(West Africa) – Prior to the outbreak of the COVID-19 pandemic, West Africa region was poised to expand by 4.0 percent in 2020. The magnitude of socioeconomic impact of the COVID-19 pandemic on countries in West Africa may not be known with certainty as the situation remains fluid.
However, early assessment suggests that the prospect for initial growth projection is now evidently remote. Thus, under a conservative baseline scenario, the economy is now projected to contract by -2.0 percent in 2020, 6 percentage points below the projected growth rate prior to the pandemic.
Real output could fall by as much as -4.3 percent in a worst-case scenario with prolonged duration and depth of the spread of the COVID-19 pandemic until the end of 2020. Growth in the region will be affected through a combination of channels, including decline in commodity prices, low financial flows, reduced tourism earnings and heightened volatility in financial markets. Deceleration in output growth will be reflected in negative growth in per capita income of 4.3 percent with the attendant social ramifications.
The sharp decline in commodity prices, especially oil and metals, will propagate fiscal and external account imbalances, stoking a build-up of public debt. Countries that depend on oil for foreign exchange and fiscal revenues such as Nigeria and Ghana, will face limited fiscal space. Net oil importing countries could benefit from lower oil prices, but with underperformance in revenues, amplified by the COVID-19 pandemic, the average fiscal balance could range from -6.3 percent of GDP in the baseline scenario, widening to as much as -7.2 percent of GDP under the worst-case scenario assuming a prolonged weakened economic setting and severe contraction in revenues.
Under such a fiscally constrained environment, countries in the region may be compelled to cut capital expenditure while relying on external sources and domestic borrowing to finance the deficits. Uncertainty in global capital markets may however raise financing costs, which could exacerbate debt vulnerabilities, especially in countries already at high risk of debt distress. The potential for those classified to be at moderate risk of debt distress to slip into high indebtedness is high.
The earlier projected low inflation prior to the outbreak of the coronavirus may be elusive as government and central banks move to cushion their economies from impact of the COVID-19 pandemic through expansionary monetary and fiscal policies. Constraints on productive capacity due to widespread lockdown and restrictions and rise in imported food inflation due to disruption in trade logistics and exchange rate depreciation in major economies will amplify inflationary effects of looser monetary and fiscal policies. Thus, under a baseline scenario, average inflation is projected to increase by about 2.2 percentage points to 10.7 percent in 2020 and could be elevated to about 11.4 percent, should the pandemic persist until the end of 2020.
The outbreak of the COVID-19 pandemic is likely to aggravate external imbalances across the region. Overall current account deficit for the West Africa region is forecast at 5.0 percent of GDP assuming impact of the pandemic tapers off by the third quarter of 2020 but could widen further to about 6.0 percent of GDP under a worst-case scenario should the pandemic persist until end of the year.
West Africa’s outward trade orientation and product concentration limits opportunities for intra-regional trade, which stands at about 8.5 percent of total trade for the region. This exposes the region to external shocks, including the COVID-19 pandemic, which has dislocated global supply chains. With intra-regional trade significantly low, opportunities for market substitution to cushion the impact of the virus on West Africa are limited.
The outbreak of the COVID-19 pandemic came at a time when West African economies were consolidating gains from sustained implementation of prudent macroeconomic policies and growth was picking up in slower economies. Despite this, the unravelling effect of the coronavirus should be seen as an opportunity for the region to implement policies that will address the health dimension of the crisis as well as build resilience against future threats to growth and macroeconomic stability.
Full report is available from the African Development Bank.
Source: ADB
