Surviving the Economic Impact of COVID-19

Surviving the Economic Impact of COVID-19

“To ask for debt relief is very timely,”- Director of ISSER.


The outbreak of COVID-19 in December last year in Wuhan, China, many thought will be one of those diseases that appear and could be contained once a vaccine is found. However, this was just an illusion. To the surprise of many, the disease has spread like wildfire to every continent and almost every country with few ones yet to record a case (in Africa, Lesotho as at 4th May 2020-WHO). And as of now, no vaccine has been found as a cure to this novel coronavirus.  

COVID-19 is rated by scholars as the most serious pandemic in world history in the past 100 years since the outbreak of the Spanish flu in 1918. For now, the origin of the virus may be of little concern as attention has shifted to how to contain the virus as well as how to minimise its impact on the welfare of the people, especially the poor and vulnerable.

Economic theory suggests that pandemics constitute a negative shock on the natural rate of the economy over the horizon. The current pandemic, unlike oil price shocks that are supply side factors, is both a demand as well as a supply shock to the global economy. This means its effect will be more severe than that of oil price shocks or a financial crisis. 

With this in mind, economies are expected to experience growth rates that fall below the natural and may remain there for some time. The implication is that the global economy will take some time to recover fully from the shocks created by this pandemic.

The Economist indicated that a 90% global economy will be left after the pandemic. This simply suggests that the world economy wouldn’t be 100% as it was before the outbreak. According to the International Monetary Fund (IMF), this is the worst recession since the great depression and even more severe than the global financial crises in 2009 which shrunk the global economy by 0.1% as the global economy is projected to slum by 3% in 2020 as a result of the outbreak of the virus.

The outbreak of the disease has resulted in multiple crises mostly —a health crisis, a financial crisis, and a collapse in commodity prices, which interact in complex ways, according to the IMF.


The facemask makes yet another comeback, from 1918 Spanish flu to the recent coronavirus pandemic from China. - Source philstar

Like any other pandemic that had swept through the world in history; the Spanish flu (1918-1920) which was estimated to have killed about 100 million people worldwide, the black death (1347-1352) which claimed about 75 million lives, the novel corona virus not forgetting the tragic number of human lives lost so far, is expected to result in the piling up of huge public debt stocks for almost all economies.

From all indications, the problem of debt settlement will be one major concern for most countries after the pandemic. An economist who predicted the last financial crises still warns of a looming greater recession which may not happen this year but within this decade and he cited debt and deficit which will lead to insolvency as a major contributor to this looming recession. When COVID-19 is mentioned some time to come, one thing that will pop up is the issue of debt crises in several economies.

The IMF projected advanced economies to run on average a deficit of 11% of GDP, even in the absence of lockdowns in the second half of 2020 when the economies are expected to see a gradual recovery. Global public debt could be around $66trn about 122% of GDP this year.

So far, the outbreak of the virus has resulted in collapsing factories, closure of shops and offices and general decline in revenues. This pose serious problems to most countries, and the situation is even worse for countries with weak fiscal standings. Governments across the world have embarked on one of the greatest borrowings in history. Ratios of public debt to GDP is expected to increase by 10 to 20 percentage points and should this happen, “government debt in Canada and US will be around 100 per cent and 120 percent respectively,” Gavyn Davies, Chairman of Fulcrum Asset Management in London.

President of Ghana e1587161156285

In the context of Ghana, a country which is already struggling with serious debt problems, managing the debt is a major concern during this period. Having joined the list of Highly Indebted Poor Countries (HIPC) in 2001, the International Development Association (IDA) and the IMF’s assessment of the sustainability of Ghana’s debt in 2019 showed that public debt risk and debt distress are high.

 Moody’s projects Ghana’s debt to hit 70% of GDP in 2020 from 64% in 2019; this is far above the 60% debt-to-GDP threshold set by the African Monetary Co-operation Program (AMCP) for developing economies and above the 55% debt-to-GDP ratio suggested by the IMF. A debt-to-GDP ratio above these thresholds is an indication of an economy vulnerable to economic changes and will be very difficult for a country in this situation to survive in the event of a recession.

On whether the projections of Moody’s about Ghana’s debt for 2020 is realistic, the Director of the Institute of Statistical, Social and Economic Research (ISSER), Professor Peter Quartey believes the projections are realistic given how much Ghana has borrowed earlier this year and also due to the outbreak of the virus– Ghana benefited from a US$1 billion loan under the Rapid Credit Facility from the IMF. Professor Quartey, however, believes that, should this prediction come true, there are implications to the economy.

According to him “since we are not in normal times, government has to assess its financial options in a bit to mitigate the effect of the pandemic. Government has no option than to look for resources and borrowing is the only available option given that tax revenue is declining.”

However, borrowing will also have some implications on the Ghanaian economy as it will certainly affect our interest payments which is likely to go up giving government less room to finance development expenditure like roads and other kinds of infrastructure. Hence, there are severe repercussions on the economy as government will be forced to use future revenues to service her debt.

Since the outbreak of the pandemic, governments are under pressure to raise huge sums of money to finance their health expenditure and other welfare needs of their citizens.  Paying doctors, nurses, and other health professionals require lots of money. The measures implemented such as lockdowns, stay-at-home orders, and frequent hand washing as well as social distancing are very difficult to observe in the poor countries.

On the options available to government in raising funds to deal with the current COVID-19 pandemic in view of the country’s rising debt stock, Professor Quartey believes “due to low revenue mobilization at this time, the next option is to borrow”.

He cited two main sources government can borrow from; multilateral institutions and financial markets. But multilateral institutions, according to him, will be the best option if they are willing to lend to us since they give loans at concessionary rates which will be less severe on the public purse in future compared to borrowing from the capital market which is quite uncertain and might come at higher interest rates.

Another option of financing government expenditure during this period, according to the Director of ISSER, is to rely on “philanthropists just like the COVID FUND where private sector businesses and other well-meaning people can contribute to help fight the virus”.

The IMF granted debt relief to 25 countries earlier this year and there are more calls by some African leaders for debt relief from the IMF; on whether Ghana will be eligible for debt relief given that it is a lower middle-income country, Prof said;

“These are not normal times, the pandemic has affected both low income and low-middle income countries, and by implication, Ghana will definitely qualify. That is why Ghana received a billion-dollar loan from the IMF. If they were to say we are a lower middle-income country, they wouldn’t have qualified us for that loan but for the fact that we are severely hit just like other lower income countries.”

At this time, Ghana will qualify for debt relief from other bilateral donors and there are also talks with China to also grant debt relief to some African countries. All these, if they happen, will relieve Ghanaians of the looming challenges. Prof Quartey believes debt relief will be a good call for Ghana at this time because the virus is a natural occurrence and has not happened because of economic mismanagement on the part of Ghana. The outbreak has been felt globally and even countries like the US are borrowing.

“To ask for debt relief is very timely,”- Director of ISSER.

He indicates that debt relief normally has positive and negative implications on countries benefiting from it. The negative effect comes when it is granted as a result of economic mismanagement. But, a debt relief at this time will have positive implications on the economy because the pandemic is a global natural occurrence.

If debt relief is granted due to the pandemic, it is good because, it is free from future repayment so that money can be used to reboot the economy.