Economic Analysis: #COVIDー19’s test to the Ethiopian economy

Getachew T. Alemu, (@NapsterE), For Addis Standard 

Addis Abeba, March 18/2020 – The world is shocked with the spread of a new strain of Coronavirus, now called COVID-19, which is categorized by the World Health Organization (WHO) as a global pandemic. The virus is spreading so fast that countries are closing borders, restricting mobility, instituting strict surveillance measures, establishing and operationalizing quarantines, putting money into social awareness programs, importing sanitation products and supporting the needy (particularly the elderly).  

Globally, markets are seeing downward spiral. Major indices such as DOW Jones, NSADAQ 100, S&P 100, and NIKKEI have all been witnessing declines in the past few weeks. Jobs are getting lost, while savings are eroding in the face of increasing health care expenditures. Vulnerable groups, such as people without health insurance coverage, have increasingly become vulnerable.

Ethiopia has identified the first victim of the virus on March 13, 2020. By the time this article was composed, the total number of confirmed cases has reached 6, while the total number of people under close follow-up stands at 992. Prime Minister Abiy Ahmed has ordered 15 days of ban on gatherings, sporting events and school. As it stands, it looks like the number of cases will increase and so will the magnitude of the problem. But there is a higher chance to put the problem under control if stakeholders, from religious institutions to business people, are to coordinate their acts towards preventing the spread of the virus.

Much as the virus is affecting many aspects of life, the primary victim seems to be the economy. Although economic gurus are still struggling to understand the channels and magnitude of the impact of the virus on the global economy, it has become glaringly visible that the spread of the virus will put more pressure on the developing economies than developed ones. In light of what might transpire in Ethiopia, this article intends to look into where the economic strains of the pandemic will be and what needs to be done.

By so many standards, the Ethiopian economy remains fragile. For one, it hosts about 26 million absolute poor people, which is a huge poverty burden, in both prevalence and depth. At this point in time, 8.4 million Ethiopians need emergency food assistance, while additional 8 million live under the Productive Safety Net Program (PSNP).

Although the macro economy has been witnessing growth in the last 16 years, averaging around 10.1%, it remains to shoulder a debt burden of 58% of GDP, a budget deficit of 3.7% of GDP, a trade deficit of 12.4% of GDP and a current account deficit of 4.5% of GDP.

Besides, the economy is one wherein 58% of the population lack access to clean water, 89% live without safe toilets, 55.7% survive without electricity and 48 million people live further than 2Km from all-weather road. Despite the fast improvement in access to primary education and health care services, quality remains a huge challenge.

In light of this, the COVID-19 pandemic will have multiple channels through which it will impose a burden on the economy. First and for most, the fight against the pandemic will have a direct impact on the fiscal space. It will increase the cost of health care provision, in the form of costs for prevention, testing, identification, isolation and care. As this comes mid-way in the fiscal year, the expense will have to come from the rather tight budget line, which saw a supplementary budget of 27.9 billion Br last week. Covering this cost will put pressure on the fiscal space that already hosts a budget deficit of 97.1 billion Br.

As first round financing, the government has announced that it has allocated 300 million Br to the fight against the pandemic. But this seems to be small, compared to the risk related to the pandemic. As such, it is easy to expect further pressure on the fiscal space, which would mean further tightening in the government expenditure.

One has to understand that this is coming at the time that the government is implementing cost-saving mechanisms, in a wish to re-balance the public-private sectors, reduce budget deficit and contain inflation. Paradoxically, inflation has lately been increasing so fast that the annual inflation stands at 21.8%.

It does not end there, however. Instead, the increasing cost for the fight against COVID-19 entails expenses in the form of supplies, instruments and devices (such as testing kits and regents), man hour, training, surveillance missions and associated overheads, media air time and communication materials, cost of shifting personnel and equipment from standard health care services and what have you. All this means, the pressure on the health care line of the budget will surely be huge.

One has to take into account that in the case of a temporary lock down of some parts of the country, if the virus sees a surge, then, this will have an impact on the economy by way of slowing down economic activities, such as merchandise trading, export and manufacturing. In this sense, it will really be a challenging time for economic players in these sectors as they have to live with permanent expenses, such as payroll, while their production process is affected by the pandemic.

As an import dependent and supply constrained economy, one major channel through which the pandemic will be affecting the economy is through affecting imports. As of now, China, the manufacturing hub of the world and the number one import sourcing country for Ethiopia, is stuck. Middle Eastern countries, European Union and North America have also imposed their own flight restrictions. This means that importers could no more travel to make orders, freight forwarders could not effectively facilitate trade and transitors could not do the facilitation as they would normally do. Shipping lines will also be affected by the travel bans and it will take more time for cargo to be transported due to new protocols in terms of certification.

These all mean further pressure on the already constrained supply chain of the economy. No doubt that there is also a local element to it.

Cognizant of the risk related to the pandemic, the local segment of the supply chain will also experience new pain points. These will include lower agricultural marketable, higher farm gate price, sluggish supply due to longer collection time, longer transport time, higher loading and unloading markup, higher distribution cost and longer retail filling.

