African leaders and the global community urgently need to agree a $100 billion financial stimulus for sub-Saharan Africa to address the fall-out from the coronavirus crisis. This is just 2.3% of the value of global stimulus packages announced so far, and worth 5.6% of sub-Saharan Africa GDP in line with the global average of stimulus to GDP of 5.1%. A stimulus with appropriate financial instruments will protect the most vulnerable livelihoods from the crisis. African countries need to step up and donors need to support them. The G20 should coordinate a major financial stimulus, and part of this should support Africa.
Sub-Saharan Africa is facing at least a $100 billion balance of payment shortfall in 2020 compared with what was previously forecast. The coronavirus crisis is still unfolding, and impacts are only slowly becoming clearer. But there will be considerable declines in trade revenues and financial flows this year, as well as other effects. All of this needs detailed examination, and the effects will differ markedly by country. Previous ODI SET analysis has examined which countries are most at risk to a global slowdown. Estimates also face uncertainty depending on the spread of the coronavirus in Africa itself, and there is separate analysis ongoing.
At current oil price levels, net oil exports will fall by at least $35 billion (the costs are $30 billion following the halving of the oil price, but prices have dropped by more). Other exports (and imports) of goods and services will also decline. There will be other effects. International tourism revenues were some $35 billion in 2018, and most of this is at risk this year. Transport services are under threat (e.g. ships not docking in Mombasa). IATA estimates that African airlines lose $4.4 billion this year. Countries will be affected differently.
Photo: Dar Es Salaam Port, Tanzania. Rob Beechey /The World Bank. Licence: (CC BY-NC-ND 2.0)
West Africa started the decade with plans for the eco – its newest single currency. It was announced that, in 2020, the 74-year old CFA franc would be replaced in the 8 member states of West African Economic and Monetary Union (WAEMU). This blog identifies three key risks for the eco and its links to prospects for economic transformation – those of devaluation, shocks and debt.
West Africa started the decade with plans for the eco – its newest
single currency. It was announced that, in 2020, the
74-year old CFA franc would be replaced in the 8 member states of West African Economic
and Monetary Union (WAEMU). This blog identifies three key risks for the eco
and its links to prospects for economic transformation – those of devaluation,
shocks and debt.
The eco’s devaluation risk
The eco will signal greater regional independence. France’s Board representation
at the Central Bank of West Africa (BCEAO) will be withdrawn. And WAEMU members
will no longer keep half of their reserves at the French Treasury. However,
there will still be a crucial link to Europe, given the eco’s euro peg. To
support West Africa’s economic transformation, the eco needs to be a stable
store of value.
There are two probable sources of devaluation risk. The first is the
likely market assessment that the eco is overvalued and at an uncompetitive
level for WAEMU countries, given the euro’s trade-weighted value. To the extent
that it is overvalued, there is a risk that the BCEAO would devalue from the
level of the current CFA franc. This would provoke inflation. The 50%
devaluation of the CFA franc in 1994 led to an average inflation spike of 28% in WAEMU
A second source of devaluation could come from the
BCEAO’s credibility being tested. This could stem from France’s loosened
supervision; from the fact that a date has yet to be set for the eco’s
introduction, preventing market positioning; or from opposition to the peg from
the policy makers of the larger economies, such as Ghana. If fiscal discipline is also judged to be
insufficient, this will pressure the eco and prompt BCEAO intervention.
Amid devaluation risk, the BCEAO has a balancing act to perform, which includes
ensuring exchange rate stability and facilitating liquidity. Both are essential
to sustained economic transformation. For example, the former will prevent losses
to early-stage export manufacturing industry owing to excessive currency
fluctuations. Equally, credit provision (in the form of access to finance and low borrowing
costs) is crucial to support investment in new industry.
eco’s vulnerability to shocks
The BCEAO’s capacity may be limited by WAEMU economies’
vulnerability to shocks, particularly when it comes to commodity prices. Most of
these countries are oil importers but commodity (mineral
and agricultural) exporters. To take one example, an oil price decline would
improve member countries’ trade positions. However, a persistent oil price
decline, coinciding with lower global demand and commodity prices, would not
augur well. The CFA franc typically shows sensitivity to these shocks (Figure
Figure 1. The CFA franc tend to move with global commodity prices
WAEMU’s vulnerability to commodity price shocks could
mean that reserves are tied up in a precautionary liquidity cushion. As things stand already,
recent estimates suggest that, at 4.3 months, WAEMU
economies’ import cover is below the 5.8 considered appropriate by the IMF. The case of Nigeria is illustrative. Despite its natural wealth,
adverse price shocks coupled with a naira peg meant reserve depletion (and FX
rationing) at the expense of Nigeria’s economic transformation and
diversification away from oil.
Similarly, the BCEAO may have to
defend the eco through selling foreign reserves via open market operations. As with many emerging market central banks, the BCEAO could also increase
its policy rate or banks’ reserve requirements to mitigate depreciation. But
there is an opportunity cost in holding up reserves that could have been
employed in productive investment. Moreover, a tighter monetary stance, via
higher reserve requirements, would curtail bank funding to the productive
A problematic pegged exchange rate
regime with limited foreign reserves is a familiar one in the case of Papua New
Guinea (PNG). PNG is an oil and commodity exporter and operates an Australian dollar
currency peg. During the 2014 oil price decline, its reserves declined by 29%as it defended the
kina. Eventual FX rationing limited financial transactions and firms’
production, particularly those that required imported inputs. There was minimal
to no economic transformation: in 2014, the financial services and
manufacturing industries contracted by 16% and 1%, respectively.
