JUNE, 2020 ISSUE 1, NO. 1 AFRICA KNOWLEDGE IN TIME POLICY BRIEF OFFICE OF THE CHIEF ECONOMIST, AFRICA REGION, WORLD BANK COVID-19 and Trade in SSA: Impacts and Policy Response BY WOUBET KASSA, RESEARCH ANALYST, WORLD BANK COVID-19 will have a severe eco- low in Africa (Figure 1) when compared to other regions. However, nowhere will the pandemic hit harder, or with nomic impact in Sub-Saharan Africa: greater adverse impacts on the economic, social, and Trade is the Key Channel political life of people, than in SSA, mainly due to the inherent vulnerabilities in the region. Economic growth The COVID-19 pandemic is first and foremost a public in SSA is expected to decline to between -2.1 and -5.1 health crisis. However, measures adopted to curtail the percent in 2020, the first continent-wide recession in spread of the virus have led to a sharp contraction of a quarter of a century.1 The economic impact will be the global economy and an even larger decline in global hardest felt through trade, due to the rare mix of glob- trade, with significant implications on the livelihoods of al shocks in demand and supply. Trade is also key to people in Sub-Saharan Africa (SSA). To date, the num- the solution, both in the direct measures to control the ber of confirmed cases of COVID-19 has been relatively spread of the virus and in minimizing the economic fall- Figure 1: Total Confirmed COVID-19 Cases in the World and in Continental Africa South Africa 4 million Africa Oceania 400 South America 3.5 million 3 million North America 300 Guinea 2.5 million Ghana Morocco 2 million Cameroon 200 Algeria Senegal Egypt 1.5 million Europe 1 million 100 Cote d'Ivoire 500,000 Nigeria Asia excl. China Kenya 0 China 0 Jan 5, 2020 Feb 10, 2020 Mar 21, 2020 May 11, 2020 Mar 1, 2020 Mar 21, 2020 Apr 10, 2020 Apr 30, 2020 May 28, 2020 (a) Total Confirmed COVID-19 Cases (b) Total confirmed COVID-19 cases per million people Source: Our World in Data, 2020 Acknowledgement: Valuable direct inputs were provided by Zainab Usman and Albert G. Zeufack Objective and disclaimer: Africa Knowledge in Time Policy Briefs synthesize existing research and data on important questions and issues around the socioeconomic dimesions of Covid-19. Africa Knowledge in Time Policy Briefs carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclu- sions are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent out. This brief focuses on trade impacts and policy re- collapse in demand. The containment measures adopt- sponses with respect to the latter.2 ed in countries most affected by the pandemic result in significant demand shocks, affecting exports and eco- The trade impacts of COVID-19 are amplified since nomic growth in SSA. countries most affected by the pandemic also rep- resent a significant share of global production and Though Africa accounts for a very small share of glob- trade. Countries most affected by the pandemic, mainly al trade (3 percent), the share of trade in the national the United States, China, Japan, Germany, the United income of most economies in the region is relatively Kingdom, France and Italy, together account for about large, compared to other regions. In 2017 the share of 60 percent of global GDP, 65 percent of global manufac- trade in GDP was 31 percent in North America, 40 per- turing and more than 40 percent of global manufactur- cent in South Asia, 56 percent in SSA and 57 percent ing exports, while forming key parts of the global value in EAP. Africa’s share of exports to the rest of the world chains (GVCs). In the first quarter of 2020, China’s GDP ranged between 80-90 percent during 2000-2017, high- contracted by 6.8 percent from the previous year — the er than any other region4. Given that the countries most largest decline since official quarterly GDP records be- afflicted by the pandemic account for a significant share gan in the early 1990s. In February, the official Manu- of global trade and output and are the largest trading facturing Purchasing Managers’ Index (PMI) hit a record partners of the region (Figure 2b), the trade impacts are low of 35.7. In addition, the U.S. economy contracted at expected to be severe. Hence, despite a relatively low the fastest rate since 2008, shrinking at a 4.8 percent percentage of confirmed cases of COVID-19 in SSA thus annualized rate in the first quarter of 2020. The down- far, the largest shocks to the region are going to be exter- turn in the Eurozone economy is even more severe; the nal. In addition, the lion’s share of foreign direct invest- economy contracted 14.4 percent over the same peri- ment (FDI) to SSA comes from these regions, creating a od. The COVID-19 related trade collapse is expected to confluence of triple shocks: falling demand for African exceed the trade slump of the 2008-2009 financial cri- exports; global supply shocks further curtailing produc- sis. Global goods trade is projected to plummet by 13 to tion in export-oriented sectors; and a slump in FDI flows. 