Despite the relatively well-implemented and coordinated macroeconomic policy in sub-Saharan Africa, governments still face debt overhangs, adverse human capital effects due to lost years of learning, and revenue mobilisation challenges.
Read ‘Loss-of-learning and the post-Covid recovery in low-income countries’, ‘Covid-19 and the monetary fiscal policy nexus in Africa’ and ‘After the lockdown: macroeconomic adjustment to the Covid-19 pandemic in sub-Saharan Africa.’
In this week’s episode of VoxDevTalks, Chris Adam speaks to Tim Phillips about his research on macroeconomic adjustment and the post-Covid-19 recovery. They discuss how the Covid-19 crisis was both similar and different to the external shocks that sub-Saharan African countries regularly face and how these countries’ responses were constrained relative to many advanced economies.
Why were sub-Saharan African countries particularly vulnerable at the outbreak of Covid-19?
The Covid-19 pandemic began at a time when many sub-Saharan African countries were already facing significant economic challenges. During the 2010s many of these countries had experienced a period of rapid growth based on high external demand, principally from China. They also found themselves able to access private capital markets, complementing traditional creditors with new official creditors. However, by 2015-16 commodity prices were declining rapidly and China’s growth was slowing. Many countries took too long to respond to their slowing growth, and it became evident that productivity growth throughout the early 2010s had been more modest than the high growth period had suggested. At the onset of the crisis, lots of countries were either at high risk of debt distress or in debt distress.
What constrained the response of sub-Saharan African countries to macroeconomic shocks?
Chris Adam outlines the remarkable policy response of many advanced economies to the Covid-19 pandemic, highlighting the scale, diversification and technology available in the private sector, as well as the size of the public sector balance sheets that allowed for a large-scale government response. In the first year of the pandemic, G20 countries were able to spend trillions of dollars, whilst central banks were able to implement huge monetary expansion.
Although, sub-Saharan African countries faced the common supply-side shock of lockdowns leading to lower output, their problems were exacerbated due to a lack of economic diversification and lower technology levels. This meant these countries were less able to substitute into online working.
Secondly, the spillover effects of lockdown elsewhere had large demand-side effects with sharp contractions in aggregate demand and collapses in commodity prices. This was particularly felt by countries like Kenya or the Seychelles that had growth strategies based on international tourism.
‘From a macro perspective, those balances were just much narrower, less able to expand substantially and rapidly without causing adverse problems with exchange rates, inflation and so forth.’
Thirdly, governments in sub-Saharan Africa had access to far fewer monetary options than advanced economies, as they lacked swap lines and faced very high economic risks of rapid expansion of the domestic currency.
Finally, the fiscal systems within these countries were far less embedded than advanced economies due to their underlying economic structures (e.g. large informal and agricultural sectors). Given also their limited fiscal space at the start of 2020, these countries had access to far fewer policy options than advanced economies (e.g. furlough payments or extensive tax credits).
What was the advice offered and the macroeconomic response of these countries?
Chris Adam comments that the tenor of advice at the domestic and international level was generally good in response to Covid-19. Effective fiscal-monetary coordination was required, and this was implemented relatively effectively. He argues that the crisis put the reforms that had been undertaken since the mid-1990s to the test and they proved relatively robust.
He further highlights the contribution of several multilateral organisations including the IMF’s relatively large expansion of its balance sheet and the G20’s debt service standstill. However, the Center for Global Development have argued that the response by the World Bank and regional development banks may have been too slow.
In his own work with the Bank of International Settlements, they conclude that the score card for the policy response in sub-Saharan Africa seems generally positive with solid coordination between central banks and governments and a good response speed on fiscal dimensions. Such success may reflect the last 25 years of investment in good macroeconomic policy in these countries that was supported by a conducive global environment of coordination and information exchange.
Finance if you can, adjust if you must
In the case of temporary shocks, the extent to which an economy can finance their way out of a shock without causing negative effects down the line (e.g. via unsustainable debt levels) is key. During the crisis, financing at first was constrained as there was a flight to safety leading to large capital outflows.
In many circumstances, financing will need to be accompanied by adjustment policies. Chris Adam highlights two important questions that must be considered in the adjustment process:
- How will the adjustment process affect investment in growth enhancing projects and in human capital that can have long-run detrimental effects?
- What are the distributional consequences of this adjustment process?
What have been the long-term effects of the Covid-19 pandemic?
Chris Adam points to three important consequences in sub-Saharan Africa of the pandemic:
- Anaemic growth: recovery in terms of economic growth and productivity growth has been slower than expected, partly driven by a slower global recovery.
- Significant debt overhang: the legacy of debt challenges prior to the crisis have now been exacerbated and are weighing down on important growth enhancing public and private investment.
- Human capital consequences: the shift away from chronic illness healthcare during the crisis has now led to a direct burden on human capital as well as long-term human capital impacts as result of lost years of learning.
What are the economic policy recommendations for responding to crises?
‘Developing more effective fiscal buffers is the critical part of the macro reform programme…the focus still remains on the question of domestic revenue mobilisation.’
Compared to advanced economies and more flexible Asian economies, the tax to GDP ratio is significantly lower in sub-Saharan Africa. A lack of domestic revenue prevents the state from having the capacity to respond at the scale often required in response to external shocks. Chris Adam comments that it is not simply a question of raising tax rates in settings where the economy may be heavily weighted in the primary or informal sector; the challenge is more complex and must recognise the political economy complexity that sits at the forefront of the micro-macro agenda.
Secondly, there is a role for the international community. The risk needs to be shifted away from entirely resting on the debtor. Chris Adam highlights that there has been some progress in this area designing debt instruments that are more state contingent or linking them to natural disasters – critical as climate change shocks become more frequent and damaging. A greater role by the international community also requires more generosity on the overseas development assistance front for macroeconomic stabilisation. Recognising the interconnectedness of the world is critical given that a shock that occurs in or affects sub-Saharan Africa will likely have global spillovers.
References
Adam, C, M Henstridge, and S Lee (2020), “After the lockdown: Macroeconomic adjustment to the COVID-19 pandemic in sub-Saharan Africa,” Oxford Review of Economic Policy, 36(Supplement_1): S338–S358. https://doi.org/10.1093/oxrep/graa023.
Adam, C, E Alberola, and A Pierres (2022), “Covid-19 and the monetary-fiscal policy nexus in Africa,” BIS Papers No. 121.
Buffie, E F, C Adam, L F Zanna, and K Kpodar (2023), “Loss of learning and the post-Covid recovery in low-income countries,” Journal of Macroeconomics, 75: 103492. https://doi.org/10.1016/j.jmacro.2022.103492.