Uganda’s economy escapes worst effects of the COVID-19

Risks

Risks  to  the regional  outlook  are  tilted  to  the  downside,  and  include  weaker-than-expected recoveries in key trading partner  economies,  logistical  hurdles  that further  impede  vaccine  distribution,  and  scarring  of  labor productivity that weakens potential growth and income over the longer term.

Output  in  Sub-Saharan  Africa  contracted  by  an estimated   3.7   percent—a   per   capita   income decline of 6.1 percent and the deepest contraction on  record—as  the  COVID-19  pandemic  and associated  lockdown  measures  disrupted  activity through  multiple   channels.

South Africa suffered  the  most  severe  COVID-19 outbreak  in  Sub-Saharan  Africa,  which  prompted strict   lockdown   measures   and   brought   the economy  to  a  standstill. With economic activity in South Africa already on a weak footing before the pandemic hit, output is expected to have fallen 7.8% last year.

Africa’s biggest economy, Nigeria, is estimated to have shrunk 4.1 percent in 2020—0.9 percentage point more  than  previously  projected—as  the  effects  of the COVID-19 pandemic and associated measures were  worse  than  expected  and  affected  activity  in all   sectors.

The deep contraction in activity extended beyond its large economies.   Oil exporting countries such as Angola, the Republic of Congo, Equatorial Guinea, and South Sudan have faced sharply   lower   prices. Equally badly battered have been countries such as Cabo Verde,   Ethiopia,   Mauritius,   and Seychelles that rely heavily on large travel and tourism sectors.

Economic indicators

Exchange rates across the Sub-Saharan region remained about 5% weaker than levels prior to the pandemic, on average, following sharp depreciations in the first half of 2020.

Inflation trends were uneven last year, as persistently soft demand helped  contain  inflationary  pressures  in  some countries such as Kenya, South Africa, whereas inflation remained elevated, or even accelerated, in response to  weaker  currencies  and  food  price  pressures  in others such as Angola, Ethiopia, Ghana, Nigeria, and Senegal.

Rising food prices weighed on households incomes and consumption.  This has prompted   governments   to   implement   policy measures to improve food provision, support the agriculture sector, and provide cash transfers to the poor.  The  pace  of  monetary  policy  easing  across the  region  slowed  in  the  second  half  of  last  year, particularly  in  countries  experiencing  inflationary pressures.

Following unprecedented capital outflows in the first half of 2020, the recovery inflows were anemic. In total, FDI flows  collapsed  by  an  estimated 30%  to  40%  last  year,  while  remittance inflows—a  vital  source  of  household  income  and foreign  currency  receipts—are  estimated  to  have plummeted  by  9%.

There    was    a    step-change    in    government indebtedness in 2020, as economic activity and government revenues sharply fell while pandemic-related spending rose appreciably.  Government debt in the region jumped on average 8 percentage points to 70% of GDP.

Government  debt  in  the  region  is  expected  to  rise  further  this  year, elevating  concerns  about  debt  sustainability  in some  economies.  This reflects expectations of persistently wide budget deficits as fiscal revenues remain below pre-pandemic levels, while health and pandemic-related spending needs continue to be elevated.

Moreover,  greater interest  payment  burdens  in  most  economies  due to the pickup in indebtedness are bound to further weigh  on  budget  deficits  and  could  undermine required  development  spending.

In all, 29 Sub-Saharan African countries—of the 44 Debt Service Suspension   Initiative   (DSSI)   country   participants—are benefiting from debt relief assistance from official bilateral creditors. Relief amounts to $4.6 billion in debt service suspension—almost half of the total potential DSSI savings. Although the  DSSI  is  providing  some  breathing  room  for financially  strained  economies,  some  countries such as  Angola and  Zambia  are still  struggling  to pay  their  sovereign  debts.

Banks  may  also continue facing  sharp  increases  in  non-performing  loans  as  companies struggle  to service their  debt  due  to  falling  revenues.

In cash-strapped   economies,   governments   faced severe difficulties to pay their sovereign debts. As a result,   Angola   and   Zambia   have   sought   to restructure their public debts.  Two  of  Angola’s largest  creditors  have  agreed, outside  of  the  G20 Debt  Service  Suspension  Initiative,  to  defer  the principal  payments  on  Angola’s  debt  for  three years,   whereas   unsuccessful   debt  repro-filing discussions  contributed  to  Zambia’s  sovereign debt default.

Current  account  deficits  widened  in  the  median economy   last   year,  as collapsing exports; including  tourism  receipts, exceeded  the  falls  in imports  induced  by  contracting  domestic  activity in Angola, Gabon, Mauritius, and Rwanda.

Deficits are expected   to   narrow   somewhat   in   2021   as improving  external  demand,  as  well  as  firming commodity  prices,  underpin  a  recovery  in  export earnings.

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