Cushioning the Blow

World Bank: debt relief needed to protect African informal sector

in depth

This article is part of the dossier:

Corona Chronicles: 13 April – 17 April

By David Whitehouse

Posted on April 15, 2020 08:31

African state finances are not strong enough to bail out the informal sector without international debt relief, the World Bank says.

Informal work accounted for 89.2% of all employment in sub-Saharan Africa in 2018. Such workers lack benefits such as health and unemployment insurance, and paid leave. Many need to work every day to earn a living. Small and medium sized enterprises (SMEs), meanwhile, account for up to 90% of all businesses. “A prolonged lockdown will put at risk the subsistence of their households,” the World Bank report says.

For SMEs across Africa, access to finance is a challenge at the best of times.

Before COVID-19, the finance gap for SMEs in Africa was an estimated $331bn. And the interest rate cuts carried out by some African countries are unlikely to be effective, the bank says, citing reduced labour supply and closed businesses due to coronavirus, as well as existing weak monetary transmission in underdeveloped domestic financial markets.

That means a different type of central bank intervention through direct credit lines or guaranteed commercial loans to formal and informal businesses is needed, the bank says.

  • Direct income support is needed for the most vulnerable—especially those in sectors where containment measures prevent them from working.
  • Cash transfers are easy to implement and are an effective way of reaching the informal sector, especially self-employed slum dwellers, the bank says.
  • Tax systems should be used to help firms through tax relief and delays on debt repayments.

READ MORE: Coronavirus: Africa must act on World Bank/IMF debt-relief proposal

South Africa, Namibia

The most decisive policy responses have come from southern Africa, the bank says.

  • In South Africa, the social security agency is making early social grant payments to the elderly and disabled
  • The government will pay sick leave to those workers affected by the lockdown, or those who get sick
  • In Namibia, formal or informal workers who have lost their incomes will get a one-off payment of N$750 (US$50).
  • Taxpayers can borrow a twelfth of their previous year’s tax payment on favourable terms.

But how to pay for it all?

The massive fiscal costs could lead several governments to default on their debt, the report says. About 17 African governments have bond spreads that exceed 1,000 basis points, a threshold which typically preceded defaults.

That means international debt relief is key.

  • In 2018, sub-Saharan Africa paid $35.8bn in total external debt service, or 2.1% of regional GDP.
  • “Conducting effective policies while preserving macroeconomic stability in Sub-Saharan Africa may require a suspension of sovereign debt payments or debt relief,” the bank argues.
  • Together with multilateral assistance from the IMF, the World Bank and regional development banks, this would “immediately inject fresh liquidity and enlarge the fiscal space of African governments.”
  • The region may need an emergency economic stimulus of US$100 billion, including a US$44 billion waiver for interest payments to multilateral, bilateral, and private creditors in 2020, the bank estimates.

READ MORE: Coronavirus: South Africa’s Ramaphosa mounts economic relief efforts

The Bottom Line: International failure to carry out debt relief would exact a heavy toll on Africa’s informal sector.

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