The Economic Impact of the Ebola Crisis

Introduction

Epidemics and other health crises in Africa continue to take a massive toll on human life and social fabric. Outbreaks of Cholera, Smallpox and Tuberculosis has been documented in the African continent for well over two millennium. Through the advancement of technology and modern medicine, we have grown increasingly adept at handling health crises. However, the perpetually evolving nature of such crises, as is evident through HIV/Aids and the recent Ebola outbreak in West Africa, means that public health crises continue to have a profound impact on human lives around the world.

The impact of public health crises such as the recent outbreak of Ebola in West Africa does not only manifest in human mortality and morbidity, but also has a large and widespread economic impact on the affected countries and beyond. Diseases and other forms of ill-health come with high costs for an individual and his/her family. These costs are exacerbated when the disease is contagious and the country is faced with a high competition for limited medical resources. This is particularly true for Guinea, Liberia and Sierra Leone, the countries worst affected by the Ebola outbreak, where the impact has been accentuated by weak health systems and ailing infrastructure.

While the health impact of Ebola has been widely studied, the full extent of its economic impact remains to be analyzed, and a plan for mitigation yet to be put into effect. This Ebola outbreak, much like other large-scale public health crises has a profound economic effect not only on the individual, but also on communities and the entire country. This paper seeks to analyze the various dimensions of economic impact of the Ebola outbreak in West Africa and will offer recommendations for both crises mitigation and future risk aversion.

Background

At the time of writing, the death toll of the Ebola outbreak stands at 5,177, with over 14,400 people being infected. West Africa is the hardest hit by the deadly virus, with 2,812 deaths recorded in Liberia, 1,187 in Sierra Leone and 1,166 in Guinea.[1] The virus continues to be an urgent health crises, the full impact of which is still very hard to predict and estimate. Recent advancements in treatment options and foreign aid in the form of physical and human capital, has ushered in new hope for containing this broadening crisis and perhaps eradicating the virus altogether. However, the outbreak and its impact remain to be understood in its full complexity.  With large populations in the affected region living in poverty, the economic impact of Ebola is expected to have a stark effect on lives and livelihoods in West Africa for a prolonged period of time.

Sector-based Analysis of the Economic Impact of Ebola

Agriculture and extractive industries account for the majority of economic activity in West Africa. Employing large proportions of the population, a shock in either of these two sectors has major implications not just on households but also on the country. With more and more cases of Ebola in Guinea, Liberia and Sierra Leone, and rampant speculation, this outbreak has had a debilitating effect on the labor market.

Agriculture Sector

The agriculture sector dominates economic output and employment in West Africa, with large proportions of the population being employed in the formal agriculture sector or involved in subsistence farming. Table 1 shows the percentage of population in Sierra Leone, Guinea and Liberia that are involved/employed in the agriculture sector, as well as the sector’s contribution to the national GDP as a percentage.

Twelve out of thirteen districts in Sierra Leone have now been affected by Ebola, with quarantine moves in place to prevent the movement of individuals, including farmers and laborers, as well as supplies of agricultural goods such as seeds and harvested crops. Prior to the outbreak of Ebola, the real growth in GDP of Liberia was projected to be 5.9%, although the revised projection is only 2.5%[2]. A significant part of this drop is attributed to the decline in growth in the agriculture sector from 3.5% to 1.3%. While concrete data regarding the effect of Ebola is gradually emerging out of the region, anecdotal evidence suggests that entire farms are being abandoned by people escaping from the epicenters of Ebola. With November and December being the peak planting season in the region, loss in agricultural activity is expected to further create food shortages and pressures on food prices.

Extractive Industries Sector

The extraction of oil, gas and minerals constitute a major part of the economies in West Africa. This sector is one of the biggest employers, generates a significant percentage of the national GDP, attracts foreign investment and has sparked investment in infrastructure and development of the service sector. According to the International Monetary Fund, Sierra Leone’s output grew by about 20% last year; however if you exclude iron ore mining, the growth number drops to only 5.5%. The extractive industries continue to have a partially destabilizing effect, with states having to cope with institutional weaknesses, corruption and a lack of transparency, while the social and ecological costs of production contribute to dissatisfaction and conflicts in the mining areas.

Ebola is taking a toll on supply chains in Guinea, Liberia and Sierra Leone and has led to increasing speculation in the sectors that are reliant on foreign direct investment (FDI) and exports. The world’s largest steelmaker ArcelorMittal has had its work disrupted in the iron ore mine of Yekepa, Liberia, following contractors pulling out laborers out of the country. In Simandou, Africa’s largest iron ore mine, foreign companies have put their workforce on leave following concerns of an Ebola outbreak. Many mining and refining companies, including Rio Tinto and ArcelorMittal have made aid contributions to combat the onslaught of Ebola, however decreased mining activity has had and will continue to have a much more significant economic impact on the population.

Impact on Domestic Income and Employment

By far the largest economic effects of the Ebola crisis is comprised not of direct costs, which include morbidity, mortality, healthcare and productivity loss, but those resulting from behavior changes. Fears and concerns surround the contraction and contagion of Ebola has led to lower domestic demand for goods and services, which in turn has had a negative impact on income and employment. This effect will not only affect the GDP figures and have short-term impact on growth, but carries the risk of restructuring the economy and labor market in the affected countries.

