Benno Ndulu: The pandemic has laid bare the pivotal roles of both the informal sector and SMEs

An interview with Pr Benno Ndulu, the former Governor of the Bank of Tanzania, for INET’s series on COVID-19 and Africa

Pr Benno Ndulu is the former Governor of the Bank of Tanzania (2008-2018), and a Professor of development economics at the University of Dar-es-Salaam (Tanzania). Prof Ndulu is also a member of President Ramaphosa’s (South Africa) Economic Advisory Council. He worked as a Lead Economist with the Macroeconomic Division of the World Bank for Eastern Africa. He is best known for his involvement in setting up and developing one of the most effective research and training networks in Africa, the African Economic Research Consortium (AERC).

The COVID-19 pandemic has triggered in Africa, just as in many parts of the world, both a health and an economic crisis. Although the continent seems - for now - less affected than others by infection and high death rates, the economic impact is much harder. Growth in sub-Saharan Africa has already significantly been affected, in part due to lockdown measures, but also to a large cut in global demand. The World Bank is forecasting a fall from 2.4% growth in 2019 to -5,1% in 2020, causing the first recession over the past 25 years. From your standpoint, how do you assess the economic and social impact the pandemic is having on African economies and livelihoods?

Pr Benno Ndulu: There are actually three dimensions to the impact of Covid-19 and there is quite a significant diversity across Africa, partly because of the type of responses to the pandemic which varies significantly across countries. Firstly there are countries that have immediately intervened with lockdowns. Generally these countries have enough resources to provide a safety-net type of interventions, but there are also other countries which have imposed lockdowns without adequate safety nets. They have used the power of the state to enforce such lockdowns without taking measures to really take care of populations that can’t go out and make an income. Remember, a significant proportion of the African population depends on day-to-day income in order to survive. So even among those who have enforced lockdowns, there is this big difference about access to safety-nets, and the impact will clearly be different too. There is another category of countries that have decided on going ‘light’ on social distancing: they have simply put certain health measures of personal hygiene and social distancing in place, not meeting in large crowds and closing schools and universities. I’m talking about countries like my own Tanzania, Ethiopia, Burundi and a good number of these are almost facing immediately elections and so they can’t afford to do much by shutting down their economies. So I think a big part of this differentiation is the balance between lives and livelihoods. Those who can afford to implement safety nets are able to work with both, but those who are not able and who are also facing political pressure in terms of elections tended not to go that route. This is what I call adopting a Swedish model without the welfare system and without the capacity of the health system to deal with both testing and contact tracing and deal with care and handling emergencies. I think the depth of the economic difficulty coming out of the immediate response will very much depend on these categories. The difference between those that went through lockdowns and those that didn’t is a matter of what happens after the lockdown gets eased off, particularly if they don’t have the capacity to test and contact trace.

The second impact is the damage on economic activities in African countries, which is brought about by the immediate global reaction to the pandemic, particularly closure of borders with impacts on trade flows and tourism for example, and disruption of economic activities within those economies and collapse of global demand. Examples include the collapse in demand for oil, with a number of oil-producing countries in Africa hit by this collapse almost immediately. So this is a big set of impacts that we need to deal with. The third impact comes from the global recession , following disruptions both at home and in trading partners countries. We don’t know yet whether the economic downturn we face is going to be V-shaped, U-shaped or L-shaped – if the last of these, we could be faced by a recession as long as that following the global financial crisis. And I happened to have been at the centre of that, as Governor of the Central Bank of Tanzania. Some countries are struggling because they don’t have the fiscal space right now to deal with the combination of current crises. We have learnt from the global financial crisis: those countries that did implement some safety-net measures so as to avoid closure of activities and keep the economy as an ongoing concern could more easily resume the recovery process. Those that have undertaken enough safety nets to keep SMEs and the informal sector going will probably start the process ahead of those that did nothing.

For those that avoided lockdowns altogether, they might just continue with less disruption to the economy because they didn’t close down, but there will probably be a cost in terms of lives.

I think for the majority of the African countries the big challenge comes from resource constraints, because they entered this crisis with depleted fiscal space, and serious debt distress. A majority are either in moderate or in high risk of debt distress, particularly low-income countries. I think this is going to be one of the biggest challenges. All countries need to take this not as business as usual, and agree to take some measures that are rather unprecedented. I also serve in President Ramaphosa’s (South Africa) Economic Advisory Council so I’ve been able to see pretty close-up this process of managing responses. I think there is a very serious problem of dealing with reversible shocks, which you’d have ridden through. But in order to go on to recovery you need growth and a lot of measures required to deal with the problem on the fiscal side. If you go for fiscal consolidation, all the rating agencies give you good marks, but at the cost of economic recovery. They take a stance that it has to get worse before it gets better.. Typically people say: try get some growth, but at the same time they tell you to start getting the fiscals under control, which doesn’t make sense. I have a very clear position. You will have to get fiscals under control, but you need time. You need a much longer time frame to work with.

