When news of a new strain of Coronavirus came out of China almost four months ago, the world seems unimpressed with the potential danger it posed. It has, however, taken the invisible microbe less than three months to literally make the whole world its empire. Its social, economic and political impacts have poured water on other burning issues of the world and left them on the backburner. Especially the world economy has been hard hit by the pandemic. The fates of businesses and potentially billions of employees hangs by the balance. Different sectors of the Ethiopian economy have also faced the wrath of the invisible microbe. EBR’s Samson Berhane and Ashenafi Endale delve into the global, regional and national economic impacts and emergency measures.
When Hyatt Regency Hotel opened in Addis Ababa in January 2019, its eye-catching architecture and the distinct services it provides helped it win the hearts of customers in a very short period of time. Situated at Mesqel Square, the 188-room hotel was even able to get a five star rating in the middle of last year.
However, despite being one of the seven five-star hotels in Ethiopia, Hyatt has been forced to suspend its services only a year and half into its Addis ordeal.
With the coronavirus disrupting the movement of people and business activities across the world, there has been a sharp decline in occupancy rate and demand for hotel services. As the whole situation risks the wellbeing of individuals on top of everything else, Hyatt had no choice but to close its doors for almost 55 days until June 1, 2020.
As the tourism sector is held at gun point by the pandemic, no hotel is immune to the problem. Except for those serving as quarantine centers to passengers coming from abroad, a majority of the 175 star-rated hotels in Addis Ababa with over 10,500 rooms are now reporting zero occupancy rate. “The numbers are scary,” says Biniam Bisrat, Chairperson of Addis Ababa Hotel Owners’ Association.
With the Coronavirus still making landfall in Ethiopia, cancellation of reservations, events and trips is expected to linger through the steep rise, peaking and flattening of the curve. Standing at the onset, one can expect the problem to be around for quite a while.
“It is the biggest crisis Ethiopia’s hospitality sector experienced in its history,” says Biniam. He also noted that it is not just Ethiopia’s hospitality sector but that of the whole World that is suffering.
As the International Air Transport Association (IATA) urges governments to provide financial relief to airlines, potential revenue loss by carriers in Africa is predicted to reach four billion dollars this year.
Home to Africa’s most profitable African carrier, Ethiopia is likely to witness a 1.6 million fall in passengers as per IATA estimates. While this could risk over 327,062 jobs in the country, it is likely to lead to a USD 1.2 billion reduction in contribution to Ethiopia’s economy, whose size was just USD60 billion last year.
Hotels, aviation companies, agents and tour operators are just a few of the hardest hit travel businesses that are facing the repercussion of COVID-19, which is changing the way people move, shop and do businesses as it gets worse every second across the globe.
Global Economic Crisis in Full Gear
Global economic crises, unfortunately, are not new and often end with an indelible mark on the economies of both developed and underdeveloped countries. The Great Depression, the Latin American Debt Crisis and the Great Recession are the most devastating economic crises of modern times.
While wreaking havoc in financial markets across the globe, the 2008 Great Recession was the worst economic crisis the world has faced since the beginning of the new millennium. Home loans granted to borrowers with poor credit histories in the U.S led to plummeting housing prices there; it even resulted in the crashing of the US stock market, the collapse of top investment banks, devastation of the international financial system and deterioration of global economic performance.
During the Great Recession, the world saw the biggest slump in GDP since the Great Depression in 1930. While the United States experienced a four percent fall in GDP, global annual economic growth fell from five percent to just two percent at the time.
The after effects of the great recession were expected to linger with countries across the globe projected to shrug off their illness and get back to normal after a decade. During that abnormality though, millions lost their jobs and billions of dollars vanished into the obscure. Moody’s Analytics indicates that the global economy lost more than two trillion dollars in value, a drop of nearly 4% from where it was before the Great Recession.
Now in 2020, the world is once again amidst a crisis that could even have wider scope and more serious impact. The International Monetary Fund has already announced that the economic fallout from Coronavirus is “way worse than the global financial crisis of 2008.”
“Never in the history of the IMF have we witnessed the world economy come to a standstill,” said Director of the International Monetary Fund (IMF), Kristalina Georgieva in a press briefing held on April 3, 2020. She went as far as saying ‘the dive in business activity has created an economic crisis like no other with over half the globe—roughly four billion people—currently on lockdown or under some form of stay-at-home orders due to the coronavirus pandemic.’
UNCTAD, in its analysis published last month, predicted that the slowdown in the global economy would cost up to two trillion dollars with USD220 billion of that amount taken up by developing countries.
