COVID-19 and the mitigation policies imposed to control the spread of the coronavirus are unexpected shocks to Malawi’s economy. Airports and schools have been closed since late March, and many business activities have slowed down considerably as government pursues social distancing measures. Many negative impacts are still unfolding, so the actual extent of the economic damage to the Malawian economy is still unknown. Simulation models, such as Social Accounting Matrix (SAM) multiplier models, can help us estimate the possible extent of the short-term economic impact of COVID-19 control efforts.
During a recent webinar, Bob Baulch and Rosemary Botha from IFPRI-Malawi presented the initial results of such a modeling study with Karl Pauw on the short-term economic impacts of COVID-19 in Malawi. The researchers used a multiplier model calibrated to a Malawi SAM developed by IFPRI, which has 63 economic activities (producers), 65 commodities (goods and services) and 15 representative household groups. Two scenarios were considered: (a) two months of social distancing (in April/May) plus external shocks over the second quarter; and (b) the proposed (but not implemented) 21-day lockdown plus social distancing and external shocks, each followed by either fast or slow lifting of restrictions during the rest of 2020. The SAM multiplier model was used to simulate the impact of these two scenarios on GDP and sector growth, the agri-food system, poverty, and government revenues on both a quarterly and an annual basis.
Simulations from the SAM multiplier model estimate that two months of social distancing plus external shocks reduces GDP by 11.6% during April/May with 1.1 million additional people falling temporarily below the poverty line, mostly in rural areas. The largest relative impacts, stated Baulch, are on industry (15.2%) and services (14.8%). While the agriculture sector itself only contracts by 3.5%, the impact on the wider agri-food system is significant, with an overall decline of 8.1% due to contractions in agro-processing (-8.5%), food trade and transport (-11.0%) and the food services sector (e.g., hotels and restaurants, -73.0%). Baulch advised caution in interpretation these simulations, as the results are sensitive to the shocks assumed and the underlying fixed-price, fixed technologies model.
Comparing the possible effects of social distancing with an urban lockdown scenario (Figure 1), the study found that a proposed 21-day lockdown in urban areas increases GDP losses by approximately $23 m per week over the social distancing scenario. The overall GDP loss per year from urban lockdowns is also 2.2. to 3.9% points higher and depends on the speed at which restrictions are relaxed.
Figure 1. Short-Term Simulated Economic Losses due to Social Distancing and Urban Lockdown Scenarios
Botha further elaborated on the sectoral effects of the two-months social distancing scenario. Limiting hotel and restaurant operations accounted for a quarter of short-term losses, followed by the closure of schools, which had a surprisingly large impact, accounting for 18.5% of GDP losses. Botha mentioned falling foreign direct investment and reduced tobacco exports as the most important external shocks.
The SAM multiplier model also looked at possible changes in per capita income during the social distancing scenario. Urban households are most affected with a 12.8% reduction in income. The poorest rural households are the least affected but still lose 9% of their capita incomes during the two months of social distancing. Hence, a serious increase in poverty should be expected.
Baulch then presented two different recovery scenarios during 2020. Depending how fast restrictions were lifted in the model, GDP contracted by 4 to 5.2%. Government revenues declined by 3.5 to 4.5%. Comparing the Malawi model to situations in other countries on the continent, Baulch noted that while the short-term impacts of Covid-19 on the Malawi economy are not as heavy as in other African countries, they are still serious.
Baulch concluded the presentation by highlighting that there is a tradeoff between public health benefits and the economic costs of the COVID-19 restrictions, “which needs to be balanced very carefully.” Minimizing the economic impacts of COVID-19 requires: (a) maintaining open markets and borders with appropriate hygiene/social distancing measures; (b) social protection measures to protect the most vulnerable, especially informal services/small retailers in urban areas; and (c) re-opening schools once it is safe to do so. Looking forward, Baulch further explained that monitoring the impact of COVID-19 restrictions on the Malawian economy should pay special attention to their impact on the urban informal service sector, the wider agri-food system, hotels and restaurants, as well as tourism, exports, and remittances.
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