debt relief needed to protect Africa’s informal sector

A largely informal workforce and fragile fiscal situation mean debt relief must be at the forefront of Africa’s response to COVID-19, says World Bank in Africa’s Pulse published this month .

Informal work accounted for 89.2% of all jobs in sub-Saharan Africa in 2018. These workers do not enjoy benefits such as health and unemployment insurance, or paid vacations. Many have to work every day to earn a living. Small and medium-sized enterprises (SMEs), on the other hand, represent up to 90% of all businesses. “A prolonged lockdown will jeopardize the livelihoods of their households,” said the World Bank report said.

For SMEs across Africa, access to finance is a challenge at the best of times.

Before COVID-19, the financing gap for SMEs in Africa was estimated at $331 billion. And interest rate cuts made by some African countries are unlikely to be effective, the bank said, citing reduced labor supply and business closures due to the coronavirus, as well as the weak monetary transmission existing in underdeveloped national financial markets.

This means another type of central bank intervention through direct lines of credit or secured business loans to formal and informal businesses is needed, according to the bank.

  • Direct income support is necessary for the most vulnerable, especially those in sectors where containment measures prevent them from working.
  • Cash transfers are easy to implement and an effective way to reach the informal sector, especially the self-employed in slums, the bank says.
  • Tax systems should be used to help businesses through tax relief and delayed debt repayment.

READ MORE: Coronavirus: Africa must act on World Bank and IMF debt relief proposal

South Africa, Namibia

The most decisive policy responses have come from southern Africa, said the bank.

  • In South Africa, the social security agency pays advance social benefits to the elderly and disabled
  • Government to pay sick leave to workers affected by lockdown or those who fall ill
  • In Namibia, formal or informal workers who have lost their income will receive a one-time payment of 750 Namibian dollars (50 US dollars).
  • Taxpayers can borrow one-twelfth of their previous year’s tax payment on favorable terms.

But how to pay for everything?

The massive fiscal costs could lead several governments to default on their debt, the report says. About 17 African governments have bond spreads above 1,000 basis points, a threshold that typically precedes defaults.

That means international debt relief This is the key.

  • In 2018, sub-Saharan Africa paid $35.8 billion in total external debt service, or 2.1% of regional GDP.
  • “Carrying out effective policies while preserving macroeconomic stability in sub-Saharan Africa may require suspension of sovereign debt payments or debt relief,” the bank argues.
  • With multilateral assistance from the IMF, World Bank and regional development banks, this would “immediately inject new liquidity and expand fiscal space for African governments.”
  • The region may need an emergency economic stimulus of $100 billion, including a $44 billion waiver for interest payments to multilateral, bilateral and private creditors in 2020, the bank estimates.

READ MORE: Coronavirus: South Africa’s Ramaphosa mounts economic relief efforts

The essential : Failure of the international community to provide debt relief would exact a heavy toll on Africa’s informal sector.

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