Ethiopia’s economic growth will decline by 9.9% in 2020

The Ethiopian Economics Association, policy working paper on the effect of COVID 19 estimates that the pandemic might slow down the economic growth by up to ten percent and exacerbate the poverty line by half at the worst case scenario.
The policy working paper issued under the title ‘Economic and Welfare Effects of COVID-19 and Responses in Ethiopia: Initial insights’ has evaluated the economic effect due to the coronavirus in different stages.
The paper has also advised the National Bank of Ethiopia (NBE) to consider reserve rate relaxation to enhance banking liquidity besides several other measures to mitigate the problem that is being faced because of the outbreak.
“Under different scenarios for labour layoffs and pandemic duration, our results indicate that the pandemic will reduce Ethiopia’s economic growth in the range of 2.2 percent to 9.9 percent in 2020,” the paper written by Degye Goshu, Tadele Ferede, Getachew Diriba, and Mengistu Ketema stated.
It further indicated that in a very conservative scenario (mild scenario) with three months pandemic duration, economic growth will be reduced by over two percentage points from the base due to labor reduction either temporarily or permanently.
“Even under the mild scenario, delays in the containment of the virus will lead to a large reduction in economic growth which could multiply the economic cost of the disease,” it added.
The poverty impact of the pandemic is considerable due to a slowdown in economic activity, “incidence of poverty is expected to worsen, especially in the severe scenario, as nearly half of the population would fall into extreme poverty under acute and protracted economic downturn and prolonged pandemic duration,” it said.
At national level, the incidence of poverty is expected to grow from 22.1 in the base scenario to 38.4 percent in the worst scenario, suggesting that nearly half of the population will fall under extreme poverty if the pandemic lasts for a year.
The paper stated the pandemic will have differentiated impact on rural and urban areas, added that the effect in service and industry sector will be more serious than agriculture sector.
“The pandemic is expected to hit hard the service sector. The industry sector, especially labor-intensive manufacturing industries will be impacted by the pandemic. If the pandemic lasts for a longer period, the agriculture sector will also be negatively affected,” it stated.
The incidence of poverty will increase by about twofold with significant variation across rural and urban residents. Similarly, the depth of absolute poverty will increase from 6 percent in the base scenario to 12 percent (double) in the extreme scenario.
Concerning expression of value it stated that under the mild scenario and three months duration, the economy will experience a loss of around 44.5 billion birr or 2.2 percent of GDP compared to the baseline, with the service sector experiencing a large contraction of 3.8 percent.
“However, under prolonged duration where the pandemic is mild, the economy will experience a significant loss, amounting 139.2 billion birr or 6.7 percent loss in GDP relative to the base case. The services and manufacturing sectors will be hit very hard if the pandemic lasts for six months,” it added.
Further more if the pandemic continues for three months under the assumption of severe scenario, about 3.6 percent of total GDP contribution from labor productivity will be lost. This means, more than 74 billion birr will be lost within three months.
“Under this scenario, the effect of the COVID-19 on the service sector in terms of reducing GDP is very high (reduction of about 6.1 percent of annual GDP within 3 months) followed by that of manufacturing and construction (reduction of about 3 percent), and agriculture (reduction of about 1 percent),” it elaborates the estimation.
“However, if the pandemic lasts for 6 months, about 9.9 percent of total GDP will be lost under the severe scenario. That means, the country is going to lose more than 204 billion birr within six months,” stating the worst case scenario.
The effect of COVID-19 on the service sector in terms of reducing GDP is very high (reduction of 15.7 percent of annual GDP within 6 months) followed by that of manufacturing and construction (reduction of about 9.9 percent), and agriculture (reduction of about 2.4 percent).
The paper that support the current government’s decision to limit mass transport, ban gatherings, business closure, flight bans, school closure, and work- from- home may be feasible measures for certain segments of the Ethiopian population under specific context.
“For the vast majority, movement restriction will not be feasible. It is important, also, to explicitly clarify, in no uncertain terms, that ‘mass transport ban’ does not and should not include national and regional supply chain and logistics networks in order to avoid the disruption to the national supply chain. This is a crucially important clarification as a matter of national security agenda,” it added.
The study has also added that due to less room numbers on household level, isolation at home is not feasible in both rural and urban areas to control the pandemic.
“The most relevant and feasible option to control the pandemic in Ethiopia is to limit the spread of the pandemic, not isolation after spread,” it added.
According to the latest policy paper of the Ethiopian Economics Association the feasibility of quarantines is also dependent on the country’s health facilities and supplies, health professionals, population size, and nature of the pandemic.
Layoff
The paper has also clearly stated the wave of the layoff and the effect in the economy. The policy paper stated that the magnitude of job loss depends on the length of the pandemic.
For instance, about 37 and 61 percent of jobs will be lost in the manufacturing and construction sectors in the three months and 6 months severe scenarios respectively. The services sector will be severely hit, as it would experience a decline in employment by 57 and 74 percent in the two scenarios respectively.
Recommendations
The paper recommended that NBE shall initiate discussions to reduce interest rates to stimulate the economy and initiate discussions with financial institutions to support exporters by increasing foreign trade credits, deferring loan payments and extend debt rollovers.
It added that NBE needs to consider reserve rate relaxation to enhance banking liquidity and discuss with commercial banks on rescheduling bank loan repayments and write off interest payments for severely affected sectors until the shock is abated.
“Put in place alternative mechanism to fill a potential import deficit. These may include planting short-season and early-maturing crop varieties and prioritizing irrigation schemes for selected foods crops (e.g. potato, maize, etc.),” it added.
The 46 pages policy working paper concludes its recommendation stating that the pandemic sends a message that there is a need to establish a national Sovereign Fund that will be activated and deployed in times of crisis and acute emergency situations.
A sovereign fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds.