Economic Effects of the Outbreak
In addition to the enormous and tragic loss of human life, the Ebola epidemic is having devastating effects on these West African economies in a variety of essential sectors by halting trade, hurting agriculture and scaring investors.
Mobility Restrictions, Trade and Transport: To halt the spread of the virus, the countries most affected by Ebola have implemented quarantines in areas where risk of infection is high while neighboring countries such as Cote d’Ivoire and Senegal have imposed restrictions on the movement of people and goods, including border closures. These measures, in turn, have reduced internal and regional trade, transport and, of course, tourism. But since official trade statistics do not capture informal trade—including cross-border trade which could range from 20 to 75 percent of GDP for West African countries—the estimated impact proposed by the World Bank may overlook the large reduction in informal trade due to mobility constraints. While these actions aim to break the chain of transmission, the president of Sierra Leone has called them an “economic blockade” that has resulted in scaled-back production and revenues for the government.
Agriculture: According to the Food and Agriculture Organization (FAO), agriculture accounts for 57 percent of Sierra Leone’s GDP, 39 percent of Liberia’s, 20 percent of Guinea’s, and 22 percent of Nigeria’s. Disruptions from the outbreak during the planting season earlier this year are expected to diminish yields for the staple crops of rice and maize during the harvest season, between October and December. Already, the price of the staple crop cassava in some places in Liberia has more than doubled (increased by 150 percent) according to the FAO. Food price shocks such as these will likely lead to inflation: According to IMF estimates, in Liberia the inflation rate will climb to 13.1 percent in 2014 from 7.7 percent before the Ebola crisis first broke.
Mining and Investment: Mining activity (which constitutes 14 percent of Liberia’s economy and approximately 17 percent of Sierra Leone’s) is decreasing in Liberia and Sierra Leone following restrictions on non-essential travel and repatriation of personnel. Voice of America reports that investor confidence has dropped since the escalation of Ebola cases. China Union and Arcelor Mittal are scaling down iron ore mining operations in Liberia. Some miners in Sierra Leone and Liberia are afraid to enter high-risk districts, and several firms (including Australian mining firm Tawana Resources and Canadian Oversea Petroleum) have suspended operations or sent foreign workers home. Investments may be postponed and even cancelled if the perceived risks are too great. Guinea, for now, is not experiencing a major impact on its mining sector since its main mines are not located in the areas where there is a high risk of infection.
Fiscal Challenges: Fiscal revenues will decline as limited economic activity reduces revenues from taxes, tariffs and customs duties. At the same time, to resolve the crisis and meet the greater health and security needs of their people, government expenditures will need to rise. Avoiding the impact on the poorest and most vulnerable will also necessitate more transfers. As seen in Figure 1, the World Bank reports that “short-term fiscal impacts are also large, at $93 million for Liberia (4.7 percent of GDP); $79 million for Sierra Leone (1.8 percent of GDP); and $120 million for Guinea (1.8 percent of GDP).”
Through its adverse effects on public revenue and spending, Ebola is putting the budget under heavy pressure, substantially widening the fiscal deficit.
Public Finance: The outbreak entails lowered revenues and increased expenditure, especially in the health sector, putting extra pressure on fiscal balances and weakening the state’s capacity to contain the disease and to buttress the economy via, say, fiscal stimulus. The three countries have resorted to external support to bridge the financing gap.
Public Revenue: The fall in public revenue may amount to tens of millions of dollars—a non-negligible proportion of gross domestic product (GDP) for three small economies. This reduction stems from slower economic activity and a contraction of the tax base in most sectors, notably industry and services. To that may be added weaker tax administration, so that fewer taxes are collected on income, companies, goods and services and international trade, as well as fewer royalties collected on the dominant natural resource activities.
Public Spending: On the other side of the coin, the crisis triggered by the epidemic calls for heavy public spending on health to contain the disease, while social protection needs grow quickly. Other non-health expenditure may also emerge, e.g. relating to security and food imports.
