East Africa Economic Outlook 2020 - Coping with the COVID-19 Pandemic

Published on 14th July 2020

East Africa’s economies are slowly transitioning from agriculture to services. The contribution of agriculture to the region’s GDP went down from an average of 33.4 percent at the turn of the millennium to 28.3 percent in 2018.This was against an increase in the contribution of services to GDP from 44.6 percent in the early 2000s to 53.8 percent in 2018. This movement is more prominent in Seychelles, Eritrea, Kenya and Rwanda where services contribute 80,67, 60 and 47 percent of GDP, respectively. However, services are not the higher value-added activities in the region to trigger the desired structural transformation. In line with this shift, the ILO had estimated that the number of employment opportunities in the region’s service sector would have more than doubled to 40.8 million while those in agriculture would have increased at a slower pace from 56.7 million to 97.6 million in 2020. These estimates are no longer tenable given the ongoing supply and demand shocks related to COVID-19-business disruptions have lowered production while the loss of income, fear of contagion and heightened uncertainty has made people to spend less, thus lowering aggregate demand with the service sector being hit the hardest.

At the global level, economic growth projection has taken a hit in the face of COVID-19 pandemic. The global economy grew by an estimated 2.9 percent in 2019 and was projected to grow by 3.4 percent in 2020. However, the COVID-19pandemic is expected to have negative impacts on the global economic growth. New projections indicate that the global economy in 2020 will contract by 3 (IMF’s WEO (April 2020)), far lower than the 2.9 percent growth rate estimated in 2019. Similarly, Africa’s economic growth projection for 2020 has also been revised downwards from 3.9 percent to -1.7 percent in a baseline scenario (COVID-19 is contained by the third quarter of 2020) and -3.4 percent in a worst-case scenario (COVID-19 crisis persists to the end of 2020). Sub-Saharan Africa’s economic growth is projected to fall sharply from 2.4percent in 2019 to between -2.1 percent and -5.1 percent in 2020, the first recession in the region over the past 25 years(World Bank’s Africa’s Pulse (April 2020)). 

East Africa’s GDP growth was projected to be 5.1 percent in 2020 (pre COVID-19)- midway between the 5 percent base in 2019 and 5.2 percent peak in 2018, and remaining the fastest growing region in Africa. All East African countries were projected to positively contribute to the growth, except for Sudan whose economy was projected to slow by 1.6percent in 2020 due to conflict. The region’s growth is largely driven by strong public spending in infrastructure, rising domestic demand, the benefit of improved stability, new investment opportunities and incentives for industrial development. However, with the COVID-19 related disruptions of fiscal expenditure plans, revenue mobilization, supply chains and international market demands, the region’s growth will be dampened significantly. Consequently, the region’s 2020 growth is projected at 1.2 percent in the baseline scenario and 0.2 percent in the worst-case scenario. A recovery of 3.7 percent in the baseline scenario and 2.8 percent in the worst-case scenario is however projected in 2021 under the assumption that COVID-19 would be contained in the short-to-medium term.

East Africa’s inflation was projected to remain the highest in the continent in 2020 at 14.2 percent, slightly above the13.5 percent experienced in 2019. With COVID-19, 2020’s inflation rate is project to rise further to 17.3 percent in baseline scenario and 18.0 percent in the worst-case scenario. The region’s fiscal deficit was expected to remain relatively stable, from a deficit of 4.9 percent of GDP in 2019 to 4.7 percent in 2020, but with the outbreak of COVID-19, this is no longer the case. Fiscal deficit in 2020 will be -6.1 percent of GDP in the baseline scenario and -6.8 percent in the worst-case scenario. Public debt remains high at 59.2 percent of the region’s nominal GDP, way above the IMF’s recommended threshold of 40 percent for developing countries, and is expected to worsen as countries seek additional resources to enhance the capacity of their health systems and to tackle the socio-economic effects of COVID-19. The risk of debt distress has increased in Ethiopia, Eritrea, Kenya, South Sudan and Sudan. The region’s current account deficit was projected to slightly deteriorate to 6 percent of GDP in 2020 from 5.9 percent in 2019, this has also been revised in the wake of COVID-19 to 7.0 percent of GDP. Overall, the impact of the region’s economic growth on poverty, inequality and unemployment is expected to remain minimal, with inequality, poverty and unemployment expected to persist in 2020.

East Africa’s growth in labor productivity was expected to average 1.2 percent per annum over the period 2018-2020, slightly above Africa’s 0.9 percent. Djibouti was poised to record the highest level of labor productivity of all East African countries, marginally improving from 4.5 percent in 2018 to 4.6 percent in 2019 but with a slight decline to 3.8 percent in 2020. Rwanda’s labor productivity was expected to remain constant at 3.9 percent in 2019 and 2020 while Ethiopia’s was expected to decline from 3.7 percent in 2019 to 3 percent in 2020, and Tanzania’s to fall from 3.5 percent in 2019to 3.4 percent in 2020. South Sudan was considered as the only country in East Africa that recorded negative growth in labor productivity during 2018-2020. However, due to the impact of COVID-19 crisis, all East African countries are expected to experience low growth in labor productivity in the year 2020.