At the end of the day, the imported as well of local pressure on the supply chain will express itself in the form of shortage of commodities in the market as well as higher prices. Certainly, this will be a huge challenge for consumers that have already been affected by the ever-rising inflationary pressure in the economy.

Pushing the inflationary cycle upwards is the panic purchase that often follows such crises. It is typical for consumers to resort to stocking in such cases. The rush for stocking will instigate an overall panic purchase in the market, pushing prices up and draining available supply. What has transpired in the markets of Addis Abeba and major cities around the country in the last couple of days, from basic consumables, such as rice, to durables, such as cleaning equipment, is exactly that. Face mask that was being sold at 5 Br per a piece is now being sold at 300 Br per piece.

One aspect of the economy that will be hit hard by the pandemic and its resultant outcome is the service sector. This constitutes airlines, hotels, restaurants, event management, and tourism among others. According to projections by IATA, the global airline industry will see a passenger business loss amounting to between US$63 billion and US$113 billion due to the pandemic. Africa’s largest Airline, Ethiopian, has got itself into serious austerity measures, including cost savings, staff hour optimization, diversification of earnings and possible reduction in work force. Hotels are seeing considerable cancellations, while tour and travel agents are also feeling the hit. Reduced public gatherings mean reduced rate of eating out, lesser events and lower tickets to facilities, such as parks and museums. These all will add up to considerable reduction in service sector earnings, growth and jobs. Noting that service sector contributes over 45% of GDP, the impact of such reductions on the larger economy will not be small.

Although with a lesser magnitude, manufacturing will also be affected. And this has to do with availability of labor, costs of ensuring safety to employees, negative impact of the pandemic on input supply and output marketing, and overall reduction in production. For a sector that remains struggling with power outages, bureaucratic and costly customs, higher staff turnover, increasing cost of production and unfavorable business environment, the new lines of costs will further the challenge. If one is to go by the latest figures, this sector contributes 5.5% to the GDP and has been growing an average of 15.5% in the last 10 years. The new strain from the pandemic will have its toll on this trajectory, negatively affecting the value addition in the economy.

Slowing business, particularly stalling external sector, will certainly be a challenge for the financial sector. Much of the short-term portfolio financing of banks goes to the merchandise sector. This remains one of the sustainably profitable segments of their business. As such, a slowdown in the external tradable sector of the economy will put a pressure on the financial institutions. For a sector with limited opportunities of short-term investments, this will really be painful.

On the other hand, the increasing cost of living and higher health care costs will also mean lower savings going to the banking sector. No doubt that this will add to the pain the sector has been feeling from the liquidity crunch, largely caused by unimaginably high loan to asset ratio.

Generally speaking, the pandemic will put considerable challenge to the private sector. It should be recalled that the Ethiopian private sector is infant, less capitalized and hardly institutionalized. As such, it is vulnerable to seasonal changes. It is obvious that a factor as global as COVID-19 will have sizeable impact on the private sector. This is furthered by the fact that the market is also undeveloped and provides little alternative for risk diversification to the private sector.

As a specialized sub-sector of the private sector, the healthcare service industry will surely be affected hugely. Included in this are hospitals, pharmacies, emergency care service providers, importers, medical equipment suppliers, specialized laboratories, technical service providers and consultants. All will be overstretched and under-supplied, while at the same time the expectations from them will be tremendously high.

As the saying goes, extraordinary times require extraordinary measures. Regardless of the fact that the government is overstretched with multiple demands, from ensuring macro stability to national elections, it should take the fight against COVID-19 as a strategic priority. Recognizing the impact the pandemic will have on the economy and the resulting pressure on jobs, income and livelihood, the government has to institute tailored stimulus package. It ought to avail resources to support the private sector, with particular focus on relieving the pressure that health care service providers feel.

There is a need for the National Bank of Ethiopia (NBE) to avail foreign currency for health care suppliers, manufacturer of sanitation products and specialized testing laboratories. This is vital as controlling the spread of the virus will heavily depend on the efficiency of these agencies.

On the other hand, the stimulus package ought to also consider the service sector. Unless direct support is availed to service sector players, the sector will be seeing huge lay offs, which, during such a pandemic, will further the social cost to the country. As such, a stabilization fund wherein service sector players are de-risked for losses, in line with their willingness to retain employees have to also be crafted.

None of the above, however, will be possible without a fiscal readjustment. As such, it is high time for the central government to get back to the drawing table and adjust its fiscal space in line with the new priorities. As its fiscal space is pressured, what the time requires is fiscal optimization and risk-indexing of the fiscal elements. As such, it is time for the administration of Abiy Ahmed (PhD) to redo its sensitivity analysis and redraw the budgetary tangents. Only then can it equate its aspiration for controlling the spreading pandemic that is stressing people, institutions and systems.

There seems to be enough will in the administration to do what it takes to control the pandemic. It is now time to translate that will into a currency of actions. If all is done right, it will not take that long before the country stands stronger in the face of COVID-19.

But first thing first, let us all wash our hands, avoid touching our faces, clean and disinfect our surrounding and stay informed. AS

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• Editor’s Note: Getachew T. Alemu is an investment and development expert with over 15 years of experience in the public, private and CSO sectors. The views expressed in here do not reflect the views of the organization that he is affiliated with. He can be reached at getupfront@gmail.com.