The paper studies the effects of the COVID-19 pandemic on African economies and household welfare using a top-down sequential macro-micro simulation approach. The pandemic is modeled as a supply shock that disrupts economic activities of African countries and then affects households’ consumption behavior, the level of their welfare, and businesses’ investment decisions. The DSGE model is calibrated to account for informality, a key feature of African economies. We find that COVID-19 could diminish employment in the formal and informal sectors and contract consumption of savers and non-savers, especially for savers. These contractions would lead to an economic recession in Africa and widen both fiscal and current account deficits. Extreme poverty is expected to increase further in Africa, in particular if the welfare of the poorest households grows at lower rates. We also use the DSGE model to analyze the effects of different fiscal policy responses to the COVID-19 pandemic.
Originally published on MFW4A’s website