Prof. Carlos Lopes: “The majority of African countries are in a situation of extreme vulnerability.”
GP Video Interview on the fiscal and economic challenges of the African continent in times of COVID-19
Prof. Carlos Lopes is currently High Representative of the Commission of the African Union for Partnerships with Europe. Previously, he also held the position of Executive Secretary of the United Nations Economic Commission for Africa (UNECA).
GPI has talked to him about the many challenges facing the African continent that are exacerbated by the COVID-19 pandemic. Special regard is given to the fiscal and economic situation as well as how this crisis can also create opportunities for further development.
Why are especially the economic consequences so severe for Africa?
Because we have a combination of factors that precede COVID-19. We have climate related developments that are very bad for the continent this year, including a locust invasion in the Horn of Africa. We have prevailing conflicts in the environmentally stressed area of the Sahel. But we also have droughts in Southern Africa and floods in Mozambique and parts of East Africa. That poses a big challenge in terms of security.
Then we also have a number of vulnerabilities that we associate with commodity price volatility. We have seen what happened with oil, but it has also happened with a league of metals that are combined with oil and amount for about 50-60 percent of African exports to the world. Now we also have the effect of logistics becoming extremely expensive because of the lockdowns and difficulties of moving anything around the world. Supply chains are disrupted and that affects soft commodities as well.
COVID-19 brings – apart from the social impact and economic and domestic contraction – huge problems in our externalities. Like, for instance, the fact that we have a flight of capital that is quite significant, close to 5 percent of our GDP, because of stimulus packages in richer countries attracting capital there. We also have a standstill on investment and debt problems resurfacing because the fiscal space in countries in Africa has diminished quite significantly.
So, all in all, I would say that it does not look good. Not just because of COVID- 19, but COVID-19 has been exacerbating all the tendencies that we have been seeing.
As paradox as it may sound, but can this crisis also be an opportunity for certain public or private sector investments regarding technologies, digitalization or renewable energies?
Yes, I think with all crisis you have some sort of consequences that can be far reaching in terms of how we conceive our government. Governments in Africa are going to be judged for the next few years based on their capacity of response, but also innovation. Because we have a young population, we have lots of innovation and what we need is a bit of scale for these to be much more impactful in terms of making transformation.
We have seen countries like Ghana and Morocco using drones for distribution of testing kits. We have seen extensive use of digital platforms, even for education. We have also seen the capacity for social protection to be delivered in a much more efficient way through mobile transactions and so on.
So, I think yes, there is an acceleration of certain number of technological developments thanks to the crisis.
One issue that has for a long time been a burden for many African nations is debt servicing, especially under the current circumstances it is very challenging. In your opinion, what are certain actions that African governments or international borrowing organizations should pursue in order to help mobilize resources for more immediate needs in health care, for instance, and to help ease the burden on these nations?
When it comes to debt, you have to trade very carefully, because if we just go for debt forgiveness in all accounts, it can create problems in terms of trust in the economies of the continent for the future. So, it is really a right balance to be stricken.
When it comes to middle-income countries in Africa, countries that have access to money markets, what we need to really put on the table is the fact that a lot of these countries pay interest rates that are very high. They do not have much access to concessional lending and they have been in disadvantage.
Whereas the Africans, if they go commercial, they are paying 6-7 percent. And despite that – despite the sizes of their economies doubling since the year 2000 and therefore their needs for lending being twice what they were in the year 2000 – they have a debt-to-GDP ratio that is just about 50 percent, when the average in OECD countries is 120 percent. So, we cannot really blame them for being bad managers.
The majority of African countries are in a situation of extreme vulnerability because of debt, but not for other reasons than very low taxation in their countries and also very unattractive interest rates that are offered to them.
Economic growth is essential for Africa’s further development. But because of the COVID-19 pandemic, many nations are now facing sharp economic contractions in the months ahead. What actions and efforts would you like to see by the international community and on a regional level in Africa, in the short and medium term, to help all these nations back on their feet as soon as possible?
I think it’s very important that we bear in mind that because of the externalities associated with African economies – like commodities taking a long time to get back to normality, or the fact that remittances from migrants are going to be affected by where the migrants are and their countries of origin being in crisis themselves, or the fact that investments are on a standstill mode and risk perceptions have gone up, and the fact that a lot of capital flight is occurring in Africa – currencies of the continent are going to lose even more than they have already lost since the year 2008, which is about 30 percent of their value.
We are not going to have a V-shape recovery plan, but rather a U-shaped for much longer than the rest. Because it is going to be much longer than the rest, we need to really brace ourselves for a much more difficult situation than the rest of the world. We are going to have probably the worst year in the last thirty.
But we should also remind everybody that before COVID-19 the predictions of the IMF for this year were to have about half of the African population, 650 million people, staying in countries growing at 5 percent or more. It is quite remarkable. We can lose all of that effort and all those reforms that have been in place for the last few decades because of COVID-19.
So, we really need to exercise some solidarity, but also need to be a bit selfish, because this is the market of the future that is going to be the largest in terms of consumers. And I think it is in the interest of everybody to actually rescue African economies for their own interest. If not for selfish reasons, then because this is going to avoid conflicts around the world.
Bernadett Fekete, Project Management