Investment, Savings and Private Consumption: In the face of lowered public revenue and increased outlays, the crisis may divert public spending from investments in physical and human capital to health and other social expenditure. Foreign and domestic private investment is also declining in the short term, often out of alarmism prompted by the disease. Authorities in all three countries have reported postponed or suspended investment in major projects.
The Financial Sector: Although the financial sector has largely been excluded from the narrative of the outbreak, it is worth noting that if large depositors withdraw funds, banks may face serious liquidity problems. Also, if some big creditors miss payments, the number of nonperforming loans will increase, eventually leading to some defaults. So liquidity management must also be a priority and banks’ bad loans portfolio need to be monitored carefully. Ultimately, loss of confidence in the financial system is the main risk factor and should be avoided. Finally, capital flight is an additional risk to the financial system especially as exchange rates have become more volatile. The World Bank reports that many wealthier Guineans and expatriates have already left the country and that uncertainty and risk aversion in Sierra Leone has prompted a rise in capital outflows.
Tourism: Airlines such as British Airways, Emirates, Air France, Asky Airlines and Arik Air have implemented some bans on flights to and from the most affected countries. The African Union has asked for these bans to be lifted and also for proper screening mechanisms to be put in place at airports. CEOs of 11 firms operating in West Africa have said that some measures, including these travel restrictions, are doing more harm than good and may well be contributing to the humanitarian crisis by blocking crucial trade flows, thereby pushing up the prices of essential foods and medicines. There are also some concerns that an indirect consequence of the Ebola outbreak will be diminished tourism throughout the African continent: As seen in another recent Africa in Focus blog, the Ebola outbreak has been dominating headlines in the U.S., African and international press since early August, even overshadowing the Africa Leaders Summit. Misconceptions about the transmission of Ebola and the risk of travel in Africa may further reduce tourism to and within the continent.
Labour Supply and Productivity: The crisis has cut the labour supply (including expatriates), potentially lowering the quantity and quality of goods and services, especially public services.
Ebola-related mortality and morbidity have cut the number of farmers available to work in agriculture and taken an extremely heavy toll on health workers.
Inflation, Money and Exchange Rates: Inflationary pressures are mounting as the crisis spreads, undermining competitiveness for businesses and traders and reducing households’ purchasing power. External assets have been substantially reduced and local currencies depreciated as foreign trade tumbles and demand rises for dollars. Countries’ currency reserves have also been hit.
Unemployment and commercial closures have risen: Many businesses or branches are shutting every week, and even those staying open have cut staff or reduced working hours. The largest proportion of the population exposed consists of rural families who depend on subsistence farming. Such people seldom have much stock to fall back on and have seen most of their savings eroded. And as markets have closed for weeks and economic activity has contracted, producers of perishable products cannot sell their produce, affecting household security, particularly in border areas.
The crisis is leaving behind a growing number of orphans, who will require targeted support—both them and the families looking after them. Finally, stigma is growing inside countries, and those saving lives are the most affected: doctors and health workers are being treated by the population as potential vectors of infection, making it hard for them and their families to lead anything approaching a normal life.
Conclusion and Summary:
Considering the tenuous circumstances that these economies find themselves facing, it may be particularly helpful if the international community continued to provide increased support in the form of:
- Humanitarian support: Such as desperately needed personal protective equipment and hazard pay for health workers, emergency treatment units, standardized and universally applied protocols for care, etc.
- Fiscal support: The fiscal gap, just for 2014, is estimated at around $290 million. Increased injections of external support can strengthen growth in these fragile economies.
- Screening facilities at airports and seaports: Policies are required that will enable the flow of relief and encourage commercial exchange with the affected countries.
- Strengthening the surveillance, detection, and treatment capacity of African health systems: Weak health sectors in Africa are a threat not only to their own citizens but also to their trading partners and the world at large. The enormous economic cost of the current outbreak could be avoided by prudent ongoing investment in health system strengthening.