32 percent3. In stark contrast to the 2008-2009 global The impact of disruptions in GVCs driven by the global crisis, where the impact on global trade slowdown was demand slump would be predominant in countries with indirect and mainly demand driven, there is now a pre- strong forward linkages – mainly exporting raw materi- cipitous slump in production (supply) as well as a sharp als used in the production for export in other countries. Figure 2: SSA Export Share (%), By Product Group and Key Partners 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1990 1994 1998 2002 2006 2010 2014 2018 1990 1994 1998 2002 2006 2010 2014 2018 Capital goods Consumer goods East Asia & Paci c Europe & Central Asia North America Intermediate goods Raw materials South Asia Sub-Saharan Africa (a) Export Share (%), Product Groups (b) Export Share (%), Trading Partners (1990-2018) Source: Calculated based on WITS database 2 COVID-19 and Trade in SSA: Impacts and Policy Response This accounts for the largest share of the region’s trade abilities, leading to conflict and instability in the region. and GVC integration (Figure 2a). The supply shocks introduce direct supply disruptions Given the region’s high dependence on commodities, in African countries that are increasingly becoming the collapse in commodity prices is expected to have more integrated into GVCs. Non-resource rich SSA very severe impacts, further reinforcing the existing countries that have been centers of robust growth in the economic vulnerabilities due to lack of diversification. region over the last two decades will be the most affect- As the pandemic spread, almost all commodity prices ed by these supply shocks. The largest declines in trade saw sharp declines during January-April 2020 (Figure are likely to be in sectors with highly integrated global 2a). In 2019, 89.4 percent, or about 9 out of 10 SSA coun- value chains (GVCs). The manufacturing sector will be tries were considered commodity dependent (Figure hard-hit due to the relatively strong GVC linkages. Sub- 2b),5 compared to 66 percent in MENA, 50 percent in sequently, exports are expected to fall due to shortage of LAC and 50 percent in East Asia and the Pacific. Hence intermediate inputs. SSA economies6 which have been in countries such as Angola, Nigeria, Republic of the transitioning or are well integrated into manufacturing Congo, Chad, Gabon, and Guinea Bissau, the precipi- GVC including South Africa, Kenya, Ethiopia, Lesotho tous fall in commodity prices is exacerbating the eco- and Eswatini, will be affected the most. These disrup- nomic fallout and reinforcing existing social and political tions in production translate into closures of businesses, vulnerabilities. Two countries most affected by this - An- especially those that export, raising unemployment and gola and Nigeria - derive 67 percent of their revenue poverty. This perfect storm of shocks could potentially and 90 percent of their export earnings from oil. At a derail early successes in economic growth and pover- time when there is additional need to further increase ty reduction achieved in some countries in the region. public expenditure to respond to the pandemic direct- The short-term and long-term employment and pover- ly or limit the subsequent economic pains through so- ty impacts from the disruption in production depend on cial welfare programs, the commodity price shock may policy responses by governments and businesses on instead reduce their capacity to even meet prior com- withstanding the crisis. The impact is worsened by dis- mitments. This may contribute to increases in poverty. ruptions in international transport networks, which raise It could also expose existing political and social vulner- the cost of trading. The impacts could be even more se- Figure 3: Commodity Price Indices and Commodity Dependence in Africa 120 110 100 90 80 70 Energy Agriculture Dependence on exports of agricultural products 60 Metals Non-commodity dependent countries 50 Dependence on energy exports Data not available or not included in the report Dependence on exports of minerals, ores and metals 40 43101 43201 43301 43401 43501 43601 43701 43801 43901 (a) Monthly Commodity Price Indices (b) Commodity Dependence in Africa Source: Based on World Bank Commodity Outlook Data, 2020 Source: UNCTAD, 2019 3 COVID-19 and Trade in SSA: Impacts and Policy Response EMPTY NAIROBI STREETS Photo: World Bank / Sambrian Mbaabu vere in countries where commercial services trade such covery is smoother. It is also critical to ward off potential as international passenger and cargo transport and in- policy capture that would further distort production. ternational tourism represent a large share of national income. Since service trade is often complementary to The external trade shocks are compounded by disrup- goods trade, the collapse in goods trade will also be fol- tions that are internal to the region, as African coun- lowed by a collapse in services trade. tries impose restrictions on the movement of people and goods to limit the spread of the virus. These re- The garment industry, a budding manufacturing strictions have slowed down regional trade with signif- sub-sector in the region accounting for a large share icant economic implications. The share of intraregional of the sector’s employment and exports, is hard hit by exports in total trade is the lowest in Africa; while a large worldwide retail closures and furloughs coupled with share of the regional trade is informal. Intraregional trade the collapse in consumer confidence. For example, the is dominated by manufacturing exports, accounting for US and the EU together account for 65 percent of Ethi- 457 percent of intra-African exports. Hence, lockdown opia’s and 76 percent of Kenya’s textile export market. measures to