There have been increasing calls for multilateral support for debt cancellation and a moratorium on interest payments for African countries. There doesn’t seem to be a unanimous position either within Africa or among creditors. Africa’s debt is owned by a variety of creditors, public and private, and the role of China who owns an important part of Africa’s debt is also central. What is the fiscal space available for African governments to respond to this? How can the debt issue be negotiated?

Pr Benno Ndulu: I think one has to take into account what countries, including developed countries, have done in terms of dealing with SMEs and corporates that need breathing space for adjustment. A moratorium on debt service has typically been one of the instruments that has been used to provide space for recovery. If the fiscal deficit to GDP ratio which is considered to be reasonable is 5%, they should know that you might have to operate in a fiscal scenario which is much worse than that for a while. However, you need to show you have a clear game plan in getting from here to there, where the fiscal deficit will be back at a sustainable level. You need to buy time.

There has been a huge change in the composition of African debt: it’s shorter in maturity, and commercial to a large extent which means reputational risk is a much bigger issue than it has been in the past. That’s where the rating agencies come in. Unfortunately, rating agencies have tended to act in procyclical way: when things are bad, that’s when they pronounce you to be in really bad shape. African countries now have also to deal with a creditor coordination problem. It used to be the Paris Club and everything was settled there, but now there are new donors like China and the real question is how does one get coordination among all the creditors to deal with this issue. I also sit in the IDA19 replenishment group: one of the things that was clear was that some multilaterals, eg. IMF, have offered to give Africa moratorium in debt servicing. But we know a good number of the low-income countries in trouble actually owe their debt to the World Bank-which has not yet provided such help. I think we certainly need a moratorium on debt service, not necessarily cancellation, because a good number of countries have debt to GDP ratios that are not outrageous. Where it’s really hurting is the debt service to revenue ratio. A good number of them have violated the threshold already, and also debt service to export ratio. So the debt distress is not largely because of a solvency problem which is measured by debt to GDP ratios. Thus it’s not the ability to pay but the ability to convert the national income either through taxation, so that there’s enough revenue to service the debt, or to convert it into foreign exchange (forex) so that there’s enough forex to meet external debt service obligations.

And finally China, is one of the key players now. Collectively all debt from other bilaterals together account for a much smaller share of African debt than China’s does at the moment. It is very important that debt restructuring continues, such as China’s negotiations with Ethiopia. As far as we know, they have agreed a restructure from 7 year debt to almost 30 years, partly because of the maturity mismatch for projects that had not started yielding revenue. Despite this, the country had to start servicing the debt which produced that mismatch. So there should be pressure from all other creditors to get China to move towards that much more effectively.

The European Union is proposing a 500 billion Euro stimulus in the next few months. If this stimulus was going to provide the best effects for African economies, how would you like it to be designed? What’s going to work best for partner countries in Africa?

Pr Benno Ndulu: In fact ‘stimulus’ might not be exactly the right word. Maybe ‘rescue’ is the function that it is supposed to play. My sense would be, just like some countries had done in the global financial crisis from 2008 to 2010, to target particularly those sectors that had suffered most from the shock. So, for example, tourism in this case is going to be a huge challenge because of closure of borders. We know that the bulk of those that spend money and visit are not just on lockdown but also face much more stringent movement restrictions. So there are a number of firms that should be protected from disappearing by providing support for them to keep the employees in place and make sure that the equipment and everything else remains ready for the time when revival of trade happens. The same is needed for related activities like travel, airlines, small firms that ferry tourists to and from hotels, and cultural activities. Tourism is one sector which has the highest backward linkages: if you deal with that you deal with a lot of other sectors. My first application would be exactly to keeping a good number of those that have suffered most from this as a reversible shock, as ongoing concern. Secondly the social safety nets which have typically cushioned the effects on poorer segments of the society: fortunately in a number of countries, there are already programs that have been running and therefore the mechanisms are already there to continue putting resources into. This is just to make sure that segments of society benefit, not just from cash transfers, but help is given to these populations to make sure that their smallholder agriculture activity continue and their children keep going to school. Let’s protect human capital from collapsing. It’s not just jobs, but also education processes.

