Africa need not copy-paste economic policies from West: Experts

KIGALI, Rwanda

African governments should adopt policies that minimize the fallout of coronavirus on micro, small and medium-sized enterprises (MSMEs), experts say.

The pandemic has spread to all of Africa with more than 3,500 deaths reported, according to Africa Centres for Disease Control and Prevention (CDC).

The UN’s mid-year report released this month showed that the impact of the coronavirus crisis is expected to slash global economic output by nearly $8.5 trillion over the next two years.

The report said the pandemic is “exacerbating poverty and inequality,” warning roughly 34.3 million people could fall below the extreme poverty line of $1.90 a day in 2020-- 56% of them in Africa.

Fred Muhumuza, a Kampala-based analyst, says African countries need not to copy-paste economic policies adopted by Western economies, where the formal sector is big with salaried workers.

“In Africa we have a wide informal sector. So you want to revive the informal sector because you cannot manage cash handouts, you don’t have the money and you don’t have the capacity to borrow anyhow more so everybody is looking for money,” Muhumuza told Anadolu Agency.

“So you may need to devise small credit for SMEs-- majority of them informal –because regular financial institutions don’t easily lend to informal entities. Now that they have eaten off their capital and their savings we need to restart them like we are jump-starting a car whose battery is down. But once that car is running, it will take care of itself.”

Muhumuza, an economics lecturer at Makerere, one of the oldest universities in Africa, stressed the need to give small subsidized loans to the SME sector.

“The market for informal sector bounces back quickly. Those are easier to start, and within a week or month they are up and running compared to if you want to restart a monster hotel that used to survive on tourists from Europe,” he said.

“So we need to go back and introduce packages from the grassroots, where the poverty is going to increase.”

The MSMEs employ around 70% of the workforce in most countries, whereby loss of jobs would have a ripple effect.

Stabilization fund

Economic growth in Africa had been strong in recent years, according to experts but the coronavirus lockdowns affected remittances, depressed the continent’s commodities demand, and hit the tourism industry.

The United Nations has forecast 3.2% contraction in the global economy while the International Monetary Fund (IMF) in mid-April forecast a 3% plunge for 2020.

In countries like Tunisia, Egypt and Kenya tourism represents around 14%, 11% and 10% of gross domestic product (GDP) respectively, according to the International Trade Centre.

Enock Nyorekwa Twinoburyo, another analyst, called for a contingency fund which can operate more like a stabilization fund.

“There is need to reduce government and commercial lending rates for small and medium enterprises in value addition or manufacturing. Establish a specialized small business recovery fund to help small businesses secure money to re-inject into businesses at zero interest rate with at least one year grace period,” Twinoburyo told Anadolu Agency.

Fiscal stimulus measures needed

Twinoburyo, a senior economist, and advisor on Sustainable Development Goals at the Sustainable Development Goals Center for Africa, called for a fiscal stimulus which must go along with effective public investment management in order to guarantee value for money and delivery of intended goals.

“Fiscal policy must increase health allocations, and agriculture to address value chains necessary to guarantee food security and social protection. But stimulus must bear in mind the required fiscal sustainability path, as well countries should desist from printing of money,” he said.

African finance ministers proposed at a virtual meeting at the end of March an economic stimulus of $100 billion.

They also appealed for debt relief to provide breathing space to countries when the global and African economies are under a standstill.

However, Muhumuza warned that fiscal measures will not be fully effective in stimulating necessary investment and growth when coronavirus is still evolving.

Second wave

The UN said the global economy could shrink by 4.9% in 2020 if a second wave of COVID-19 infections flare up and lockdowns continue into the third quarter of the year.

With ongoing easing of lockdowns, health experts have warned there is likely to be a spike in number of cases.

“When you are still in that kind of situation this is not the right time to discuss fiscal stimulus. The recovery journey is yet to start for most of these economies,” said Muhumuza.

“You cannot begin to stimulate a patient when the doctors are still doing diagnosis.”

Muhumuza underlined that in any event it would not be prudent to inject entire stimulus in sectors where economic activity will remain limited at this point in time-- May or June.

“Some companies will comeback slowly in August, some in December; like airlines are unlikely to resume commercial flights at this point in time. So it makes no sense to put money into airlines as a stimulus, it makes no sense to put money in tourism as stimulus,” he said.

“It should depend on the nature of the industry and when the economy slowly picks up you put in more energy to keep the momentum.”