control the virus will have negative impacts The sharp decline in clothing demand in these markets on the manufacturing sector in the region. In addition, a has led to factory closings and layoffs in Sub-Saharan Af- large share of regional trade, often missing from official rica. The Jobs Creation Commission in Ethiopia predict- trade statistics, is informal. The nature of informal trade ed in March that total job losses could range between is that it is dominated by small-scale producers and trad- 1.41 and 2.5 million over three months in the country ers, engaged in agriculture and other primary sectors. while the manufacturing job losses are estimated at 340 As of May 26, 2020, 438 African countries had closed thousand. Without active private-public partnerships to their borders. Small-scale cross-border trade contrib- support the factories affected and safety nets to provide utes to the income of about 43 percent of Africa’s entire for workers, it is difficult to guarantee that factories will population while supporting the livelihoods of signifi- remain resilient or that lives, and livelihoods will go back cantly more people indirectly. Such trade, dominated by to normal, post-COVID. Failure to support furloughed agricultural and livestock products, is an essential part factory workers could push many more people into pov- of food security in the region. Substantial disruption to erty and pose uncertainties about the future of firms. regional trade and agricultural supply chains could lead This threatens to erase the invaluable gains made in em- to increased risks of food insecurity and poverty in a re- ployment and productivity in most of these economies gion that is already home to the largest number of the over the last few decades. In many SSA economies, so- global poor and the food insecure. cial protection systems are almost nonexistent. A mix of worker retention programs, social protection, and firm relief measures to support firms are crucial to avoid the persistent effects of the crisis and ensure that the re- 4 COVID-19 and Trade in SSA: Impacts and Policy Response Trade Policy Responses to Mitigate the Shocks The first policy action is to do no harm. Blanket Protec- tionist policies would do more harm than good. Open trade in both goods and services plays a key role in overcoming the pandemic and limiting its health and economic impact, especially on the poor. A few coun- tries have adopted protectionist policies, mainly export restrictions, for fear of shortages of supply or goods associated with COVID-19, as well as other essentials goods such as food and basic materials. Trade policies adopted by African and other9 countries during the crisis affect the cost and availability of COVID-19-related med- ical supplies as well as necessities, mainly food. African countries depend heavily on imports of medical sup- MARKET PLACE plies, with 94 percent10 of pharmaceuticals in the region Photo: World Bank / Sambrian Mbaabu imported from outside the region. The experience from the 2006-2008 commodity price hike demonstrates that Deeper regional coordination in trade and COVID-19 export restrictions on food are contagious and lead to response is necessary, both to limit the spread of the increasing uncertainties and further price hikes, wors- pandemic in the region, and to minimize the immedi- ening the problem. Even when they work, export bans ate and long-term economic fallout. Africa can lever- on food may lower domestic prices, which reduces the age the recent momentum in the Africa Continental incentive to grow food crops in the next season. On Free Trade Area (AfCFTA) and the Regional Economic the other hand, reducing tariff and non-tariff barriers Communities (RECs) to coordinate response efforts and can help facilitate the flow of such goods, supporting address long-term challenges including commodity de- response efforts. While many African countries have pendence and vulnerability of agricultural supply chains. adopted measures to reduce trade barriers, the region Regional integration, particularly intra-Africa trade, has lags behind the rest of the world in reducing both tariff been found to strengthen the capacity of economies to and non-tariff measures on imports of COVID-19 relat- absorb global shocks and build resilience to shocks in ed goods and essential supplies. A lot of the individu- advanced economies. In addition, regional integration alized country-specific problems of supply are better could provide the pathway to transition out of commod- addressed by an open and more integrated production ity dependence, since it promotes exchange in a more system. diverse set of goods (versus trade in concentrated pri- mary goods). The share of manufacturing goods in in- Countries should strengthen trade facilitation to tra-Africa trade is much higher than its share in Africa’s streamline and simplify regulatory and border proce- exports to the world. In 2017, the share of manufacturing dures across the region by improving the efficiency goods in total intra-Africa trade averaged 52 percent of services and increasing access to trade finance. compared to 22 percent in agriculture11 and even lower Through collaborative frameworks, countries should in fuels trade. Although Africa has comparative advan- aim to reduce the administrative time and transaction tages in agricultural goods exports, the composition