The Chinese factor

Sally Farid, Tuesday 7 Apr 2020

China is the main trading partner and creditor of many African countries, causing their economies to be affected by the slowdown in Chinese production and the demand for oil,

photo: reuters

The measures taken by China to contain the Covid-19 pandemic have resulted in an overall two per cent reduction in Chinese production, which has so far been translated into a $50 billion drop in global trade, according to figures from the UN Conference on Trade and Development (UNCTAD).

Its report revealed that the sectors most hurt by the drop included the “manufacture of precision tools, machinery, automotive equipment, and communications devices”. The economies most impacted were those of the EU ($15.5 billion), the US ($5.8 billion) and Japan ($5.2 billion), it said.

According to a report on the oil market from February 2020 by the International Energy Agency (IEA), demand for oil in China represents 14 per cent of global demand and the growth of demand for oil in China is more than 75 per cent of the growth in global demand. Therefore, any relapse in China’s economy is expected to negatively impact the global economy in general and indirectly affect the African economies.

The IEA expects global demand for oil to drop by 435,000 barrels a day in the first quarter of 2020, which is the first quarterly contraction in more than a decade. It also expects that global demand for oil will drop in 2020 by 365,000 barrels a day, the worst demand performance since 2011.

The economic impact of the Covid-19 coronavirus on the African countries depends on the size of their trade, investments, and movement of people with China. Since some African countries greatly depend on oil and gas exports, it is expected that the drop in oil prices will negatively affect their economies. Since the discovery of the new coronavirus, the price of oil has dropped to lows it has not seen in years.

Sub-Saharan Africa could lose up to $4 billion in exports if the pandemic leads to a drop in demand by China and the rest of the world, due to falls on the stock exchange, halts in production, closed borders, and canceled flights. If the price of oil falls by five per cent due to a drop in global demand caused by Covid-19, the Sub-Saharan African countries will see a $3 billion drop in oil revenues. The countries that will be most impacted include Angola, the Democratic Republic of Congo, Sierra Leone, Lesotho and Zambia. Angola sends 60 per cent of its exports to China, for example.

The pandemic is also impacting tourism, especially since several African countries have ordered travel bans in and out of their territories, dealing a blow to the continent’s airline and tourism sectors. It is estimated that African airlines have lost $400 million since the start of the pandemic, and most Sub-Saharan African countries have stopped flights to and from China. Countries that have taken the firm position of banning flights with the outside world include South Africa, Tanzania, Mauritius, Kenya, and Ghana.

Fluctuating exchange rates are another economic feature of the pandemic. Since most African currencies are tethered to foreign currencies, their flexibility is limited and they are impacted by economic crises. The rand in South Africa lost five per cent of its market value against the US dollar after the crisis began, and other African countries saw a rise in the price of their bonds. Economically, this means a rise in the cost of financing and hence a rise in the cost of repayments and the servicing of debt on their bonds.

Meanwhile, Chinese infrastructure projects in Africa have faltered due to the disruption resulting from the travel bans. The larger problem is that supply chains for primary components for these projects come from China and have become disrupted, making it difficult to find components, equipment, and machines from elsewhere.

African officials are concerned about the fast spread of Covid-19 across the continent, which will impact many sectors in their countries. Africa is home to 16 per cent of the world’s population, but it spends very little on healthcare at around two per cent of global spending. This means that the pandemic will seriously impact African communities on top of the other diseases they already suffer from, including HIV, Ebola, and others. The ability to contain Covid-19 will rely on the resilience of public healthcare systems in Africa. One example is Djibouti, which ranks 157 out of 191 countries on the World Health Organisation’s (WHO) healthcare systems index.

The African Export-Import Bank (Afreximbank) announced the launch of the Pandemic Trade Impact Mitigation Facility (PATIMFA) on 20 March, with $3 billion to assist the African countries in dealing with the economic and health impacts of the Covid-19 pandemic. It will facilitate financing for countries that are Afreximbank members to cope in an organised manner with the financial, economic, and health shocks resulting from the novel coronavirus outbreak. It will also support central banks and other financial institutions in these countries to pay trade debts and avoid defaults. It will support and stabilise foreign currency resources for central banks so they can support critical imports during the Covid-19 pandemic.

Egypt is a key member of the Afreximbank. The $3 billion will assist members whose revenues are linked to specific export revenues, such as from metals, to manage any sudden drop in revenues due to slumps in exports. It will also facilitate funding trade to import urgent necessities to combat the pandemic, including medical equipment and equipment to refurbish hospitals. This will be done through direct financing, credit lines, guarantees, currency swaps and other mechanisms.

The African countries need to adopt a slew of health policies and media campaigns to contain the pandemic and research the possible economic impacts of it depending on the extent of their exposure to the novel coronavirus through trade, investment, and the movement of people. The African countries must move to limit shocks from the outside resulting from an over-reliance on one country or one activity.

China is the main trading partner and creditor of many African countries. The Covid-19 outbreak reminds us of the importance of diversifying export partners and identifying funding other than from China.

The writer is professor of economics at the Graduate School of African Studies at Cairo University.

*A version of this article appears in print in the  9 April, 2020 edition of Al-Ahram Weekly

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