“The economic fallout from the shock is ongoing and increasingly difficult to predict, but there are clear indicators that things will get much worse for developing economies before they get better,” UNCTAD Secretary-General, Mukhisa Kituyi said.
The trade sector was the first to be hit amid supply chain disruptions on a global as well as regional level. Regional trade efforts are hampered. Countries that rely heavily on tourism receipts are expected to be greatly impacted by the imposed travel restrictions as well. The service sector is likely to experience the biggest losses in tandem with weaker revenue gains stemming from the transportation sector.
Most affected countries will be those that don’t have sufficient economic buffers, in the form of import coverage above the IMF suggested three-month threshold to provide essentials in a market hard hit by the pandemic, according to Alisa Strobel, Senior Economist at IHS Market. “The capacity to absorb the desperate demand for essentials following mitigating measures such as lockdowns in a paralyzed supply chain determines how hard countries are hit,” Strobel tells EBR. The long history of weak capacity to absorb shock, expressed through meagre national emergency reserves, indicates that Ethiopia could be highly impacted by the pandemic.
LDCs that are large commodity exporters may have benefited from favourable commodity prices in 2018/19 providing short term buffers, while the majority of LDCs struggle with low import coverage. Keeping this in mind, Strobel concludes that LDCs don’t have the sufficient reserves to provide the essential fiscal stimulus packages necessary.
“Injecting liquidity to support economic growth and providing essential safety nets and support for businesses and workers without further accumulation of debt, given the current already existing constraints, such as very high debt burdens as well as high servicing cost, is not possible,” Strobel told EBR.
She noted that declining Chinese demand for commodity imports, depressed commodity prices and disruptions at ports during 2020 will slow economic growth in and worsen the balance of payments of LDCs with a relatively high dependency on trade with China.
All in all, analysts expect a large drop in foreign direct investment in 2020 stretching to 2021 amid the global uncertainty surrounding COVID-19, especially in the oil and gas industry. “Oil demand is collapsing because of the closure of a large share of the global economy due to COVID-19,” Strobel says. “This ultimately has severe negative economic implications for countries that are high crude-dependent net exporters; they will face substantial economic challenges with dwindling demand and crude prices in free fall.”
Cross Sectoral Impacts on Africa, Ethiopia
Africa, which makes up a lion’s share of the developing countries, would also be hit by economic shockwaves from the pandemic at a dramatic speed higher than that of the 2008 global financial crisis.
The earlier projections of 3.4Pct continental economic growth have been scaled back to 1.1Pct in the April 6, 2020 report published by the African Union.
Exports and imports of African countries are also projected to plummet by at least 35Pct from 2019, according to the AU. This is equal to USD270 billion, over four times higher than Ethiopia’s GDP. “Having already strongly hit Africa’s major trading partner, China, the outbreak was inevitably impacting Africa’s trade,” said Vera Songwe, Executive Secretary of the UN Economic Commission for Africa (ECA).
Africa is also likely to experience a delayed or reduced FDI as patterns from continents redirect capital supply, McKinsey & Company warned. Although foreign direct investment was also predicted to grow by USD46 billion in 2020, AU estimated that the continent would lose up to 15Pct of FDI as COVID-19 persists.
Ethiopia is no different. Citing USD7.2 billion losses registered during the 2008 financial crisis and 2014 commodity price shock, AU put Ethiopia amongst top six African countries with a tourism sector severely impacted by the virus.
In fact, as COVID-19 catches every economy off guard, emerging economies like Ethiopia, whose capacity to uphold the strains is limited, are almost bare-handed in the fight. The East African country, under the leadership of Prime Minister Abiy Ahmed, is also in a frantic effort to maintain economic productivity with minimal human mobility, although complete lockdown has been ruled out until EBR’s edition went to print.
Industries are operating under two shifts with half of the manpower on either shift. Numerous factories have already been unable to resist the effects of the pandemic. A case in point is the situation of metal manufacturers, a majority of whom partially suspended operations as shortage of raw materials persisted.
“Accessing raw materials is becoming more difficult while the 500 employees of our company are forced to work on a shift basis to apply physical distancing. All these are adversely impacting our performance,” said Mathewos Asele, CEO of Kaliti Metals and Corrugated Iron Factory.
Tilahun Abay, Planning and Communications Director of Metals Industry Development Institute, agrees. “The metal and metal products sector had already been weak for the three years before COVID 19. Absence of raw materials caused by shortage of forex had severely affected the industries, a situation set to get worse due to the outbreak of the virus,” he says.
