With the effects of the Covid-19 pandemic ravaging sub-Saharan Africa’s economies, countries could face a financial crisis, dashing hopes of survival of businesses and pushing many households into poverty.
Global economists and financial experts are calling for state intervention to rescue banks from liquidity challenges after restructuring loans worth billions of dollars and extending moratoria on repayments to help cushion borrowers facing financial difficulties.
“It is absolutely about strengthening financial institutions. Governments should not do anything or implement policy measures that might take away the capacity of financial institutions to play their part in economic recovery,” said Razia Khan, Standard Chartered Bank’s chief economist in-charge of African operations.
“Policy makers have to make a very important balancing role between immediate needs of the economic crisis and how to restore confidence and build a well-capitalised banking industry that is better able to support growth in the future,” he added.
Economic recovery was the focus of a recent virtual forum hosted by the Overseas Development Institute (ODI). Discussions revolved around post-Covid-19 trade-offs between financial stability and economic renewal for African countries, and what specific financial sector development policies and regulations could restore stability.
In the UK, the government channelled £330billion ($421 billion) into the banking system as a business support package under the Coronavirus Business Interruption Loan Scheme.
“The current economic shocks may turn into financial shocks because there is a limit to the amount of credit and liquidity that low income countries can generate in their own economies, and this has been compounded by the inability of these countries to meet their own foreign exchange needs and outflows of capital arising from the deteriorating economic conditions,” said Adeyemi Dipeolu, the special advisor on economic matters to the President of Nigeria.
“This Covid-19 pandemic has led to financial shocks. The longer the economic conditions remain tight the more likely we are going to have financial shocks.”
The banking system is now grappling with more loan defaults and restructuring, and delays in repayment, which could erode interest income — the lenders’ key source of revenue.
According to Dr Dipeolu, African governments are now confronted with the challenge of finding appropriate policies that will kick start economic growth without jeopardising the stability of the financial sector after the Covid-19 pandemic.
“The trajectory of Covid-19 in low income countries is complex and this will compound the efforts to revive such economies,” he said.
He added that post-Covid-19 recovery in developed countries may be slow and is likely to result in huge financing gaps, large debt service obligations, foreign exchange shortages and heightened credit risk in the banking industry.
The World Bank has forecast a decline in growth in the region from 2.4 per cent in 2019, to between -2.1 per cent and -5.1 per cent this year, estimating that African economies could lose between $37 billion and $79 billion in output losses.
According to ODI, economies will struggle to achieve financial stability and recover as concerns mount on issues around debt sustainability.
The crisis will also impact African countries’ financial sector development (FSD), which may also have implications for how policies and regulations are formulated and implemented in a post-Covid world.
“We are looking at severe economic impact from Covid-19. We have got a crisis that we are dealing with,” said Jonathan Rosenthal, Africa editor of The Economist Magazine.
Judith Tyson, a research fellow at ODI, called for the strengthening of both national and regional development banks to help in the recovery of economies destroyed by the pandemic.
“We need to put greater emphasis on the strengthening and expansion of development banks to accelerate lending to the productive sectors of the economies post Covid-19,” she said.
The International Monetary Fund has cautioned banks against paying dividends to shareholders this year, saying that lenders need to preserve cash to boost resilience of the banking industry against Covid-19 related shocks.
The fund’s managing director Kristalina Georgieva said banks should take measures to shore up their capital and liquidity positions to support fresh credit as the global economy braces for a deep recession this year, with only partial recovery expected in 2021.
“One of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations. The interests of bank shareholders are aligned with those of bank supervisors and customers. All stakeholders will ultimately benefit if banks preserve capital instead of paying out to shareholders during the pandemic,” Ms Georgieva said
“Protecting the banking sector’s strength now means that, once the recovery picks up, shareholders can expect large payouts — indeed the more profits retained now, the larger the eventual payout,” she added.
POVERTY INCREASE
According to the Overseas Development Institute, the Covid-19 pandemic is already radically worsening the economic outlook for Africa.
Poverty is expected to increase by two per cent of the regional population, with 26 million people falling under the poverty line, erasing five years of progress in poverty reduction.
Half of the new poor will live in just five countries: The Democratic Republic of Congo, Ethiopia, Kenya, Nigeria and South Africa — with Nigeria contributing the most with 6.6 million according to unpublished World Bank material.
To stem an economic crisis, in the short-term international finance institutions need to support SMEs and micro-businesses directly or through financing via banks and micro financial institutions.
In the longer-term, finance to support recovery — also known as ‘patient capital’ — will be key to replace lost bank lending, especially in sectors where employment and informal occupations are concentrated.
