CHALLENGES GALORE COME EAST AFRICA’S WAY BUT THERE IS OPPORTUNITY AS WELL
(Posted 11th March 2020)
East Africa’s private sector apex body, the East African Business Council, yesterday published a briefing document, outlining both challenges and also opportunities for the region’s businesses.
Supply chain disruptions and the downturn of aviation and tourism form a major part of the document as are the setbacks to major infrastructure projects due to problems with imports but also lack of labour – many Chinese project workers and managers had traveled to China for the Chinese New Year and were then caught up in the anti-COVID19 measures.
Below is the full text of the brief for the benefit of ATCNews readers across the Eastern African region but also for those from the rest of Africa where similar challenges are no in need of a concerted and urgent response:
EABC BRIEF ON IMPACT OF THE CORONAVIRUS (COVID-19) OUTBREAK TO EAC BUSINESSES
1.0 CORONAVIRUS (COVID-19) OUTBREAK
The first case of COVID-19 was reported in mainland China in December 2019. So far, over 3,000 people have died of the disease, while more than 80,000 infected cases have been reported in over 40 countries across the world. In an attempt to limit infections, several countries in the Asia, Middle East, Europe and the Americas have already banned large gatherings and imposed stricter travel restrictions. There is likely to be increased transmission of COVID-19 across the world as efforts to find its cure and vaccine are yet to bear fruits.
2.0 IMPACT OF COVID-19 TO EAC BUSINESSES
The ongoing COVID-19 presents a significant challenge to EAC economies due to its strong links with the world economy in terms of trade, business and investment. Some of the sectors which have been heavily impacted include: trade, tourism & travel-related services, supply chains, construction and infrastructure.
Below is an analysis of the impact of COVID-19 to select sectors in the EAC region:
The EAC Trade and Investment Report 2018, indicates that total EAC imports grew by 19.2 percent to USD 38.3 billion in 2018 from US$ 32.2 billion in 2017. Imports from the EU amounted to USD 4.3 billion and accounted for about 11.3 percent, while imports from the rest of the world declined but still constituted 44.3 percent of total imports. The main source of imports from the rest of the world were Asia and the Middle East signifying the importance of countries like China, India and UAE as EAC trading partners. According to the International Trade Centre (ITC) TradeMap, EAC imports from China increased by 6 percent from USD 6.9 billion in 2017 to USD 7.3 billion in 2018. On the other hand, EAC exports to China increased by 22 percent from USD 1.5 billion in 2017 to USD 1.9 billion in 2018.
Some of the main products imported from China (as per the Harmonized System (HS)) include: machinery, mechanical appliances, nuclear reactors, boilers; parts thereof; electronical machinery & equipment parts thereof; Articles of iron or steel; iron & steel; vehicles & parts & accessories thereof; plastic & articles thereof; furniture, bedding & mattresses and rubber and articles thereof.
EAC trade is set to be impacted negatively given its trade ties to China, Europe and the Middle East which are among the countries and regions heavily affected by COVID-19.
With the disruption of imports following the outbreak of COVID-19, EAC stands to be affected by shortages of raw materials, capital goods and consumer goods which were originally imported from China. Already some EAC Partner States have started experiencing declines in imports from China including raw materials, capital goods, intermediate goods and final products. Kenya’s imports from China have plunged by Ksh. 58.64 billion in the first two months of the year on the back of the deadly COVID-19 outbreak, signaling possible supply disruptions of household goods. Provisional import data from Kenya shows the value of goods ordered from China in January and February this year dropped by 36.63 percent compared to a similar period in 2019.
In addition, the EAC Partner States are expected to experience higher prices of Chinese products caused by supply shortages. In the medium and long-term, reduced imports from China are also likely to intensify inflationary pressure to EAC economies.
Similarly, some EAC Partner States have registered a decline in export values and this has been attributed to the reduction in demand from Asia, mainly China. For instance, Rwandan sellers of coffee, chilli and other products valued at approximately $10,000-$20,000 sold on Alibaba’s T-mall e-commerce platform are currently stuck, struggling to ship their goods to China.