Businesses dependent on global sourcing are facing challenges with the disruption of the supply chain. Especially textile exporters that mushroomed in the country over the last half a decade are experiencing a downfall in revenues as they face suspension of orders from big US, European and Chinese companies. With no end to the misery in sight, industries inside Hawassa Industrial park furloughed over 14,000 employees.
Cepheus Capital, in its preliminary assessment of macroeconomic impacts of the Coronavirus, predicted that the textile factories that export items could lose USD50 million per quarter because of COVID-19. Not only textile factories but also flower exporters as well are likely to register zero revenue for several quarters if the Coronavirus crisis stays around for a long while.
During the first half of the current fiscal year, USD225 million worth of flowers were exported. Keeping this in mind, the country is likely to lose at least USD150 million in export revenues from the same item between March and June 2020, leaving the fate of around 150,000 employees in the balance. “We are losing ETB800,000 per day and changing over 100,000 flowers to compost every day,” says Isayas Kebede, CEO of Ethio-AgriCEFT, which has two large flower farms in Bahir Dar and Holeta.
Insiders claim that NBE’s decision to lift the minimum price set for flowers cannot solve the problem as the cause is zero demand from Europe.
As an industry closely linked with the hospitality sector, breweries are another group bearing the brunt of the pandemic. The governmental precautionary measure to have bars and night clubs shut significantly affects beers sales. One of the biggest beer makers in the country, BGI informed EBR that the industry as a whole is experiencing a significant drop in transaction.
BGI has already felt the impact of the pandemic as it has shut down four factories out of five, sending a significant number of their employees on annual leave. Gebreselassie Sifer, the company’s commercial public relations manager, stated: ‘we haven’t laid off any permanent employees thus far and it’s our plan to keep it that way for as long as we can.’ Gebreselassie further explained that BGI is a adjusting itself to the new reality, although they believe that ‘the worst is yet to come.’ He remarked that they have devised innovative solutions to keep the business afloat and maintain their connection with customers by partnering with home delivery companies, for instance.
Yet another one of the businesses that have suffered from the pandemic is the media. With business slowing down, the media are increasingly finding it difficult to draw advertisers that make a vital source of their funds.
The problem has especially been acute in print media as newspapers and magazines shared by people are perceived as potentially hazardous to social health under the current dire conditions. The reduced movement of people and a possible lockdown also make it hard for publishers to sale their newspapers and magazines. The print media is, therefore, bracing for a complete shutdown as the pandemic claims more of our socio-economic ordeals by the day.
The Press Council made up of broadcast and print media notified Berhanena Selam Printing, the leading printer in the country, of the desperate situation the print media is facing. The council stated that the print media are facing difficulties collecting receivables from advertisers, stating that the printer needs to consider printing newspapers and magazines on credit. The council also notified the Prime Minister’s Office of the troubles both broadcast and print media are facing to pay for office rental and employees’ salaries and asked the head of government to help them out with access to bank loans.
Be that as it may, Cepheus Capital predicted that over 20,000 businesses will be affected by the Coronavirus. This includes small businesses that have very low capital with fewer employees.
“My sales dropped drastically while I witnessed no change in fixed costs, including rent and wage,” said Amanuel Mengistu, a retailer of shoes. “On average, I used to sell over 24 shoes every day. For the last three weeks, my average daily sales was just one. I don’t know how long I can survive the crisis,” he noted.
The dramatic and sudden fall in demand for non-food items, especially those considered as non-essential, since the outbreak is affecting the ability of businesses and small and medium enterprises (SMEs) to function. Given the limited resources that SMEs have, they have less resilience to deal with the economic shocks caused by the outbreak. “Surely, many of us will be out of business very soon as we won’t be able to cover our fixed cost and no one seems to be in a position to bail us out,” says Amanuel.
The agriculture sector has also not escaped from the COVID-19 economic crisis. As regional states and city administrations impose restriction on movement of people to curb the spread of the virus, farmers are amongst the vulnerable groups affected. While this is largely due to the disruption of market chains and trade, the impact is severe on those whose livelihood is dependent on trade of agricultural items.
“As we already don’t have a direct contact with farmers because of the involvement of intermediaries, the problem is more severe as the whole supply chain has been disrupted subsequent to the outbreak,” says Mohammed Yusuf, Executive Director of Addis Modjo edible oil.
Meanwhile, banks, which were already in a liquidity crisis, are struggling with a jump in non-performing loans largely because of the pandemic. Although the government has injected ETB15 billion to boost liquidity in the banks, this was found to be inadequate by many bankers.
