Global economy to hit 75-year low in 2020 due to the Covid-19 pandemic

AFRICA – The coronavirus pandemic and shutdown measures to contain it have plunged the global economy into a severe contraction.  

According to World Bank forecasts, the global economy will shrink by 5.2% this year. That would represent the deepest recession since the Second World War, with the largest fraction of economies experiencing declines in per capita output since 1870, the World Bank said in its June 2020 Global Economic Prospects. 

Sub-Saharan Africa has been ravaged by the COVID-19 pandemic, and economic activity collapsed in the first half of this year. The pandemic has taken a heavy human and economic toll, causing the most serious disruption to region-wide economic activity on record.  

Sub-Saharan Africa has suffered as a result of the impact of the pandemic on its key trading partners, the disruption to global travel and supply chains, and the collapse in global commodity prices, particularly for oil and industrial metals. These shocks have heightened risk aversion among investors and prompted unprecedented capital outflows. 

In Nigeria and South Africa, activity has fallen precipitously in the first half of the year. Several industrial commodity exporters, such as Angola, the Democratic Republic of Congo, and Ghana, have had to cope with weaker external demand and lower prices for oil and metals, in addition to domestic disruptions.  

Agricultural commodity exporters, including Côte d’Ivoire, Ethiopia and Kenya, have suffered from a collapse in demand as well as disruptions to supply chains. The fall in global travel as a result of the pandemic has hit hard on countries with substantial exposure to travel and tourism, such as Cabo Verde, Ethiopia, Mauritius, Seychelles.  

Inflation has crept up in the region, reflecting currency depreciations and supply chain upheaval. While many countries have announced fiscal support measures, in many instances these involve reprioritizing existing budgets given fiscal constraints. International institutions have called on bilateral creditors to suspend some debt payments. 

“This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges,” said World Bank Group Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu.  

“Our first order of business is to address the global health and economic emergency. Beyond that, the global community must unite to find ways to rebuild as robust a recovery as possible to prevent more people from falling into poverty and unemployment.” 

Economic activity in the region is on course to contract by 2.8% in 2020, the deepest on record. Per capita GDP is anticipated to fall even more sharply, likely pushing millions in the region back into extreme poverty.  

Growth could resume to 3.1% in 2021 assuming the pandemic fades in the second half of the year, that domestic outbreaks of the virus follow a similar path, and that growth in major trading partners rebounds.  

Sub-Saharan Africa faces daunting hurdles to contain COVID-19 given weak health care capacity, lack of access to basic sanitation, and the prevalence of informal economic activity across much of the region. 

The economy of Nigeria is expected to shrink by 3.2% this year, given the collapse in oil prices, which represent 80% of the country’s exports, about a third of banking sector credit, and half of government revenues. South Africa’s output is forecast to contract 7.1% this year, the deepest contraction in a century, as stringent but necessary containment measures curtail economic activity. 

Risks are tilted firmly to the downside. A longer lasting and more severe pandemic would trigger an even deeper recession in the region and have devastating effects on the health and well-being of the region’s population.  

The effects of the pandemic are expected to markedly increase the region’s vulnerability to debt distress, and these strains will be compounded by the increased borrowing necessary to fund larger deficits.  

Severely constrained government resources could lead to a curtailment of critical public services during the pandemic and further weigh on activity. There are also growing concerns that the pandemic may cause a food security crisis in the region as border closures and trade restrictions disrupt trading in food and agricultural products.  

The region’s large numbers of displaced people could complicate efforts to prevent the spread of COVID-19. In addition, there is the risk of social unrest as governments prioritize efforts to thwart the virus and peacekeeping efforts lose momentum. Rising unemployment, falling incomes, and potential shortages of essential items could lead to instability and weigh on activity well after the pandemic has faded. 

The pandemic highlights the urgent need for health and economic policy action, including global cooperation, to cushion its consequences, protect vulnerable populations, and strengthen countries’ capacities to prevent and deal with similar events in the future.  

It is critically important for emerging market and developing economies, which are particularly vulnerable, to strengthen public health systems, address challenges posed by informality and limited safety nets, and enact reforms to generate strong and sustainable growth once the crisis passes. 

Emerging market and developing economies with available fiscal space and affordable financing conditions could consider additional stimulus if the effects of the pandemic persist.  

This should be accompanied by measures to help credibly restore medium-term fiscal sustainability, including those that strengthen fiscal frameworks, increase domestic revenue mobilization and spending efficiency, and raise fiscal and debt transparency.  

The transparency of all government financial commitments, debt-like instruments and investments is a key step in creating an attractive investment climate and could make substantial progress this year. 

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