The COVID-19 crisis is severely straining African economies, threatening to undermine decades of progress and jeopardize long-term goals, including economic transformation. But there are certain policy measures that, if prioritized, can help economies rebound more quickly after the immediate crisis and keep the transformation agenda on track.
As Africa entered a new decade, there was sustained, if not vibrant, optimism for the future. Many of the continent’s economies were continuing to grow, while poverty was continuing to decline. In 2019, regional growth was 2.4 percent and as of March 2019 more Africans were escaping extreme poverty than falling (or being born) below the poverty line. But the pandemic inflicted severe strain on governments and economies in 2020, resulting in Sub-Saharan Africa’s first recession in 25 years. The 6.1 percent decline in per capita income in the region was the deepest contraction on record, according to the World Bank. The lasting effects will pose dire challenges to Africa’s growth trajectory and transformation agenda.
Many African governments quickly enacted “stay at home” measures and emergency fiscal and monetary policies. For example, Ghana committed $100 million to support preparedness and response, and another $166 million to support selected industries, while the South Africa Reserve Bank has reduced the policy rate by 100 bps to 5.25 percent and announced measures to ease liquidity conditions. To support these efforts, the African Union and the Economic Commission for Africa are tracking policy measures and providing advice, while the African Development Bank floated a $3 billion “Fight COVID-19” social bond. The international community is also responding with various measures of emergency relief such as loans and grants, while the G20 agreed to temporarily halt debt payments for the world’s poorest countries.
However, even after the immediate COVID-19 crisis abates and the necessary economic and social adjustments are made, African governments and their development partners must ensure that Africa’s transformation agenda—which is critical to the continent’s long-term sustainable and equitable growth—is not permanently derailed. In fact, governments should use the urgency of the COVID-19 crisis to make meaningful policy changes that will not only help in the short term but also strengthen the long-term recovery efforts.
Emergency situations often create opportunities for lasting reform. For instance, during the HIV/AIDS and Ebola crises in Africa, important health sector reforms were initiated at the national, local government, and community levels. Likewise, the series of macroeconomic crises of the 1980s and 1990s led to an improved macroeconomic policy environment in in many countries that led to vibrant economic performance in from 1995 through 2008.
After the immediate crisis abates and the necessary economic and social adjustments are made, African economies must move as quickly as possible to regain lost GDP, jobs, revenues, investments, and productivity. This paper is targeted specifically to forward-looking policies. It is intended not to replace important emergency measures that save lives but rather to protect the future.
What follows are ten key transformative policy priorities for Africa in the aftermath of the pandemic: economic “rebound” measures that will help position economies for a more rapid and sustainable period of growth. The policy recommendations are grouped in four areas: resource mobilization and management; governance, effectiveness, and transparency; business and investment environment; and digital innovation and entrepreneurship.
While there are many policy considerations across all sectors—first and foremost in public health, which is widely understood and not included here—the actions emphasized below provide a balanced approach for both immediate relief and longer term economic transformation. They are not necessarily new recommendations; in many cases these are actions that should be taken regardless of the pandemic. But now, they are more critical than ever to recapture the gains lost—and to keep the transformation agenda on track.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Resource Mobilization and Management
Some African governments are already taking measures to create fiscal space, such as reallocating budget resources to immediate COVID-19 needs and health responses or rethinking or postponing public sector projects. This crisis response environment also provides an opportunity to undertake transparent value-for-money assessments, which could include dropping some projects altogether, and enacting crucial measures to better manage and mobilize resources.[/vc_column_text][vc_tta_accordion gap=”10″ c_icon=”chevron” active_section=”0″ collapsible_all=”true”][vc_tta_section title=”1. Close tax loopholes and eliminate exemptions.” tab_id=”1589929853593-3d73ad0c-5626″][vc_column_text]On average, the tax-to-GDP ratio in sub-Saharan African has risen by only 2 to 3 percentage points of GDP in the past two decades, and at least ten countries’ tax to GDP ratios remain below 15 percent. With the collapse of industry in most countries and the extra burden of tax forgiveness related to COVID-19 response packages, revenue generation will become significantly more difficult.