“We were already in a tight liquidity condition, thus expecting support from the government. The latest injection is not even enough to recover from the already existing liquidity crisis, let alone serving as a panacea to the economic woes caused by COVID-19,” said a Senior Banker working at Bunna Bank.
Analysts also say that the liquidity injection may be less than the headline figure may suggest. The ETB15 billion has been offered against the stock of NBE bill repayments that banks were to receive from NBE by June 2021, according to report by Cepheus Capital.
“Moreover, as banks already had outstanding short-term loans due to NBE from recent borrowings, most of the fresh funds made available to respond to the Coronavirus may effectively be absorbed, leaving banks with much fewer net resources,” the report underscores.
Informal Sector in Danger, Hunger & Poverty Likely to Rise
Alemu Simegn came to Addis Ababa from the town of Mer’awi in the State of Amhara. He has been working as daily labourer at Merkato, the largest open market in Addis Ababa, for the last five years. Earning at least ETB100 a day, he has difficulty making ends meet. With the threat of the Coronavirus though, he has found it hard to daily make even a quarter of that amount over the past three weeks.
“My job is usually to carry clothes and other items for wholesalers but all of them have stopped operation lately because of the virus,” he says. “I, thus, have no choice but to beg food from cafés and restaurants to survive while I can’t raise the money to pay my ETB800 rent.”
Alemu’s predicament is just a glimpse into the hardship informal workers in Addis Ababa and other urban areas are enduring. Numerous Ethiopians in the informal sector, which accounts for over a third of the economy, are in an uphill battle for survival now that their sources of daily income have gradually stopped functioning. With no savings and remittance to cover their expenses, these workers are basically left with no income to support themselves.
The grim reality is shared around the world as about two billion people, accounting for 61Pct of the global working population, are vulnerable to economic shocks caused by the Coronavirus as majority of them don’t have nothing or little to survive, if they are forced to stay at home.
The problem is severe in Africa where 86Pct of employment is informal. Ethiopia, where daily labourers and other informal workers are becoming unemployed as economic activities come to standstill, is no different. If left unaddressed, the situation will pose huge economic risks to informal workers, according to analysts. “I fear that hunger could kill many before corona does,” Alemayehu Geda, Professor of Economics, warns. “The economic consequence of the virus is very scary and will worsen poverty in Ethiopia, where over 70Pct of the population earns below ETB100 a day.” Taking into account that 7.5 million people are employed in urban areas, the virus could result in job losses of as much as 1.5 million workers, according to Cepheus Capital.
The World Bank also warned that poverty is likely to get worse across the world, including in Ethiopia, which makes up one of the five countries that cumulatively stack up half of the World’s poor along with Nigeria, India, Democratic Republic of Congo and Bangladesh. This has troubling implications for developing economies, including tighter credit conditions, weaker growth and the diversion of government resources to fight the outbreak, according to Ceyla Pazarbasioglu, Vice President of the World Bank. “This would reduce funds available for key development priorities and setback the fight against extreme poverty,” she warned.
African Union, in its latest report, pointed out the potential losses in tax revenues and external financing due to the disruption of economic activities, which will restrain the capacities of African countries to finance their development. This means lesser tax revenues and wider budget deficit for Ethiopia, which has been struggling to boost its domestic revenues over the last three years.
Furthermore, as the country is experiencing a decline in exports of services and major commodities, including flower, textile and Khat due to the pandemic, forex flow is also likely to decline this year. That is expected to put a huge strain on the country’s balance of payments and the ability to repay its external loans. Remittance is also expected to fall as Ethiopians living abroad are in a difficult financial situation. However, Cepheus Capital predicted that a fall in oil prices and a decline in imports because of the spread of the virus will help Ethiopia save some forex, possibly above one billion dollar.
How is Ethiopia responding?
It was just few weeks after the spread of Coronavirus throughout the World that Ethiopia’s Prime Minister Abiy Ahmed (PhD) proposed a new package as a response to the impacts of the outbreak on African economies. He proposed for a section of the debt of low-income countries to be written off as part of efforts to reduce the economic impact of the pandemic.
Underscoring the substantial threat COVID-19 poses on the economy of African countries, he explained that such challenges cannot be adequately addressed by policies and measures taken individually by countries. He then urged G20 leaders to assist Africa with USD150 billion funding in a bid to cope up with the Coronavirus crisis.
