central Bank announced a US$128 million package to support businesses and households hit by the pandemic. The package involves distribution of food parcels to more than 200 000 eligible households, and loans at favourable conditions to businesses. In addition to this, CNBC-Africa reports that the Nigerian government plans to make US$150 million from its Sovereign Wealth Fund available to stimulate economic sectors affected by the virus.

In Rwanda, the Central Bank has made available US$543 million to increase liquidity in order to stimulate the economy. This facility is earmarked to support banks to enable them to provide favourable loans to badly affected businesses.  

One of the largest stimulus packages in Africa  so far was announced by the Egyptian government in early April this year, which made available US$6.3 billion to be disbursed as favourable loans to businesses. In addition to this, the measures include a three-month tax freeze on real estate transactions, the unfreezing of bank accounts of defaulting investors, and a bailout package to the aviation and tourism industries – both of which have been devastated by the local and global impact of the virus. President Al-Sisi also said that there will be a programme to distribute food parcels to between 3 and 4 million temporary and seasonal workers for a period lasting between three to four months.

In Kenya, the government reduced the threshold of taxable income, personal income tax (from 30% to 25% across the board), corporate income tax, VAT (from 16% to 14%). It also introduced an emergency cash transfer to eligible elderly people and orphans, and rapid payment of businesses that have supplied goods and services to government institutions. They also announced  salary cuts for top government officials: 80% for the president and his deputy, 30% for cabinet ministers, and 20% for other senior positions.

In Zambia, the government announced a stimulus package of US$526 million, providing favourable loans to businesses affected by the restrictions. Other measures include the removal of VAT on imported spare parts, lubricants and stationery.

In South Africa, the government proposed a stimulus package of US$166 million, a Covid-19 Solidarity Fund, a temporary employment scheme, stepped up access to the Unemployment Insurance Fund for employees who have lost their jobs, and a tax subsidy  of up to US$26.90 per month for each employee earning below US$349.50 per month. Badly affected businesses are allowed to delay 20% of payments of employers’ tax liabilities, and small businesses have been given debt relief.

Additional measures were announced by the President on 21 April, which included a US$26.9 billion. From this amount, US$2.2billion is specifically dedicated to increase social grant pay outs between May and October, and to cover the Covid-19 grant for the unemployed who are not currently receiving social grants. But the bulk of the stimulus package (US$10.6 billion) is earmarked to provide loan guarantees to big businesses with an annual turnover of between US$5.4 million and US$16.2 million.  

The Namibian government announced a US$450 million stimulus package to assist businesses affected by the lockdown. The package is meant to provide wage subsidies to businesses in the tourism, aviation and construction sector. In addition to this, the Namibian government announced an Emergency Income Grant, which is a once-off payment of US$40.32 to unemployed adults and workers in the informal sector who have lost jobs due to Covid-19. The total grant amount for this programme is US$30.2 million.

In Ghana, the government has announced measures including reducing water bills by 50%, lowering of reserve requirements for banks and other lenders from 10 to 8%, a reduction of interest rates from 16 to 14.5%,  and the removal of mobile money transfer charges for amounts below US$18. The country has asked the International Monetary Fund for a credit facility to help deal with the effects of this pandemic.

There are many other African countries that have provided some sort of relief for businesses, livelihoods and the economy in general, and the situation is quickly evolving.

Are these measures addressing challenges in the informal sector?

From the brief review I have provided here, the priorities of African governments are clear: the bulk of the interventions adopted so far are mainly aimed at supporting businesses in the formal economy.

This is true also of countries such as South Africa, Nigeria, Egypt and Rwanda, where there are state programmes to distribute food parcels to vulnerable households. In the case of South Africa, out of the US$27 billion announced, only US2.2 billion will go to the poorest people by means of grants, while the bigger companies will receive 40% of the total package. We have a similar situation in Namibia, where US$450million is dedicated to businesses in the formal sector, but only US$30 million will go to supporting the most vulnerable groups.

In a continent where the majority of people work in the informal economy, which is characterised by high levels of vulnerability, one is left wondering if the current government responses are seeking to  narrow the inequality gap in Africa.

Given that most of the business support packages will be administered through commercial and development banks, it means that majority of businesses in the informal sector will be left out because they have no means to access loans through banks. Someone who runs a barber shop, renting a little room and two or three hair clippers, may not have the collateral required to apply for such a loan. In African countries, loan access among small businesses can be as low as 9% on average. This is likely to increase the burden on the poor, and income and wealth inequalities that have already been growing over the past two decades.

Other initiatives such as tax exemptions, VAT reductions, and wage subsidies, present similar problems. Informal businesses simply do not have the bureaucratic infrastructure and the formal recognition that is needed to activate these measures.

While it is important to support small and medium enterprises in the formal sector, the current strategies leave out the unemployed, under-employed and self-employed, who are the most affected by the crisis, and already belong to the social strata with the lowest incomes.

Commendable efforts in South Africa and Namibia are being made to address the plight of the poorest sections of the population through social grants, but these are not adequate to address the massive levels of inequality which will be exacerbated by Covid-19.

Governments need to work harder at finding effective ways to support informal businesses and workers, or else their hardships will increase significantly and socio-economic inequalities will also sharply rise.

In history, economic shocks resulting from pandemics have been known to present an opportunity to make a dent on inequality, because governments have a good reason to take from those who have, in order to redistribute to those who have not. Judging from the measures so far, Africa might be missing this opportunity.

If African governments do not change direction, it is possible that the measures implemented to stop the spread of coronavirus may have devastating effects on livelihoods, further aggravating people’s suffering and the overall loss of lives.

Horman Chitonge is professor and head of African Studies at the University of Cape Town. He has published extensively on industrialisation, economic growth and development, and agrarian political economy in Africa.

The views expressed in this article are those of the author and do not necessarily reflect Corona Times' editorial stance, or the position of any institution or association.

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