Governments should move swiftly to identify tax loopholes and eliminate exemptions and concessions, particularly for global corporates and wealthy individuals. This would include taking steps to prevent tax-base erosion and profit shifting by companies from one jurisdiction to another. In this time of crisis, such actions will strengthen the social contract between citizens and government by addressing burdensome “tax expenditures”, which are often incurred without parliamentary oversight and a lack of public transparency. A 2019 McKinsey report suggests that programs to enhance tax and tariff performance, including closing tax loopholes, could have the potential to deliver revenues of between two and three percent of GDP, partially offsetting slower growth impacts on revenues.[/vc_column_text][/vc_tta_section][vc_tta_section title=”2. Enact policies to increase resource mobilization after the pandemic.” tab_id=”1589929853661-2179e5c9-901b”][vc_column_text]Tax collection levels are highly uneven across the African continent. In 2018, South Africa’s tax-to-GDP ratio stood at 25 percent, compared to 16 percent for Kenya and only about 11 percent for Ghana and Ethiopia. Even in oil-exporting nations such as Nigeria, tax collection excluding resource rents still makes up less than 10 percent of GDP. In most African countries, there is significant room to increase tax revenues through various means, such as simplifying VAT policy, enforcing tax collection, and utilizing technology to create more efficient tax systems.
Governments can take steps to improve enforcement and collections through increased investment in revenue authorities and audit functions, and by preparing for significantly expanding property tax revenue. Over the medium term, digitalization now provides opportunities to improve compliance through online registration, paperless tax transactions, and mobile payments. According to Doing Business 2020 the use of online systems for tax filing and payment resulted in efficiency gains in several Sub-Saharan countries.[/vc_column_text][/vc_tta_section][/vc_tta_accordion][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Governance, Effectiveness, and Transparency
Many countries are taking actions to improve government effectiveness and speed public sector response times during the crisis. While increased government interventions are necessary, so too are actions to increase transparency and efficiency and to help ensure COVID-19 emergency packages are well governed and effective. [/vc_column_text][vc_tta_accordion gap=”10″ c_icon=”chevron” active_section=”0″ collapsible_all=”true”][vc_tta_section title=”3. Eliminate overlapping government initiatives.” tab_id=”1589932208709-79aa818d-09b1″][vc_column_text]For most governments, it will be difficult in the midst of the COVID-19 crisis to make swift organizational changes, but processes should be put in place now to implement significant government streamlining over the medium term. And some much-needed changes can be introduced as part of economic recovery plans. For example, governments with a multitude of job creation or agricultural support programs should move to consolidate initiatives for improved effectiveness and impact, resulting in significant savings. Along the same lines, there has been a trend in Africa to expand presidential cabinets and ministerial posts, leading to unwieldy management and overlapping mandates. (By contrast, Ethiopia has reduced cabinet posts by nearly one-third.) The recovery period is a sensible time to address bureaucratic bloat for a more focused and efficient use of people and resources.[/vc_column_text][/vc_tta_section][vc_tta_section title=”4. Improve public expenditure management.” tab_id=”1589932208803-a599bb0f-17df”][vc_column_text]Given the fiscal space challenges, governments should use the urgency of the crisis to ensure all public monies are used in the most efficient manner, such as spending on activities that either respond directly to the crisis or on activities that will promote growth and economic transformation. In fact, if managed well, a reduction in public sector spending can help crowd in the private sector. To this end, it is critical to improve budget management by line ministries, with special attention to waste and fraud. This would include vigorous vetting of government projects based on sound economic, technical and financial criteria. The capacity of the auditor general should be strengthened for rapid and robust audits and reviews. Where applicable, results-based budgeting should be introduced. In all countries, an enhanced effort should be launched to address longstanding corruption issues and pass legislation where needed to strengthen those anti-corruption efforts.