Locally, PM Abiy’s administration introduced a stimulus package that aims at reducing the impact of the pandemic on the economy. Boosting liquidity of commercial banks, extending the loan repayment period of businesses, raising transaction limit on mobile money transfer, allowing exporters to sell their products locally and waiving tariff put on imported products are amongst the series of measures taken by the administration.
Girum Kassa, an Economist, considers the measures taken by the government encouraging. “I see the PM’s appeal to G20 to advance Africa USD150 billion in emergency funds and the liquidity injection as right measures as they will provide debt relief (for SMEs) and additional loans to their customers in need,” Girum says. “But above all, the plea for a moratorium on debt repayment (debt freeze) to official creditors, including China, is the most important one. I see this as an important lifeline, as either new money debt write-offs couldn’t come fast. This can only give us a breathing space.”
But not everyone approves of the move by the government. “The government is taking ad-hoc measures, instead of responding systematically. And the package did not take the labour profile of the population into consideration, which would have been important to come up with a better economic model,” says Alemayehu.
For Zerihun Gudeta, an Economist, the focus so far has been more on administrative measures to contain the spread of the virus and less on economic policy interventions. “This is understandable. The country does not have sufficient policy buffers to deploy to mitigate the impacts,” he argued. “The priority of the stimulus should be to ensure not only that the direct effects of the pandemic on production, distribution and consumption are minimized but also that they do not translate into significant losses in employment, income and consumption,” Zerihun adds. “The intended beneficiaries of such an economic stimulus package must be businesses and vulnerable households.”
Analysts argue that the package introduced by the government lacks depth and coverage compared to measures other countries with similar macroeconomic fundamentals and exposure to the pandemic have taken. Citing the case of India, Ayele Gelan (PhD) argues that Ethiopia’s stabilization measure is completely devoid of any element of preparedness for disaster relief. “It also inclined towards rich businesses, such as importers and exporters, while there was no mention of relief to poor households and small businesses or the farming sector,” he says.
As the Coronavirus throttles the world, several countries are implementing various measures to contain the crisis. Based on announcements by governments, analysts say over USD10 trillion is needed to respond to the crisis globally although it is dependent on the depth and duration of the outbreak across the globe. China, for instance, reduced reserve requirements for banks, allowing them provide USD80 billion loan to struggling businesses. Germany also allocated Euro35 billion to prop up its economy. Fast processing of company tax refunds, settlement of pending bills and credit facilities to households are amongst measures taken by African governments as response to COVID-19 crisis.
International organizations are also availing funds to save countries from economic crisis. IMF announced its readiness to mobilize one trillion dollar lending capacity to fight the virus. It also availed about USD50 billion through its rapid-disbursing emergency financing facilities for low income and emerging economies. So far, 85 countries approached the Fund seeking financial assistance. “Never in the 75 years history of our institution have so many countries found themselves in need of emergency financing,” said Georgieva.
The World Bank, for its part, approved a set of emergency support for developing countries. While approving close to two billion dollars to assist 25 developing countries, it has prepared to deploy up to USD160 billion over the coming 15 months to support measures to fight COVID-19. Ethiopia is amongst the first recipients of the financial assistance, receiving USD82 million to raise preparedness and response to the outbreak. But this is just a safety net measure, not something that could address the economic crisis in a prompt manner, experts say.
Zerihun argues that while waiting for financial inflows from the international community, which may take time, Ethiopia should initiate negotiation with lenders to delay some of the agreed reform actions as they may not be attained (anyway) if the current situation persists. “In the meantime, it could embark on a fiscal expenditure audit to identify underutilized funds lying around that could be diverted to the fiscal stimulus package,” he suggested.
Zerihun also pointed out that the search for fiscal space could also take advantage of the plunge in the international price of crude oil, which fell from USD60 a barrel three months ago to about USD20 these days. As oil imports cost Ethiopia USD2.6 billion last year, the current price reduction avails an opportunity to buy the same amount for half the price. “Ethiopia should not allow a 100Pct pass-through of this windfall gain to the consumer. It should rather see to it that a significant percentage of the gain finds its way to boost government revenue so that it could be accessed, if need be, to support the economic stimulus package,” he says.
On the other hand, Ayele Gelan (PhD) argues that the government should be provide relief assistance to people. He contends that the amount of funds that the government would avail per household should be enough to cover their subsistence and other obligations. “The intervention would be a combination of fiscal relief (cash or in-kind hand-outs) and leveraging outstanding loans, including delays in debt payments,” he concludes. EBR
9th Year • Apr.16 – May.15 2020 • No. 85