of costs of trading across borders. This can be achieved by its exports tends to be skewed towards manufactured improving customs procedures, reducing customs clear- goods in trade within the region. This suggests that ance times, establishing one-stop shops, and streamlin- agriculture and intra-Africa trade in agriculture are un- ing regulations across borders. Governments need to derdeveloped, offering unexploited opportunity for this invest in transitioning customs and other trading trans- sector in intra-Africa trade. With increasing regionaliza- actions to electronic and digital platforms. In Kenya, for tion and the rise of robust regional blocs reigning over example, the ministry of agriculture stated it will not re- global trade, African states operating separately would new tea and coffee auctions if traders fail to permanent- find it challenging to grow faster and reduce poverty on ly migrate trading to an online platform in two months. a large scale. The pandemic provides additional impetus Similar efforts could help transition customs and trading to intensify and expedite the effective implementation platforms into more efficient systems, hence reducing of AfCFTA to deepen regional trade and integration and costs of trading in the long term. lessen SSA’s dependence on natural resources. 5 COVID-19 and Trade in SSA: Impacts and Policy Response Through the African Union (AU) and other regional and centration of GVCs. A more resilient strategy to reduce global forums, African countries could benefit from the risk of potential supply-chain disruption would be coordinating their responses and mobilizing support for firms to reduce dependence on any one individual from international financial institutions. Due to limited supplier13. Vietnam and Bangladesh have been, and are fiscal space further tightened by the reduced growth expected to continue to be, the main beneficiaries of and deteriorating current account, there is a need for this shift. With the right policy mix and active industri- a coordinated global effort to rescue the region from al policies, African countries could also present a viable the impacts of the shock. Through the AU and other fo- alternative to attract some of these investments, based rums, African countries should coordinate their efforts on their comparative advantages. A robust set of active in mobilizing the required support from international fi- policy reforms to improve the business climate; improve nancial institutions as well as major creditor nations. Afri- contract enforcement mechanisms; maintain flexibility in can countries should push for a more open global trade promoting and attracting FDIs; and strengthen comple- that puts pressure against restrictions on exports of key mentary services such as finance, transport and com- medical supplies and food items. Regional efforts to re- munications; and trade facilitation could contribute to tool manufacturing to produce COVID-19 related goods attracting such investment to the region. According to a may address the immediate challenges and lessen the 2019 survey that tracks U.S. sourcing executives’ plans cost of disruptions in production. To facilitate such re- for textile and apparel manufacturing, the major factors tooling of existing manufacturing capabilities, there is a that determine sourcing include: (i.) speed to market; (ii.) need for temporary exemption of intellectual property production and sourcing cost, including labor cost and rights protections on COVID-19 related medical goods, access to cheaper yarns and fabric produced locally; (iii.) to promote domestic production of these items. The Af- flexibility and agility with respect to quickly adjusting the rica region seems to have capitalized on existing mo- delivery, volume, and products based on requests; and mentum in regional coordination to respond to the crisis (iv.) risks of factory, social, and environmental compli- better than many other regions. For example, the Africa ance. Policy reforms that address these key challenges CDC is pooling orders across the region to better posi- could better position SSA countries as attractive desti- tion members to access the global market for COVID-19 nations for firms seeking to relocate manufacturing in related medical goods. response to the crisis. African countries should position themselves to seize States, in coordination with domestic firms, lead firms, opportunities that may arise from the desire to diver- and workers’ unions should adopt strategies to sus- sify global supply chains and expand into new desti- tain businesses through the pandemic and ensure that nations. The combination of trade-policy shocks and the recovery is smooth. Due to external demand and the enduring public health concerns from the pandemic supply shocks transmitted through trade and domes- have created uncertainty about the future of trade, re- tic lockdowns, SSA is facing unprecedented disruption sulting in a rethinking12 of global value chains (GVCs), of business activities. Despite best efforts, many firms possibly leading to a shift in sourcing locations. Though could face the risk of collapse, and the resulting loss of more study is required, the experience from the Great millions of jobs without strong social safety nets could East Japan earthquake suggests that more diversified be catastrophic. There are also uncertainties with