The eco’s fiscal convergence risks
Realising the vision of the Economic
Community of West African States (ECOWAS) for economic and monetary union has
been a bumpy journey. In 2000, ECOWAS
created a roadmap for a single currency by 2020.
Although the first phase was to introduce the eco by 2015 in the West African
Monetary Zone (WAMZ), comprising The Gambia, Ghana, Liberia,
Sierra Leone and Liberia, this was
abandoned owing to insufficient economic convergence. With the eco now due to launch in WEAMU
economies in 2020, there is still a desire for its usage across ECOWAS – but
convergence remains a problem.
convergence will be key for the
eco. And there is likely to be little of it. ECOWAS convergence criteria include a budget deficit limit of 3% of GDP, an
inflation rate cap of 5%, a debt-to-GDP ratio of 70% and exchange rate
fluctuation within a +/-10% band. As
of December 2019, only Togo had met these.
Inflation has not converged and is as high as 24% in Liberia. When it comes to fiscal convergence, not only have targets been missed
(Figure 2) but also the IMF assessed The Gambia,
Cabo Verde, Ghana and Sierra Leone as in debt distress in 2019.
Figure 2. Most ECOWAS countries do not meet the fiscal deficit criteria
As Europe’s experience has shown, political partnership is important for monetary and economic union. ECOWAS leaders have expressed the belief that, as countries meet convergence targets, an ever wider union will emerge. However, in practice, there has been little real cohesion. WAMZ heads recently released a joint communiqué expressing concerns over WAEMU’s eco adoption. And the region’s two big economies are at odds: Nigeria indicated that it was not ready for an ‘ECOWAS eco’ in 2020, while Ghana is keen. An Extraordinary Summit of WAMZ heads of government will be held soon. A commitment to follow WAEMU and plan for eco adoption would be positive. Crucially, an ECOWAS central bank could promote the financial stability that is crucial for economic transformation. One way would be to reduce political influence from any country pursuing high-risk policy, such as excessive debt financing. A commitment to a stable (and eventually freely floating) regional eco, low inflation and fiscal discipline would improve investment ratings and promote investment inflows geared towards greater economic transformation.
Photo: CFA Francs from Benin. Arne Hoel / World Bank / World Bank. CC BY-NC-ND 2.0
The Royal Government of Cambodia (RGC), Digital Economy Policy Working Group, in partnership with the SET programme and supported by Australia’s Department of Foreign Affairs and Trade (DFAT), are hosting a consultation on RGC’s ‘Strategic Framework for Cambodia’s Digital Economy’ in Phnom Penh on 4 November 2019.
The half-day consultation will focus on the opportunities and challenges to inclusion posed by Cambodia’s transition to a digital economy, including the role that digital skills development can play in addressing these challenges. Consultation outcomes will inform the framework’s development.
Cambodia has advanced significantly in relation to the development of its digital economy, and the Royal Government of Cambodia is developing a long-term strategic framework to support it further. Digital transformation does not automatically support all members of society however, or to the same extent: complementary measures that include skills development are critical to make digital transformation work for inclusive development.
The Royal Government of Cambodia, Digital Economy Policy Working Group, in partnership with the SET programme and supported by Australia’s Department of Foreign Affairs and Trade (DFAT), are hosting a consultation on the strategic framework in Phnom Penh on 4 November 2019.
This half-day consultation will focus on the opportunities and challenges to inclusion posed by Cambodia’s transition to a digital economy, including the role that digital skills development can play in addressing these challenges. Consultation outcomes will inform the framework’s development.
The Keynote address will be presented by H.E. Vongsey Vissoth, Permanent Secretary of State of Ministry of Economy and Finance and Chairman of the Digital Economy Working Group. The consultation chair will be H.E. Ros Seilava, Under Secretary of State of Ministry of Economy and Finance and Deputy Chairman of the Digital Economy Working Group.
The consultation will be informed by and build on an ongoing SET study on economic transformation and the digital economy in Cambodia: For further information see:
On 16 May 2019, the SET programme, in partnership with the Ministry of Industry, Trade and Cooperatives, Government of Kenya, Msingi East Africa and Invest in Africa held the ‘Growing an Inclusive Economy’ event to launch the SET report ‘Integrating Kenya’s micro and small firms into leather, textiles and garments value chains: Creating jobs under Kenya’s Big Four agenda.’ The Hon. Peter Munya, MGH, Cabinet Secretary, Ministry of Industry, Trade and Cooperatives, officially launched the report, praising it, and outlining steps the Government of Kenya is already taking to implement its recommendations.
The event brought together government, MSMEs, the private sector and industry experts to discuss the critical role Micro, Small and Medium Enterprises (MSMEs) play in the Kenyan economy and ways to better integrate them into the Kenyan Government’s Big Four Agenda. Key recommendations from the report were discussed including that the Kenyan Government should restructure MSME institutional support structures, introduce dedicated MSME incubator programmes and involve county governments in MSME support.
The report and event built on SET consultations, held on 18 July 2018 in partnership Kenya’s Executive Office of the Presidency, to discuss the role of MSMEs in the ‘Big Four’ agenda with government, manufacturing firms, funders and industry.
The Hon. Peter Munya, MGH, Cabinet Secretary, Ministry of Industry, Trade and Cooperatives, officially launched the report, praising it, and outlining steps the Government of Kenya is already taking to implement its recommendations, including through regular coordination meetings between county and national government representatives.