COVID-19 has been presented as a moment of reflection for African policymakers on how to rethink development models. Reflections by several organisations like the African Development Bank and UNECA have argued for further economic transformation by adopting measures to diversify economies and integrate the informal sector. How would you reflect on these?

Pr Benno Ndulu: First broadly, I think I agree with that. Responses to the pandemic have laid bare the pivotal roles of both the informal sector in rural and urban settings as well as SMEs in the livelihood of Africans. This has been the case, notwithstanding all the major efforts we have been involved with, in modernizing our own economies. We have got to make sure that any transformation strategy carries the bulk of those livelihoods in these sectors and to do so by raising their productivity. This is why better connectivity within value chains and also enhanced value realized from their effort, giving them better prices etc, to reduce their costs - and technology will play a great part of this. Formalization becomes quite important in the transformation process - we have seen that happening in Indonesia and also some examples in Africa. In Indonesia, all the motorcycle riders are now operating under one unit called gojek: not only has that allowed them to do their business much more efficiently, but it has also created a basis for them to have safety nets organized for the group of almost 3 million people now. Similar ones are coming up in Africa, be it Uber type motorcycles, but localized. These are all sprouting, and they provide a mechanism to really organize this kind of welfare systems; when there is such a shock it’s possible immediately to have that as a rescue mechanism, so that we are not totally unprepared. So long as more than 60/70 percent of Africans depend on this circuit, we have got to make these sectors much better than they have been. We in our own work in the Pathways for Prosperity commission have shown how this can be done: taking advantage of the digital economy and there are many solutions.

Secondly, the responses have also demonstrated the role of digital technology in clearly showing that we can reduce the cost of doing development by applying these technologies in the way we deliver services in education and health and we have many examples of how that can be done

Finally, I’m one of the persons that have admired Richard Baldwin’s globalization story of new stage, which is trading labour services via tele-migration. The new stage is driven by a reduction in face-to-face costs, enabling tele-migration. It allows to separate labour services geographically from labourers. So that people will sit in one nation while working in offices in another nation and the container ship of that tele-migration - as it used to be for trade in the past for globalization - happens to be digital platforms and there are many of those that are now sprouting. Digital platforms have got to have a much bigger space now. I’ll give you an example in South Africa: labour absorbing digital platforms are helping the country to raise its share of globally traded services. These currently employ almost 255,000 people and projections of interventions hope to probably raise that number by 500,000 in the next decade and it becomes a new source of growth. This is in addition to other initiatives that are aimed at unlocking demand for low-skilled labour via digital platforms. I think these are all very important initiatives that ultimately will start taking jobs to where people are rather than having to force migration of people from the rural areas into the cities in order to be able to offer their services. And this is going to be the next major big element that needs attention in the transformation process.

Talking about technology, what should be the role of technology in tackling the health and economic effects of the pandemic? How can African governments and populations make use of accessible, quality and affordable technology innovations especially mobile applications for e-health, e-education provision and chatbots for infection prevention and information?

I think there are a few elements that need to be fixed. First, I think countries have to get digitally ready and this doesn’t mean just to have the networks and the infrastructure: it includes enabling all citizens to be able to connect to health service information, be it for public health purposes, be it for treatment. In Somalia, there are solutions now where one doctor can take care of almost 40,000 people through using a mobile phone, and distinct apps are being developed to help doctors also give specialized attention to individuals. You can only do that once you have these sorts of artificial intelligence and mobile phone type initiatives that build platforms for such services. So getting countries digitally ready and inclusively is extremely important. Populations need to have universal access to this kind of technology services, and in order to deal with that, it is important that it is also affordable. So in part it will need revisiting business models. We know there are business models that are being developed now with cross-subsidization across market segments just like with electricity: those who use very few units are charged much less than the cost. Those that use more are charged more and you have cross-subsidization which is happening. So I think we just have to make sure we have inclusion in coverage but make sure that it’s affordable and that there are solutions that serve the purpose. Otherwise the big difference between access and use will persist, and part of the reason is affordability and products that make sense to users.

About the COVID-19 and Africa series: The Commission on Global Economic Transformation (CGET) chaired by Nobel laureates Joseph Stiglitz and Michael Spence and hosted by the Institute for New Economic Thinking (INET) is carrying out a series of conversations with African thinkers about their perspective on economic transformation and how the COVID situation re-shapes the options and pathways for Africa’s development.

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