African countries were hit first by economic crisis before the health crisis from the corona virus outbreak in 2020. Once the corona virus broke out in China, Europe and North America, demand for Africa’s products plummeted. Most African countries depend on commodities for export. So this has made very huge economic impact. African countries were already dealing with this economic issue before COVID-19 arrived in the continent accompanies.
In the words of Dr. Ngozi Okonjo-Iweala, former Finance Minister of Nigeria “I think this will be a difficult year, 2020, spilling over into 2021”
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So the question is not whether there will be an economic crisis; the question is how severe will it be in the mid-term to long-term.
When the 2008 global financial crisis began over 10 years ago in the United States, followed by the United Kingdom, many initially thought it would not affect Africa – or at least not much. But it turned out to have a significant impact on the continent. We’ll be exploring how the next global financial crisis will likely affect Africa, and how that will affect you. With this knowledge, you can better prepare yourself for the impending crisis or at least not be taken unawares.
Table of Contents
Why are we talking about Economic Crisis?
Is it something to be worried about?
From the Black Monday on October 19, 1987; a sudden, severe stock market crash that struck the global financial market system; to the global financial crisis of 2008, considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s; modern world has experienced mild to severe financial crisis every decade. It’s called the business cycle; what goes up must come down. For the past few years, many experts have predicted an economic recession by 2020. A 2018 article on WorldFinancialReview.com stated that “it appears that there is a foregone conclusion that 2020 is the date that crash 2.0 will wreck havoc once again”. In the same year, JP Morgan warned that “Next global financial crisis will strike in 2020, sparked by an automated trading system.” And Forbes magazine wrote, “2020 might be the worst decade in US history – triggered by contagion from a global credit crisis.”
There seemed to be early data, statistics and speculations to support this claim a few years ago. But no one anticipated it would happen the way we are seeing it today.
Today, the corona virus recession, also known as the Great Lockdown, is an ongoing severe global economic recession which began affecting the world economy in early 2020. The recession has been the steepest economic downturn since the Great Depression. On 14 April 2020, the International Monetary Fund (IMF) reported that all of the G7 nations had already entered or were entering into what was called a “deep recession”, alongside most of the western world with a significant slowdown of growth across developing and emerging economies. So in the event of a prolonged economic crisis, how is it likely to affect Africa? Let’s look at different ways African countries will likely be affected and what that means for you.
1. Lower commodity prices
As I mentioned earlier, most African countries were already in an economic crisis before the first corona virus case was reported on the continent. And this was largely due to low demand for commodities like oil and other mineral resources from the outside world, which resulted in low prices.
Nigeria and other oil-dependent African countries are already seeing the impact of weak oil prices due to low demand in the international market. Diamond producing countries like Botswana and South Africa are also impacted by low demand. And because these countries are highly dependent on natural resources for its major income, and have little savings, the low demand of these commodities in the international market will cause significant losses to the government and ultimately, the people.
2. Trade volumes
Nations prosper on inter-trade with other nations. When potential buys of your goods and services have less money to spend, they prioritize their spending. And the patronage on your product and services will likely be affected. During the 2008 crisis, trade declines were visible in a wide range of sectors in Africa. For instance, declines in wholesale market prices for cut flowers in the Netherlands meant that Ethiopia earned only 47% of a projected $280 million from flower exports in 2008 to 2009, which resulted in the inability of some producers to service debts to the Development Bank of Ethiopia.
Between January and August 2009, Kenyan horticultural exports declined by 35% in volume compared with the same period in 2008. There was a reported 10% decline in the number of tourists arriving in mainland Tanzania in 2009 compared with the same period in 2008, result. Consequently, the revenue obtained from arrivals declined by 22.1%.
Oil accounts for more than 95% of Sudan’s total exports. As a result of reduced oil prices on world markets, the total value of Sudan’s exports declined from $12.9 billion in 2008 to $5.3 billion in 2009. In Mozambique, the value of exports of goods in 2009 fell by 37% compared with 2008. With globalization, the economic crisis in one region can easily spiral across the globe.
3. Migrant Remittances
It is estimated that over 25 million migrants from sub-Saharan Africa remitted a total of $46 billion in 2018. So that money uncle and aunt living abroad transfer home for whatever purpose is called remittance and each year tens of billions of dollars flow into Africa from this source. But this data is believed to be under-represented because many rely on informal channels to send money home. Money sent home by migrants competes with international aid as one of the largest financial inflows to developing countries. Many families in the continent depend on money from relatives abroad for livelihood. In the event of a prolonged global recession, the continent is likely to witness a decline in remittances. Many families back home will be affected.
4. Foreign direct investment
A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company.
Private capital flows have become an increasingly significant source of investment in developing countries, indicating the high degree to which developing countries have become integrated into the global economy and thus how exposed they are to any financial shock. FDI tend to be highly volatile in most developing countries. A financial shock can result in the sudden withdrawal of capital flows and also in sharp declines in inflows.
In times of economic crisis, private investors appear to shy away from Africa, as they tend to minimize their risks by shifting their investments to more liquid and safer markets and assets. For instance, in 2008, net private capital flows to Africa fell by 5 per cent to US$ 28 billion. In Ethiopia, FDI flow declined by 31% from 2008 to 2009.
With all these sources of foreign earning declining in the case of a global economic and financial crisis, many African countries will get poorer. Reserves in some countries will become dangerously low. By end of February 2009, gross official reserves in the Democratic Republic of Congo had plunged to $33 million, the equivalent of less than 1 day of imports. IMF support helped to raise the reserves to nearly 2 weeks of imports.
Generally, countries that rely less on commodities such as oil, copper and diamond are less affected during an economic crisis as observed from 2008 crisis.
How does all this Affect you?
You and I are not politicians or technocrats. We cannot make decisions on the governmental level to make a change. The only thing we can change is how we respond in a time of crisis. A prolonged economic crisis will mean that many people will lose their jobs. Unemployment rates will be a record high. According to the Overseas Development Institute, 50 to 100 million new poor people were created from the 2008 recession in the continent.
The question you’ll want to ask yourself is, “can my career and skill thrive in a recession”? In the event of lay-off at your workplace, are you easily dispensable? Will your skill continue to be in demand? What can you do to be more valuable in the market? There are opportunities in crisis for those who are prepared.
