The East African economy was projected to grow impressively this year but the Covid-19 pandemic has become a damper to the region’s outlook.
However, while the virus is estimated to wipe off billions of dollars from the global economy, there is hope that the East African region will remain resilient in the face of the pandemic. The EAC has been outpacing other regions on the continent defying natural law expectations.
2020 is no different.
According to the African Development Bank (AfDB), the economic disruption caused by the Covid-19 pandemic has slowed the region’s growth projection to 1.2 per cent for 2020.
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Despite the declined projection, the rate still outstrips other African regions with a forecast that the economic growth will rebound to 3.7 per cent in 2021. This projection, however, is dependent on the virus being contained by the third quarter of this year.
Before the virus struck, the region’s economic growth was projected at more than 5.0 per cent which is above the continent’s average growth of 3.3 per cent. The region was above the global average of 2.9 per cent.
The region has had to contend with not only the pandemic shocks but also a locust invasion both of which have contributed to massive job losses resulting in increased humanitarian needs. Looking ahead, these effects will aggravate poverty and income inequality.
AfDB projects that if the pandemic persists until the end of 2020, the region’s growth will tank to 0.2 per cent which is still above Africa’s predicted average of -1.7 per cent.
With small and medium enterprises (SMEs) being the backbone of the region’s economy, East African governments have to come up with ways to ensure that these businesses remain afloat to weather the effects of the pandemic.
In Kenya, the region’s investment hub, a new report by Wylde International shows that nearly a third of SMEs will struggle to pay salaries in the next six months due to dwindling profits. So bad is the situation that 19 per cent of these see themselves defaulting on loans while a similar percentage expect revenue losses in the next six months.
However, there is a silver lining in that the VAT reduction by the government has been highlighted as a useful intervention by 51 per cent of SMEs followed by PAYE reduction.
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Simon Chelugui, Cabinet Secretary for Kenya’s Ministry of Labour said East African countries could overcome the effects of Covid-19 and turn their economies around by mitigating external and domestic risks.
“We need to implement a decisive and coordinated response to contain the spread of Covid-19; mitigate its health and socio-economic effects; accelerate structural transformation; improve the investment climate, and maintain the peace and security of our region,” he said.
The pandemic will affect East African economies through falling commodity prices and trade with restrictions on travel negatively impacting tourism. East Africa has experienced waning financial flows affecting the fiscal and current account balances. On the other hand, disruptions in food supply chains have hurt production and distribution.
AfDB’s lead economist Dr. Marcellin Ndong Ntah has urged East African countries to accelerate real structural transformation that could mitigate vulnerabilities to domestic and external shocks.
Dr. Ntah calls for the transitioning from low value-added production to higher value-added activities under which most SMEs fall.
For East Africa to successfully manoeuvre the challenges brought about by the pandemic, long term goals should be about nurturing skills for the future workforce, broad reforms in education, investment in education technology and establishing linkages between academia and industry.
In addition, the deeply embedded vice of corruption should be dealt with decisively and comprehensively to bring about a turnaround in the sector that creates employment for more than 80 per cent of citizens in East Africa.
Rwanda, Ethiopia and Tanzania are the fastest growing economies in the region. This means that other countries in the region should ensure that the SME sector which plays a big role in expanding economies is not neglected.
Kenya has taken steps to ensure that SMEs get the funding they need. With the launch of Stawi last year, the government targets the SME sector which contributes an estimated 28 per cent of the country’s Gross Domestic Product (GDP). The mobile-based credit scheme aims at spurring the SME sector which employs approximately 14.9 million Kenyans. Stawi seeks to improve access to credit for small enterprises allegedly locked out of the formal credit market.
Unfortunately for the rest of the East African countries there is no such scheme meaning that most small businesses will continue struggling to secure credit.
While the programme has been criticised in Kenya across many quarters, it is definitely a start towards creating a reliable source of funding for the country’s numerous SMEs.
Other nations in the region should take note and work towards making sure that their economies thrive by ensuring that there is availability of credit or establish the infrastructure for its disbursement on a large scale for the sector that holds their economies together.