To mitigate the impact of COVID-19 on trade, EAC Partner States need to diversify their sources of imports by seeking alternative affordable sources of products that they import from China. This exercise of seeking new markets should be done jointly by the public and private sectors. In the long-term, EAC Partner States should strategize in enhancing their capacity to locally produce raw materials, capital goods, intermediate and final products at competitive prices. This will reduce trade deficits and cushion the EAC Partner States against economic shocks in the global trade.
2.2 Tourism & Travel-Related
Tourism is considered as one of the largest foreign exchange earners and fastest-growing sectors in the EAC. According to the Report by EALA on tourism development in the EAC-2018, tourist arrivals in the EAC region increased from 3.5 million persons in 2006 to 5.7 million persons in 2017. Tourism contributed to the Gross Domestic Product (GDP) of the EAC Partner States by an average of 12% in 2017. The percentage contribution was higher than the average in Rwanda (14.9 %), Kenya (10%) and Tanzania (14%), Uganda (9.9%), Burundi (4.3%). Tourism contributes an average of 18.8% to EAC total exports, although the percentage contribution was higher, in Rwanda (30.5%) and Tanzania (26%). The total contributions of tourism to export earnings were at 1.5% for Burundi, 18% for Kenya, and 17.9% for Uganda.
Following the outbreak of COVID-19, the tourism and travel-related industry is expected to be negatively impacted following the imposition of stricter travel restrictions by countries affected by COVID-19. In addition, some EAC Partner States have already suspended air travel services to and from Asia which is among the top sources of tourists to the EAC region. This will impact earnings from tourism as well as air travel services since Asia is considered by air travel companies as one of the most lucrative and profitable routes.
To mitigate the impact of the COVID-19 on tourism and travel-related services, EAC Partner States should scale up their development of domestic and regional tourism.
2.3 Supply Chains
Given the fact that China is among the EAC’s largest source of imports, the outbreak of COVID-19 has disrupted supply chains in all EAC Partner States. With the decrease in imports from China, there is a likelihood of disruptions in the supply of household products, raw materials, intermediate and capital goods. The disruption in the supply of household products will have a negative impact on consumers through hiked prices, and wholesale & retail businesses in the region. The disruption in the supply of raw materials, and intermediate & capital goods will heavily affect manufacturers who source their inputs from China.
This leads to a decline in cargo volumes which pass through EAC and international ports, thus having a negative impact on transport and logistic services in the EAC region.
To lessen the impact of COVID-19 on various supply chains, EAC governments in collaboration with the private sector should devise alternative means of sourcing products locally and explore new markets. Additionally, EAC governments should consider offering fiscal incentives to heavily affected sectors to prevent them from total collapse.
2.4 Construction and Infrastructure
The EAC Trade and Investment Report of 2018 indicates that Foreign Direct Investments (FDI) into East Africa decreased by 15.9 percent to USD 5.7 billion in 2018 from US$ 6.8 billion in 2017. Overall, FDI inflows to the EAC were concentrated in the manufacturing, construction and services sectors. FDI into manufacturing and construction amounted to US$ 2.1 billion and US$ 1.0 billion in 2018 respectively. China and India continued to be the major sources of FDI into the EAC with inflows amounting to US$ 1.1 billion and US$ 281.02 million respectively.
Meanwhile, the overall increase in the import bill for EAC countries has been attributed to the import of capital goods like transport equipment, building and construction materials for the construction of the Standard Gauge Railways (SGRs), roads, airports, and ports. Most of the capital goods are imported from China since it is the largest investor in these projects with Chinese companies being the main contractors.
The COVID-19 epidemic is likely to impact the EAC construction and infrastructure projects given their connection to China in terms of either investment or contractors. With the disruption of the flow of capital goods from China, most of the projects which are being constructed by Chinese companies will slow down.
To address the above challenge, EAC Partner States should endeavour to enhance local content policies at both country and regional levels. In addition, EAC Partner States should come up with a clear policy on how domestic companies can be more involved in the mega projects by forming special purpose vehicles at country and regional levels.
Given the fact that the East African Community is one of the regional integration blocs on the African continent, Partner States should devise regional approaches to mitigate the impact of COVID-19. Since the EAC Partner States are implementing the Customs Union and Common Market commitments, there is a likelihood that most of the economic impacts from COVID-19 will be the same across the EAC, albeit at varying degrees. In addition, the EAC Partner States should jointly devise regional measures to prevent the outbreak of COVID-19 in the EAC region.