A new research paper considers the devastating impact of COVID-19 on the private sector in Africa and argues that development finance institutions (DFIs) are uniquely placed to provide financial support to businesses and lead the eventual recovery.

The Association of European Development Finance Institutions (EDFI) asked a group of researchers to consider the impact of COVID-19 on the private sector in Africa, and the role that its members could play in supporting businesses through crisis and recovery.

Researchers from the Overseas Development Institute, the United Nations Economic Commission for Africa and the European Centre for Development Policy Management examined the economic fallout of the virus in Africa, the responses of governments and international donors, and the role that DFIs could play in delivering support for the private sector.

The report found that the economic impact of COVID-19 on African nations has already been profound, that governments across the continent lack the financial resources necessary to respond effectively, and that international donors have to date focused primarily on the public sector.

The authors go on to argue that support for the private sector will be essential to reducing job losses and preserving livelihoods, and suggest that DFIs, if properly supported by their governments and donors, are well positioned to effectively channel support to businesses in crisis.

The report describes the anticipated loss of 19-22 million jobs in Africa as a result of COVID-19, with trade restrictions also bringing risks of limited access to health equipment and food insecurity.

The private sector has been severely impacted, with tourism, manufacturing and other markets contracting substantially, and with an immediate impact on lives and wellbeing for vulnerable populations.

The report found that, while European governments have made large-scale financial commitments to support their own markets, many African governments lack the resources necessary to support their economies to the same extent. Governments and donors internationally have begun to announce interventions to support developing nations in crisis, however these commitments have tended to focus on the needs of the public sector. The missing piece of the global response to the developing crisis in Africa is targeted support for the private sector.

DFIs have a history of acting as economic first responders, and their established presence in Africa means that they can respond quickly to meet the needs of existing and new clients.

The report notes that European DFIs directly and indirectly employ 5.4 million people in the poorest economies, and that these institutions can effectively channel liquidity into African businesses.

Because the scale of the crisis is so great, however, DFIs will need support to intervene effectively.

The authors recommend that governments and DFI shareholders redirect some existing aid financing to DFIs for delivery to the private sector, loosen credit criteria so that DFIs can take on more risk, and commit significantly more funding, such as through a guarantee fund. It is hoped that these steps, if taken quickly, could prevent an economic contraction from becoming a major development failure.

The economic effects of COVID-19 will persist beyond any immediate lockdowns, and businesses will need both ongoing support and investment champions to lead the return of private sector investors and to promote recovery. DFIs have the knowledge, the relationships, and the local presence required to do this effectively but, as this report shows, they will require greater support from governments and donors to intervene meaningfully on behalf of African businesses and workers.