Impact of COVID in Sub-Saharan Africa

- Summarised from World Bank's authors Calvin Z. Djiofack, Hasan Dudu and Albert G. Zeufack's chapter in COVID in developing economies

The study used simulations with ENVISAGE, World Bank’s computable general equilibrium model to investigate the economic impact of COVID in sub-Saharan Africa. Three scenarios were studied:

• Global spread and severe cases in Africa - Assumptions under this scenario were: 
• The containment measures in the developed economies are lifted after three months
• Activity in China beings picking up amid global slowdown
• Global growth slows by up to 3.5 percentage points before picking up in 2021
• COVID spread to every sub-Saharan country
• China like scenario that no new cases within three months, that is, outbreak ends by July 2020 
• Propagation profile close to Ebola outbreak in Guinea
• The economic impact of Ebola used to calibrate the exogenous shocks. Size of shocks rescaled for each country according to the Epidemic Preparedness Index (EPI) 
• Global spread and a catastrophic outbreak in Africa - Assumptions under this scenario were
• Policy responses slow, ineffective leading to a high number of cases and deaths in 2020 and additional cases in 2021 (like scenario 1 but with higher cases)
• Propagation profile close to Ebola outbreak in Sierra Leone and the same was used for calibration of economic impacts
• Global spread and non-cooperative African response - Assumptions under this scenario were
• All similar to scenario 2 but with regional trade blockades 

Their model considers two types of transmission channel for shocks -

• International channel
• Oil prices - Oil production in the rest of the world increases by 15% as a result of lifting the cap on oil production by major producers. Demand falls by 20%. Size of the shock according to this would be the difference between pre and post-crisis price projections
• Tourism flows - Size of the shock was defined as the difference between pre and post-crisis tourism flows. The impact on the tourism sector was assumed to be the same as during the SARS crisis. The shock was implemented by increasing transaction cost and decreasing total factor productivity of the sector by 2% in the model
• FDI - The magnitude of shock simulated was the one observed during 2014 Ebola pandemic in West Africa, decreasing FDI
• Domestic channel
• Labour market participation effect - Fear among households would cause restrictions labour supply, at least the households which can afford it. The size of the shock was taken the same as the one observed in West Africa during the Ebola crisis in 2014 (only African countries)
• Capital utilisation - Lack of utilization and increased uncertainty would delay investments. 
• African countries - Calibrated as the same observed in West Africa during Ebola
• Other countries - Calibrated in a way so as to match the level of GDP projected during the crisis
• Labour productivity - 
• African countries - Calibrated as the same observed in West Africa during Ebola
• Other countries - Calibrated in a way so as to match the level of GDP projected during the crisis
• Trade - Implemented by an increase in transaction costs in all countries. The size of the shock was calibrated to match the increment in unit export and import prices observed in West Africa during the Ebola crisis
• Regional trade - For scenario 3, implemented by increasing transaction costs. The regional trade was assumed to fall by 90%

# My thought - Would domestic structural parameters (calibration) remain the same during this crisis as Ebola? Wouldn't a global downturn (global variables) have worse numbers than Ebola?

For calibration, the mention of West African countries meant variable deviations from normal observed in Sierra Leone and Guinea during Ebola 2014-16. The domestic shocks for other countries were then scaled according to country-specific conditions.

1. Short-medium term effects of COVID:

• Growth effects
• Continent-wide
• Under scenario 1
• Growth would be slower by about 5.7% in 2020 (from 2.6% in 2019 to -2.5% in 2020) and by 1% in 2021 compared to baseline
• The decline of growth is due to lower consumption (decline by 6%), lower private investment (decline by 8%) and lower exports (decline by 4%)
• Exports decline due to higher transaction costs. Investment declines due to a reduction in FDI and lower government and household savings (reduced income due to low productivity and employment). Deterioration of fiscal balance leads to an increase in interest rates which declines private investment. Lower imports contribute positively to growth
• 45% of the impact on sub-Saharan countries is due to domestic shocks
• Under scenario 2
• Growth would be slower by 7.6% (from 2.9% in 2019 to -4.7% in 2020) in 2020 and by 9.8% in 2021 compared to baseline
• 65% of the impact on sub-Saharan countries is due to domestic shocks
• For domestic shock transmission: reduction in productivity, reduction in capital utilisation and later increased trade costs are the order of importance
• For international shock transmission, commodity channel (oil price crash) is the most important followed by FDI and trade flows
• Sub-regional
• Asper estimates oil-producing economies would be hit the hardest
• Oil-importing and metals exporting countries would suffer badly as well
• Impact on three largest African economies - Nigeria, South Africa and Angola would be significant due to declining oil prices, capital outflows, declining metal prices and containment reasons
• Impact of domestic shocks on South Africa would be lower than many others because of it's higher EPI
• Due to Nigeria's relatively closed economy compared to the other two, it would be hit relatively less by international shocks. But domestic shocks would hit it hardest due to its low EPI
• Amongst sub-regions
• Central Africa would be impacted the most due to more oil-exporting economies and lower EPI nations
• East Africa would be the least hit because of oil-importing economies and higher EPI
• West Africa suffers because of the rapid spread of COVID in this region and more mining and tourism-dependent economies
• Fiscal effects
• Under scenario 1
• Revenues would be lower by 12% than baseline in 2020
• Under scenario 2
• Revenues would be lower by 16% than baseline in 2020
• Distributional effects
• Agricultural and services sector would see sharp declines
• Manufacturing sector would be 5% higher than baseline because increased transactions cost would boost domestic production
• Non-cooperative policy effects
• Trade blockade would reduce GDP by 8.5% from the baseline in 2020
• Literature shows that regional trade in Africa mainly employees poorest households and especially women in informal activities, so non-cooperative policies would effect them
• It could also affect food security in the region

2. Long-term economic effects: The study says that COVID shock is mainly a demand shock and would vanish in the long term. However, depending on the severity and depth of crisis, it will have an effect through productivity, capital accumulation and human capital. In 2014 Ebola crisis, declination to labour productivity due to declined human capital and infrastructure was seen.

• GDP 1% lower permanently in the optimistic scenario. In a catastrophic scenario, it would be 4% lower
• In the absence of policy interventions, L type recovery where GDP doesn't return to pre-COVID levels even when growth does

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