re- supply chain networks lead to firms’ resilience to natu- spect to recovery, and whether production would return ral disasters. The current crisis has revealed the extent to pre-crisis levels after the pandemic. The economic im- of dependence on Factory China and the risks of con- pact of the pandemic may not be short-lived, and many firms will need support to restore operations and main- tain productivity growth. This includes easy access to financial services, support for temporarily unemployed workers, market recovery, and other more localized interventions to ensure continuity of production oper- ations, post-crisis. The success of policy responses to restructure essential production, effectively manage dis- ruptions, and the subsequent reopening will determine if a country or a firm comes out of this crisis weakened or resilient. It is also important to consider the risks of political capture in adopting firm and industry specific policies, often fast-tracked and without due discourse, MASKED SELLER AND BUYER to avoid the pitfalls from the lessons of failed industrial Photo: World Bank / Sambrian Mbaabu policies in the past. 6 COVID-19 and Trade in SSA: Impacts and Policy Response SOCIAL DISTANCING IN THE MARKET Photo: World Bank / Sambrian Mbaabu Conclusion global coordination to scale up safety nets, minimize the risks to long term business disruptions; facilitate flow Trade and globalization are the channels through which of essential goods and services and ease the burden pandemics spread. Trade is also the channel through on the region’s debt requirements to free some fiscal which the economic impacts transmit across economies, space. There is a need for active policies to support both poor and rich. Africa is unique in many ways com- enterprises so that disruptions are not permanent, and pared to other regions. Despite the relatively low num- the shocks do not persist. This requires coordinated ef- ber of confirmed cases, the region’s economy would be fort between governments, workers organizations, and hard hit due to its high reliance on trade, heavy depen- global lead firms as well as domestic firms. This chal- dence on commodities, an already fragile food system, lenge could also provide opportunities to actively intro- and limited fiscal capacity to respond to the economic duce reforms, not only to address short-term shocks, but fallout from the crisis. This crisis will reinforce the re- also introduce aggressive reforms that would otherwise gion’s inherent vulnerabilities, posing risks of wiping out be considered sweeping. As they chart their future be- the gains made in poverty reduction. SSA countries that yond the pandemic, African countries should reconsider have been registering robust growth face rapid growth their industrial policies and encourage firms to rethink declines due to disruptions in production and falling their strategies to address emerging uncertainties. global demand. The response calls for a regional and 7 COVID-19 and Trade in SSA: Impacts and Policy Response References Africa CDC. May 26, 2020. COVID-19 Scientific and Public Health Policy Update. Baldwin, R. and Tomiura, E. 2020. Thinking ahead about the trade impact of COVID-19. Economics in the Time of COVID-19, 59. Brixiová, Z., Meng, Q., and Ncube, M. 2015. Can intra-regional trade act as a global shock absorber in Africa? IZA Discussion Paper, (9205). Calderon, C., Kambou, G., Zebaze Djiofack, C., Korman, V., Kubota, M., and Cantu Canales, C. 2020. Africa’s Pulse, no. 21, spring 2020: An analysis of issues shaping Africa’s economic future. Coulibaly, Souleymane, Woubet Kassa, and Albert G. 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Economic development in Africa report 2019: Made in Africa – rules of origin for enhanced intra-African trade. World Bank. 2020. World Development Report 2020: Trading for Development in the Age of Global Value Chains. Washington, DC: World Bank Group. 2020. Commodity Markets Outlook, April. World Bank, Washington, DC Notes 1 World Bank, Africa’s Pulse, 2020. 2 This brief is mainly about the medium to long term trade implications and trade policy responses. There has been robust discus- sion elsewhere on the role of a more open trade in facilitating the flow of COVID-19 medical goods and supplies and easing import and export restrictions. WTO, 2020 estimates that in an optimistic scenario, volume of global goods trade falls by 13%. With possible failures to respond 3 and control the pandemic, the trade collapse could reach as high as 32% compared to 2019. 4 UNCTAD, 2019 5 A country is considered export-commodity-dependent when more than 60 per cent of its total merchandise exports are com- posed of commodities (UNCTAD, 2019) 6 World Development Report 2020 7 UNCTAD, 2019 8 Africa CDC, May 26 COVID-19 Scientific and Public Health Policy Update. 9 More than 20 countries have announced a ban on the export of medical gear including personal protective equipment. These include many OECD countries who account for a large share of the export of these goods - South Korea, Taiwan, France, Germany, Russia and India among others. The EU has also restricted export of PPEs, requiring authorizations 10 Brixiová et al. 2015 11 Calculations based on UNCTADstat 12 Baldwin and Tomiura (2020); Gruszczynski (2020) 13 Todo et al. (2015), Freund (2020) WORLD BANK GROUP Afric R ion, Offic of th Chi f Economist