The ongoing West African Ebola outbreak will have a catastrophic effect on the economies and societies of Guinea, Liberia and Sierra Leone. It also carries implications for economic growth in the wider West Africa region and in Sub-Saharan Africa as a whole. Restrictions on movement, rising prices and investor fears will hamper economic activity. The disease is not only stunting economic growth and turning back years of development, it is also breaking down social links and engendering distrust. The ramifications will be felt long after the disease’s spread is brought under control as investment is curtailed, children orphaned and families ripped asunder. For these states, already both economically and politically fragile, the effects will be devastating.
More Cases To Come
Guinea, Liberia and Sierra Leone are the three countries worst affected by the outbreak of Ebola, the viral haemorrhagic disease that has ravaged the region and beyond through the course of the year. According to data from the World Health Organization, as of October 7 there had been a total of 8,376 cases of Ebola across the three countries, resulting in 4,024 deaths. There have also been more limited outbreaks in Senegal (one case) and Nigeria (20 cases and eight deaths), though these were rapidly contained, and neither country has recorded a new case as the 21-day incubation period has elapsed. Further afield, there have been two cases contracted in the US and one in Spain. The outbreak is now by far the largest on record.
The outbreak is far from being contained, and we expect to see continued new cases in Guinea, Liberia and Sierra Leone. The three countries are among the poorest in the world and have lacked the resources needed to effectively contain the spread of the disease. Weak state capacity and poor public health infrastructure are hampering efforts to contain the escalating outbreak. Although the rate of contractions is levelling out in Guinea, according to the latest data, those in Liberia and Sierra Leone continue to rise sharply despite significant increases in aid resources from donor states. This will have implications for economic growth, as well as social and political stability.
Growth Severely Impeded
Liberia and Sierra Leone are facing the greatest challenge to their macroeconomic stability since the end of their respective civil wars, in 2003 and 2002. We revised down our 2014 growth forecasts for the two countries in August as Ebola started to affect economic activity, and we have done so once more in October as the disease continues to spread. Prior to the outbreak we had forecast real GDP growth of 12.1% in Liberia in 2014, followed by 20.9% growth in 2015, but this has been revised down to 3.2% and 3.8% respectively. In Sierra Leone, our forecasts have changed from 11.6% and 11.0% to 3.9% and 5.5% respectively. In Guinea we forecast real GDP growth of just 2.0% in 2014 and 3.3% in 2015. Our 2014 growth forecasts for the three countries would have been lower still were it not for the four months or so of unimpeded economic activity at the start of the year.
The Ebola outbreak is hindering trade, draining government resources and forestalling investment, most notably into the iron ore mining sector. The growth of iron ore mining in the region was the primary factor behind our formerly bullish outlook for the region. However, the coalescence of a sharp downturn in global iron ore prices and the outbreak of the Ebola virus will dent West Africa’s growth outlook as mining companies suffer reduced revenue, difficulties in accessing finance and logistical disruption. Companies such as London Mining have come close to bankruptcy, while even industry major ArcelorMittal has been forced to declare force majeure on its expansion plans. The ramifications of the outbreak will affect the sector for years to come, and this is a key reason behind the downgrades to our growth forecasts over a multiyear horizon.
Effects Will Be Felt Beyond The Near Term
Mining is not the only export-oriented industry to have been affected. The production of cash crops has also been curtailed, as has industrial food production. There are also serious challenges to private consumption as a result of the outbreak. Companies have been mothballing operations in a bid to contain the disease, and nonessential civil servants in Liberia have been told to stay at home. Although employees have often been paid in advance, there have been reports of workers promised pay but not receiving it. If wrought on a grand scale, this will severely impede consumption growth. Restrictions on movement and the closure of markets will also affect consumption levels.
Inflation Will Rise Once More
One effect of the outbreak will be to push up inflation, particularly through rises in food prices, as food is the largest component of the consumer price index (CPI) baskets of the three countries. In Liberia, for example, food and non- alcoholic drinks account for 45.2% of the basket. According to the UN Food and Agricultural Organization (FAO), in Liberia at the start of September the price of West African staple cassava had increased by 150%, and peppers by 133%. According to the FAO, the harvest season in the affected region had been looking positive given adequate rainfall during the cropping season, but the ‘restrictions on the movement of people and the supply of labour have led to serious concerns on production prospects.’
Countries in West Africa have closed their borders with the affected countries in an effort to stem the spread of the disease, and this will serve to further push up the cost of imported foods the longer it goes on. Airlines and some shipping companies have also ceased their calls. Imported food price inflation in Liberia has risen since borders were closed, from 3.8% year-on-year in April to 12.6% in May and 11.6% in June (last available data). Prices of internally produced foods will also rise; quarantines and restrictions on movement will reduce the ability of traders to sell their goods, as will the closure of markets. The production of domestically produced foodstuffs will fall as workers are unable to travel due to bans.
CPI inflation had been falling fairly steadily in Guinea and Sierra Leone through the first six months of 2014, but we expect that all three countries will see rapid price growth through the remainder of the year and into 2015. We forecast that inflation in the three countries will rise to 30.0% in December 2014. It appears unlikely that the outbreak will be contained before 2015, and we believe that price growth will remain high next year also, forecasting inflation of 20.0% in December 2015. As inflation data for recent months become available, it will become clearer how strongly Ebola is affecting price growth.
Rising food prices will, to an extent, be contained by a concurrent decrease in wages, as workers are restricted in their movements and cash crop production (eg palm oil, cocoa and rubber) declines. However, this will serve to dramatically erode purchasing power for the average household. The urban poor will be the most affected by this, as rural populations are largely subsistence farmers, producing food for their own consumption.
It is not only in those countries directly affected by the Ebola outbreak that economic activity will be disrupted. The outbreak will serve to curtail tourism in The Gambia and Senegal, despite no cases having been reported in The Gambia and only one in Senegal – which has subsequently been declared Ebola free. In October we revised down our real GDP growth forecast for The Gambia, predicting that the economy will expand by 3.9% in 2015 following an estimated 4.4% expansion in 2014. Our previous forecasts were for 5.1% growth in 2014 and 5.3% growth in 2015.
These downwards revisions are largely due to the impact that the West African Ebola outbreak is having on the country’s tourism sector. According to a report by the World Bank published on September 28, The Gambia has seen 65% of hotel reservations cancelled. With the disease unlikely to be contained before the start of 2015, we expect that sentiment towards The Gambia will continue to weaken among holidaymakers, and that the country will struggle to attract visitors. Senegal will see a similar reduction, as will other holiday destinations in West Africa.
Political Risk To The Fore
We believe that one effect of rising food prices will be a rise in urban violence in the major cities of Guinea, Liberia and Sierra Leone. The cities are already more prone to the spread of Ebola, given how their populations live in much closer proximity than those in the countryside. This is especially true for those living in the slums. As purchasing power is eroded and families find it harder to feed themselves, we expect societies to fracture, resulting in increased theft and violence.