The domino effect in economic loss is best illustrated through an example. When Jonathan Mwemba, a day laborer at an iron ore mine in Guinea starts showing symptoms of Ebola and stays home, his absence from work results in a fall in the value of output. This is then compounded with the cost of caregiving, including scarce goods and services such as hospital beds, medicine and doctor-hours. Thirdly, there are intangibles associated with his illness, for example the misery caused by pain, time taken off from work by a relative or loss of leisure time. Last but not least, his Ebola-like symptoms will cause a growing concern among his co-workers, neighbors, family and friends. Decreased social activity and interactions can lead to decreased economic output. The mine where Jonathan used to work might also run the risk of being shut down due to the concerns of the miners and other staff about an Ebola outbreak.

Fiscal Impact

All these costs add up and an impact assessment conducted by the World Bank estimates that the short-term impact of the outbreak of Ebola will cost the three countries a cumulative $359 million in forgone GDP.  However, the situation can be even grimmer in the “High Ebola” projection of the World Bank which would mean that Liberia will lose the equivalent of about 12% of its GDP in 2015 (see Figure 1).

The fiscal impact of the Ebola crisis in Guinea, Liberia and Sierra Leone has already been substantial. Government revenue has shrunk, and this is expected to be a trend over the coming year with slow economic activity and challenges in tax administration due to quarantines and curfews. According to the World Bank, Liberia will be faced with a fiscal gap of about $93 million, Sierra Leone with a gap of $79 million and Guinea with $120 million

The Expected Impact of Ebola on Global Markets

Despite concerns of a global epidemic, the Ebola crisis has thus far not had a major effect on global markets outside of the three core affected countries. Their relatively small weight in global GDP, trade and financial markets so far has limited Ebola’s effects on global markets despite the death toll surpassing that of SARS.

There have been some ripple effects, including the sealing of borders which has prevented cross-border trade. Ivory Coast and Senegal have sealed their borders with Guinea, and this has been emulated by other countries too, affecting the trade flow among West African countries.

Recommendations

Faced with a rapidly evolving outbreak and looming economic crisis, the governments of Guinea, Liberia and Sierra Leone must take some drastic steps to ensure that the crisis does not leave a lasting mark on the economies of these countries. The following are a set of recommendations to the leadership in each of these countries in order to mitigate the economic impact of the Ebola crisis.

• Communications strategy to encourage reopening of businesses – The governments of Guinea, Liberia and Sierra Leone are encouraged to embark on a mass communications campaign in order to encourage local businesses to remain open, or to reopen if they are closed. This should be accompanied with health messaging informing the residents and travelers to this region on early detection of symptoms and preventative actions that can be undertaken. Keeping local businesses open is very important in keeping the economy vibrant, as reflected by the recent decision by the President of Liberia, Ellen Johnson Sirleaf, to end the state of emergency in her country.
• Consider issuing sovereign debt bonds – Since Foreign Direct Investment (FDI) flows into the economy has decreased rapidly at the onset of the Ebola crisis, the finance ministries in Guinea, Liberia and Sierra Leone should consider floating debt bonds as a means of attracting foreign investment. Foreign investments will provide the necessary capital to implement large-scale infrastructure development projects, which will not only have human development impact, but will also create much needed jobs in the area. Although the economies of these countries are reeling from the crisis, the GDP growth rate remains relatively high compared to other investment options. The governments should considering approaching the IMF for providing loan securities, making the bonds even more lucrative for investors.
• Improve business environment and create an Export Processing Zone (EPZ) – The governments of Guinea, Liberia and Sierra Leone must promote investment through improving the business environment in their countries. This can include cutting investment costs, providing tax breaks as well as reducing the time and effort it takes to start a new business or import/export items to and from these countries. To further facilitate foreign investment, it is recommended that each of these countries create EPZs in their countries which provide an enclave that is favorable for trade. EPZs will provide as space for foreign companies to ship, handle, manufacture and export goods with the intervention of customs authorities.
• Provide stimulus to the agriculture sector – The agriculture industry is by far the biggest employer in each of these countries, and it is recommended that the government provide economic incentives to keep this sector performing efficiently. Supporting the local agriculture sector does not need big foreign investment or retraining of the labor force. This stimulus can come in the form of improved market access for small stakeholder farmers, provision of high-yield seeds and fertilizers and perhaps a direct cash transfer program for farmers.
• Cut government programs that are not essential for job creation – The first step to recovering from this economic crisis is provide job opportunities for the citizens, which will in turn fuel the local economy. In light of this, it is recommended that the government cut any programs that are not contributing to the creation of new jobs. Money saved from such cuts can be allocated to more productive areas which match the skills of the local population.
• Seek international support to contain the health crisis – The governments of Guinea, Liberia and Sierra Leone should continue to seek funding and expertise from the World Bank and other international donor organizations for financing and coordinating the medical response to the crisis. In order to effectively handle this health crisis, these countries have to reply on outside skills and funding. It is also recommended that funding be provided in order to build a robust health infrastructure in these countries, which will last beyond the current crisis and will have the ability to handle future outbreaks.
• Encourage reinstituting of cross-border trade – The governments of Guinea, Liberia and Sierra Leone should push for the reopening of borders between neighboring countries and to stimulate cross-border trade. Through improved screening measure instituted at the borders, the government can reassure the movement of peoples and goods across these borders.

Conclusion

While much attention has been focused on controlling the Ebola crisis in West Africa, it is imperative that we consider the impact of Ebola in a holistic manner that encompasses any economic repercussions for the core countries of Guinea, Liberia and Sierra Leone. The governments of the core counties, as well as the international community is encouraged to bolster the economies in these countries and to commit to improvements in the health sector that is better equipped to handle and even prevent future crises.

[1] World Health Organization : Ebola Update, November 2014, 2014

[2] The Economic Impact of the 2014 Ebola Epidemic, World Bank, 2014