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Covid-19 Watch

Economic Impact of COVID-19: What you should know before delving into numbers

COVID-19 outbreak presents multifaceted economic effects. It might be too soon to do an economic impact assessment and to forecast for the economy but holistic and critical thinking about how to approach the subject is very important. This article provides an insight into six channels through which COVID-19 is impacting on the economy. Hence, the need to critically apply one’s mind while assessing the economic impact in order to generate appropriate policy interventions.

First, the fear of contamination is one of the most crucial but unmentioned and hardly a quantifiable factor that is bound to have a high economic impact on the economy. The impact is through the aversion behaviour arising from fear, thereby making economic activities halt. The fear of contagion compels reduced labour force participation, thereby disrupting activities across all sectors of the economy. According to a World Bank report, aversion behavioural effects accounted for 80% to 90% of the economic impact of the SARS pandemic of 2001-2002 and the 2009 H1N1 flu pandemic.

Second, mobility restrictions, informal trade and transport. The major concern about COVID-19 relates to its fast transmission rate. To reduce the transmission, restrictions on the movement of people and the closure of borders was indispensable in South Africa. Cargo transport was not restricted, thus minimal disruption of formal trade. Economic implications of this intervention include reduced trade within the country, reduced tourism, and reduce informal trade. Although official trade statistics do not capture informal trade (including across border exchanges), women account for 70% of informal cross-border traders in SADC region; mainly dealing in agricultural products. Therefore, the possibilities of underestimating the impact of COVID-19 on informal trade due to mobility restrictions should not be ignored.

Third, agriculture. The need for labour within the agricultural sector especially at critical stages, for instance at planting and harvesting is very important. A shortfall of that leads to low yields due to either late planting or postharvest loses (e.g. perishable fruits and vegetables must be timely harvested). Despite the disruptions from the pandemic, South Africa’s agricultural sector is very essential, hence strict interventions were instituted so that all agricultural operations continue with minimal interruptions.

However, in other countries like in India, farmers were called upon to delay the harvesting of wheat until late April 2020 while fruit and vegetable farmers panicked that their produce was to rot in the filed due to labour shortage since workers could not reach farms. More draconian interventions like export bans of rice were imposed by Vietnam, Kazakhstan imposed restrictions on the export of wheat while Saudi Arabia sanctioned export bans on fresh produce. These disruptions bear a direct effect on any country’s food stocks, thereby enticing speculative market actors to increase prices of staple food items.  

Fourth, the financial sector. Effects of COVID-19 are manifesting through liquidity problems, especially when large depositors choose to withdraw funds or when creditors fail to honour repayments. Failed repayments exacerbate the problem of the nonperforming loan. Thus, financial institutions need to put considerable attention to bad loans. Moreover, financial markets tend to tumble during times of shocks e.g. the ongoing pandemic. For instance, as restrictions were being imposed by president Cyril Ramaphosa while declaring a national state of disaster on Monday 16, 2020, the Africa All-Share Index at Johannesburg Stock Exchange (JSE) dropped by 12%, the biggest drop ever since August 2013.

The Rand also lost value by 2.2% against the US dollar and more volatility is foreseen in financial markets if COVID-19 is not contained quickly. The volatility presents a major risk of reduced investor confidence in the economy, implying that prospective investors might choose to postpone investing, and the worst-case scenario would be cancelling investment deals. Therefore, every stakeholder has a responsibility to guard against reduced investor confidence in the economy.

Fifth, fiscal challenges. COVID-19 is not business as usual case. This is compelling government expenditure to increase in a bid to cushion the most vulnerable (i.e. the elderly, children, disabled and poorest by providing food parcels and medical care) against the severe impacts. Moreover, fewer fiscal revenues are expected due to limited economic activities especially during the lockdown period, implying less revenue collection from taxes, tariffs and customs duties.

Lastly, Tourism sector. The temporary closure of borders to inbound foreigners, suspension of flights (local and international), and the suspension of activities at entertainment and tourism centres renders limited revenue inflows for the sector yet overhead costs are incurred to attract tourists even post COVID-19. Fewer tourists cause reduced consumption thereby impacting on the retail, hospitality and entertainment industries.

Article by: Dr Moses H Lubinga, Senior Economist,  Trade Research, National Agricultural Marketing Council

Disclaimer: The views and opinions expressed in this article are those of the author. They do not purport to reflect the opinions or views of Mzansi Agriculture Talk or its members.

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