[/vc_column_text][/vc_tta_section][vc_tta_section title=”5. Revisit national development strategies.” tab_id=”1589932208902-84b53403-40fc”][vc_column_text]Most countries have national development strategies, often aligned with the Sustainable Development Goals, but in many cases they are not backed by financing plans—and thus are not implementable strategies. In the context of the budget measures discussed, these strategies should be revisited with a view to ensure they serve as roadmaps for the economic recovery. It will be especially important to develop mechanisms by which SMEs and the informal sector can access support quickly and easily, including addressing supply chain challenges and basic production. Some governments such as Ethiopia, Kenya, Ghana, and Uganda quickly adopted policies to keep agricultural value chains active, but more will need to be done in the aftermath of COVID-19. In particular, governments should institute progressive food import substitution policies that provide market-oriented incentives for national food production and processing, while using the same to support women and smallholder farmers.[/vc_column_text][/vc_tta_section][/vc_tta_accordion][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Business and Investment Environment
To sustain the business sector, some African governments are instituting new policies related to taxes, labor, access to credit, and debt services. In most countries, these actions include support to businesses and individuals as a response to temporary jobs cuts. But looking beyond the immediate impact of lock-downs and short-term unemployment, governments should focus primarily on ensuring an improved environment for business and investment.[/vc_column_text][vc_tta_accordion gap=”10″ c_icon=”chevron” active_section=”0″ collapsible_all=”true”][vc_tta_section title=”6. Increase the ease of doing business.” tab_id=”1589932060664-a57af029-ae76″][vc_column_text]African economies will only recover from this crisis with robust job growth if there is a thriving private sector. Extraordinary efforts should be taken now to pave the way for easy and rapid private sector activity, including the establishment of new firms, corporate expansion, and improved company registration and taxation policy. According to Doing Business 2020, Sub-Saharan African economies raised their average ease of doing business score by just 1 percentage point in the previous year. Even in areas where African countries have made strides, they are well behind others. For example, in high-income economies, 97 percent of companies use electronic filing or payments, whereas in Sub-Saharan Africa it is only 17 percent. The “beyond emergency” policy measures need to address the most pressing binding constraints to business in each country—which in many instances will be access to credit, contract enforcement, labor regulations, and reliable provision of utilities.[/vc_column_text][/vc_tta_section][vc_tta_section title=”7. Improve investment policy in key sectors.” tab_id=”1589932060745-c6f12434-18c8″][vc_column_text]Closely related to improving the ease of doing business, governments should move quickly to foster investment after the immediate crisis, particularly in key sectors such as infrastructure and manufacturing. The investment pipeline should be re-assessed (in coordination with the private sector) to prioritize those projects that are in the greatest national interest, will lead to job creation, and will have the largest economic impact in the medium term. Investment promotion agencies should revise standard pitch documents, and governments should quickly make policy changes related to regulatory, financial and legal issues. While the global economy is being greatly impacted, there will remain a very large latent capital base looking for bankable projects—and Africa should take advantage.[/vc_column_text][/vc_tta_section][/vc_tta_accordion][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Digital Innovation and Entrepreneurship
In response to the crisis, governments across Africa will be looking to find new solutions to old problems and to crowd in finance to spur employment. There have already been many examples of innovation efforts such as leveraging diaspora finance and supporting entrepreneurs. There has also been a rapid increase in the use of “contactless” technologies for business, health care, and learning. Governments should start planning now to accelerate their digital economies and foster rapid and broad innovation.[/vc_column_text][vc_tta_accordion gap=”10″ c_icon=”chevron” active_section=”0″ collapsible_all=”true”][vc_tta_section title=”8. Crowd in venture capital for entrepreneurs.” tab_id=”1589932289949-2f040d3c-573a”][vc_column_text]In seeking investments, African governments should actively encourage venture capital funding to foster entrepreneurship and accelerate advances in technology and innovation. Even though some 150 digital startups mobilized a record $1.16 billion across Africa in 2018, that figure represents less than 1 percent of global incubator funds—all the more notable since some 80-90 percent of Africa’s venture capital funding originated outside the continent. By comparison, India attracted $7 billion in 2018; China’s total was a staggering $70 billion. By crowding in more venture capital, there is tremendous scope for countries to spur business and economic activity, especially in tech. For example, the Digital Transformation for Africa initiative, a coalition led by the African Union, involves increased funding commitments of $100 billion over the next decade to close Africa’s digital divide.[/vc_column_text][/vc_tta_section][vc_tta_section title=”9. Support an innovation ecosystem.” tab_id=”1589932290036-e4c4d30f-1f4f”][vc_column_text]Technology and innovation hubs are proliferating across the continent—approximately 620 active tech hubs were identified in 2019. But these hubs are often disconnected from government policy and are not well integrated into the private sector. As a result, innovation often occurs in “silos” with limited overall economic impact. Countries should prioritize a more robust and inter-connected innovation ecosystem between entrepreneurs and tech hubs, funders and development partners, and policymakers and other government actors. Some steps are being taken; the Digital Transformation for African initiative entails a comprehensive new approach and tighter policy coordination. In addition, policymakers in particular have an important role to play in supporting an innovation ecosystem by ensuring ease of entry for entrepreneurs, maintaining robust public-private dialogue, and instituting clear regulations for innovation finance.[/vc_column_text][/vc_tta_section][vc_tta_section title=”10. Develop comprehensive innovation policy.” tab_id=”1589932385203-59bc9911-e9d2″][vc_column_text]A few countries, including Kenya, Mauritius, Morocco, South Africa, and Tunisia, have comprehensive digital or innovation strategies in place—most focused on digital technology. The strategies should be aligned with national development priorities as discussed previously and highlight sectors that will support job creation. They must also directly address skills that will be needed for the next generation and the future of work in Africa. The Fourth Industrial Revolution is ushering in new technologies—artificial intelligence, the internet-of-things, and gene therapy, among other examples—that will reshape entire sectors of the economy. Likewise, the COVID-19 crisis is changing how people work, learn, and receive services such as health care. Countries that have not developed such strategies should start now, with a view to using the economic recovery as an opportunity for entrepreneurs to lead development of new markets.[/vc_column_text][/vc_tta_section][/vc_tta_accordion][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]
Given the unprecedented nature of the COVID-19 crisis, the most immediate policy actions for any state to undertake are obvious. Governments must first and foremost direct their resources and focus their responses on ensuring public health and safety. In this regard, the actions of many of African leaders has been heartening. At a national level, heads of state, central bank governors, ministries of finance, and health sector leaders have moved quickly. In most instances, citizens have responded appropriately to stay at home orders and where possible, social and financial assistance has been provided to the poorest and sectors most affected.
However, supporting design and implementation of policy reforms to ensure a faster economic rebound will face many barriers and challenges. For example, there will be a critical need for stronger cooperation and intra-Africa trade to increase the regional provision of critical supplies such as food and medical equipment—but the pandemic forced further delay to the implementation of the African Continental Free Trade Area Agreement.
There also is no way to predict how long it will take for global medical systems to gain full control over the COVID-19 pandemic. Whatever the timeframe, the economic rebound is likely to take many years beyond that. Finally, addressing all challenges will require transformative political leadership now more than ever: a clarity of vision, implementing smart policies, governing selflessly, and building trust among citizens, which not only will make implementing reforms during the rebound easier but also greatly enhance the chances of success.
The recommendations outlined here must, of course, be adapted to each local context, with the full recognition that not all reforms will be feasible in many countries. They also are not exhaustive, and governments will need to address a wide range of other policy challenges. But if the recommendations are prioritized and pursued, they will help African economies rebound more quickly over the next three to five years and help ensure transformation goals—and all the gains made thus far—are not lost in the process.
This paper was originally published in May 2020. It was updated in January 2021.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column][vc_column_text]