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Economic shocks of COVID19

Economic shocks of COVID-19

Almost two months have went by since the first COVID-19 confirmed case has been reported in Ethiopia and the next three to six months are expected to be the difficult and troubling time for the country’s underdeveloped health sector and economy.

The virus was first discovered in December, 2019 in Wuhan City, Hubei Province of China.   Currently, COVID-19 has become a source of economic crisis as much as a health crisis. Although, it took some time for the virus to Africa, the existing fragile health and economic establishments in the continent will exasperate its impact. As of April 15, 2020, 52 African countries have confirmed cases with 16,265 infections based on Johns Hopkins University report. On the same day, there were 85 confirmed cases in Ethiopia with three death counts.

The government of Ethiopia is taking numerous measures to limit the spread of the virus. These are rooted mainly on the strategy of social distancing, frequent hand- washings, avoiding handshakes and other basic safety guidelines. In fact, closure of schools and universities across the country, banning of social gatherings majority of government employees were made to work from home. It has also suspended operations of the flag barrier, Ethiopian Airlines, it has cancelled flights to 91 destinations. Ethiopia has closed its land borders. In addition,, all passengers travelling to the country are obliged to spend a mandatory  14 days quarantine. Furthermore, stepping up its effort, the government has declared state of emergency on April 8, 2020.

As we hope these measures could help curbing the speared of the virus, the country cannot escape the possible economic blow, the magnitude might vary from one sector to the other. This happens mainly because of exogenous economic effects that come from direct trade links with affected countries in Asia, Europe and North America. According to the International Monetary Fund (IMF), global economic growth could fall to 0.5 percent for 2020. Following this trend, the last quarter of Ethiopian fiscal year, between April and June, is going to present severe economic crisis, as pointed out by Berhane Demissie, managing partner of Cepheus Growth Capital on a webinar organized by Precise Consult International on April 9, 2020. This has already witnessed in the horticulture sector where flower export trade dominates.  Players of the sector have reported a 20 percent reduction in export volumes amid the coronavirus outbreak. Flower export is among the top three foreign hard currency earners along with coffee and Khat. The horticulture industry has generated a little over 300 million dollars in the previous eight months of this fiscal year, according to the Ministry of Trade and Industry. Main trading partners include, European countries – one of the hard hit and hot spot areas of coronavirus pandemic - having 80 percent of the market share. European market is also the major market destinations for Ethiopian textile and garment industry products. Consequently, a similar fate has fallen on this sector as well. The textile sector is considered to be a golden ticket to industrialization by the government, at least it provides numerous jobs and foreign direct investment (FDI) opportunities and probably export earnings as well.

The other sector that is expected to suffer as a result of travel restriction and loss of incomes across the world is the tourism and the hospitality sector. The United Nations World Tourism Organization (UNWTO) estimates that 20 to 30 percent sharp falls to the world tourism markets. And, the impact is set to linger for the coming three to six months, as Berhane explains. Along with this, the aviation service – predominantly the Ethiopian Airlines - is also taking a hit with 550 million dollars loss in revenue. Ethiopian is shifting to cargo and currently flies to 19 destinations with less frequency which is a significant reduction from 127 destinations it used to fly amidst travel restrictions. Generally speaking 20,000 firms could be affected following the coronavirus outbreak, as Berhane predicts. On the other hand, this could restrain the finance sector, which is already struggling with liquidity crisis, as a result of nonperforming loans and other hindering factors.

As COVID-19 continues to spread, it is also setting endogenous effects leading to a huge disruption of economic activities that could threaten the livelihoods of millions of citizens. On a mid-level scenario, 1.4 million jobs are estimated to be lost because of the disease as Ephrem Tekle (MD), Job Creation Commissioner has revealed speaking on the same webinar organized by Precise Consult International. If the spread of the virus continues for the coming six months this number is likely to double. Currently, there are 1.9 million self-employed people within the urban economy, susceptible of  impacts COVID-19 could cause. Accordingly, when such pushes further comes to be a reality, they are doomed to fall under the poverty line. All these economic crises coupled with reduction in remittance and FDI inflows are expected to set country’s economy back from its positive natural growth. For couple of years, the country has been registering a broad based economic growth that helped to list Ethiopia as one of the fastest growing economies in the world.

In order to reduce this gigantic economic fallout governments need to consider measures outside of the traditional economy crisis responding box, as states Abebe Aemro-Selassise, director of the IMF Africa Department. Instead of simply injecting money to the economy that could back fire later, experts advise that it would be wise to have selective policy responses and work closely with international organizations including the IMF and World Bank, Abebe added. Following suit, the government of Ethiopia is implementing various strategies to contain the economic fallouts. Provision of direct credits, postponing debt payments, waiving taxes are some of the proposed measures by the government to support and stimulate firms stay in business and ensure the livelihoods of many citizens as stated Ephrem. As these mitigating measures are underway to help the recovery of the economy, the government is also working on, to further introduce stimulation packages as Eyob Tekalign (PhD) state minister of Finance has indicated during the webinar Plausible tax incentives are to be introduced so that firms could maintain jobs during the pandemic.

Nevertheless, the economy crisis is not limited only on specific sectors; as economic fallouts could strain relationships between government and citizens and that could lead to political tension and disorder. This could prove to be challenging especially, when security forces are overstretched. , This is  one of the volatile issues that need to be dealt cautiously.

Although there seems to be countless fallouts coronavirus pandemic could cause on African countries, the continent is advised to use the opportunity and  make some structural changes, says Abebe. For instance, this could be a time for countries to change their trade patterns with Europe, USA and China by diversifying and strengthening their manufacturing sector that would enable them to be less exposed to external shocks in the future, he concludes.