To harness East Africa’s growth prospects and mitigate the underlying external and domestic risks, a multiple of political and socio-economic policy interventions are necessary. These include consolidating peace and stability, accelerating structural transformation, strengthening macroeconomic policy coordination and diversifying the development financing sources. Other interventions may include deepening regional integration and developing skills for the workforce of the future. In the face of COVID-19, the private sector and development partners must come in to help restore the growth trajectory, create employment and accelerate poverty reduction. Equally, East African governments must come up with targeted fiscal, monetary and social insurance policies to moderate the social and economic impact of COVID-19. While countries could initially undertake country-specific interventions, joint and collaborative efforts would be desirable given the integrative nature of the region. In the short term, there is need for donor emergency response package to channel funding in critical areas such as strengthening the capacity of the health systems and supporting poor households already in safety net programs and others. In the medium-to-long term, there is need to stimulate domestic demand to counter the effect of weak global demand while deepening structural reforms to support the transition from public sector to private sector led growth in the region. To diversify development financing sources, East African countries should reduce over-reliance on government borrowing to finance public investments, which has contributed to a rise in the risk of debt distress, and instead explore other financing avenues such as the use of public private partnerships and securitization of infrastructure assets, and undertake complementary measures to boost domestic savings mobilization.

Though East Africa is expected remain among the fastest growing in the world, only a few of the region’s workers will have high quality jobs. This is partly due to low skill levels of the labor force, largely to the region’s low quality of education and skills development. East African countries adopt varied education systems ranging from three-cycle to two-cycle with years of schooling ranging between 11 and 16 years. The region’s education systems equipped the population with an average of five years of schooling, implying low educational outcomes. Only five of the 13 countries in the region have mean years of schooling which is above the region’s average of five years. These are Seychelles (9.5 years), Kenya (6.5 years), Uganda (6.1 years) and Tanzania (5.8 years). Ethiopia has the lowest mean years of schooling at 2.7 years. Close to 5 million adolescents and 8 million children in East Africa are out of school with Sudan accounting for about2.6 million out of school children, slightly above Ethiopia (2.3 million) and South Sudan (2.2 million). The large number of children who are out of school compared to adolescents indicates limited access to education, particularly at pre-primary school level.

East African countries are also confronted by high school dropout rates, especially at primary school level. This increased from 35 percent in 2010-2014 to 49.7 percent in 2015-2018. Sudan had the highest primary school dropout rate at 65 percent, followed by Uganda, Burundi and Rwanda. Educational outcomes are, however, going to be dampened by the COVID-19 crises that has made all the countries in East Africa other than Burundi close schools and universities to mitigate the spread of the virus. The closure of schools and universities has affected close to 90 million learners of whom 49 per cent are girls. While school closures seem to present a logical solution to enforcing social distancing within communities, it could create longer-term human capital issues for East African economies, widen learning inequalities, and hurt vulnerable children and youth disproportionately particularly girls who may never return to school even after schools reopen. It is estimated that East African countries are likely to experience a COVID-19effect of at most 10 percent of a standard deviation on educational outcomes.

Transformation towards services and regional integration in East Africa are expected to boost the region’s demand for educated and skilled labor. The Northern Corridor Integration Project (NCIP) and Central Corridor Initiative has created a workforce demand of 4,500-15,500 for maritime transport and shipping logistics in ten years, while Lamu Port-South Sudan-Ethiopia-Transport (LAPSSET) is to generate 200,000 jobs through the port and related activities. The NCIP’s regional demand for Information and Communications Technology (ICT) skills is expected to increase to 8,300-30,600skilled ICT workforce while a regional strategy for scaling up access to modern energy services will demand 12,044professional and technical staff in the geothermal industry.

The region may, however, not reap the full employment benefits of transformation and integration due to the large gap between demand and supply of education and skills, and low levels of education and training which impedes productivity of the labor force. Firms in East Africa generally cite an inadequately skilled workforce as a major constraint on their businesses. The region is also deficient in specialized Technical and Vocational Education and Training (TVET) skills, particularly in transport, energy, manufacturing including agro-processing and ICT, which could dampen the region’s industrialization and integration agenda. There is a weak sync between the skills possessed by the labor force and those required by industry, implying that the region’s inadequacies in education and skills development could result in a less productive workforce.

Policymakers in East Africa should, therefore, focus on improving access and the quality of learning taking place in the education and training institutions; linking universities and other tertiary institutions such as TVETs and the education system in general with industry; and integrating higher learning skills in the curricula by remodeling the curricula to create critical and creative thinkers who are emotionally intelligent to fit in an automated and ICT intensive society. Closure of schools and universities due to COVID-19 calls for change in the way East African countries think about provision of education. It calls for measures to ensure adoption of inclusive methods of digital and distance learning that considers the gender digital divide.

Courtesy: AfDB

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