Coronavirus: South Africa expects economy to tank as it grapples with pandemic
South Africa is bracing for a deep recession amid the COVID-19 outbreak, and is engaging with domestic and international financiers to mount an adequate response.
By David Whitehouse
An overwhelmingly informal workforce and weak a fiscal position mean that debt relief must be at the front line of Africa’s response to COVID-19, the World Bank says in Africa’s Pulse published this month.
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.
READ MORE: Coronavirus: Africa must act on World Bank/IMF debt-relief proposal
The most decisive policy responses have come from southern Africa, the bank says.
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.
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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