Wednesday, October 1, 2014

The Economic Impact of the Ebola Epidemic

The outbreak of Ebola in Western Africa has had a significant impact on the area, particularly the nations of Guinea, Liberia and Sierra Leone that are at the forefront of the infected zone.  One thing that has received little attention is the impact of the unprecedented Ebola epidemic on the area's economy.

A report by the World Bank suggests the following:

Short-term impact on the economy (2014):

Guinea - growth reduced from 4.5 percent to 2.1 percent
Liberia - growth reduced from 5.9 percent to 2.5 percent
Sierra Leone - growth reduced from 11.3 percent to 8.0 percent

In total, $359 million worth of output will be lost during 2014 by all three nations combined.

If the epidemic is not contained by the end of December 2014, a scenario that appears to be quite likely, there will be a medium-term impact on the economies of all three nations for the calendar year 2015.  The World Bank ran two scenarios; a "Low Ebola" scenario where there is rapid containment in the three core nations and a "High Ebola" scenario where the containment in the three core nations is slower and the epidemic spreads to a wider region and for a longer period of time.

Here is a chart showing the medium-term impact on the economy for both Low and High Ebola scenarios in percentage points of GDP:


In total, the negative impact to GDP for the three nations in 2015 is expected to be $97 million under Low Ebola and $890 million under High Ebola.

In this posting, I'm going to focus on the impact of the Ebola epidemic on Liberia, the nation that has suffered the most deaths thus far.  Here is a map showing the latest death count, current to September 22, 2014, the latest date that the Liberian Ministry of Health and Social Welfare has provided us with mapped data:
  

Let's look at a bit of background information first.  According to the CIA World Factbook, Liberia has a population of 4.092 million with 43.2 percent of its population under the age of 15.     Liberia's economy relies heavily on foreign assistance, particularly after the civil wars of the 1990s and 2000s.  The nation's GDP (purchasing power parity) was $2.898 billion in 2013, putting Liberia in 184th place in the world.  GDP in 2013 grew by 8.1 percent, the 11th fastest growing economy in the world, largely because of increasing demand for its mineral resources, agricultural products, iron ore, rubber and forestry products.   

Life expectancy at birth is 58.2 years, putting Liberia in 199th place out of 223 nations.  The nation's literacy rate is 60.8 percent.  GDP per capita in 2013 was $700, putting Liberians in sixth last place out of 228 nations.  In 2000, 80 percent of the population was below the poverty line and there was an 85 percent unemployment rate in 2003.  More than half of the population is urban, mainly concentrated around the capital city of Monrovia.  

The Ebola outbreak has had a significant impact on all sectors of the Liberian economy as shown in this chart:


The mining sector contributed about 56 percent of the $559 million worth of exports from Liberia in 2013.  Production of iron ore is dominated by two large companies; Arcelor/Mittal and China Union. Production at the largest mining company (ArcelorMittal) appears to be on track, however, investments to expand capacity have been put on hold because of the epidemic.  China Union has closed its operations since August.  

The agricultural sector contributes about 25 percent of Liberia's GDP with nearly half of the total workforce and three-quarters of the rural workforce engaged in agricultural activities.  Production and shipments of rubber, Liberia's most important agricultural export, have been disrupted with exports expected to drop by about 20 percent in 2014.  The nation is also home to the world's largest producer of palm oil (Sime Darby) and investments in palm oil planting have been slowed due to the evacuation of both managerial and supervisory personnel.  The construction of a modern palm oil plant that began in July 2014 has also been put on hold.  On top of these issues, the areas in the northwest part of the nation that have been most impacted by the Ebola epidemic are Liberia's main food growing areas.  The shortage of labour resulting from the ongoing quarantine has affected both the harvesting and planting of crops and has resulted in food shortages and higher food prices as shown on this bar graph:


The services sector comprises about half of Liberia's economy and employs nearly 45 percent of the labour force.  The hotel and restaurant sector has been impacted by the reduction in the number of commercial flights into Liberia with occupancy rates in hotels dropping from 70 percent before the epidemic to 30 percent now.  Some hotel workers have been laid off and occupancy rates in some facilities are as low as 10 percent.  The domestic transportation sector has seen a significant drop in the amount of fuel sold with gasoline sales down 21 percent and diesel sales down 35 percent.  Wholesale and retail businesses have reported a 50 to 75 percent drop in turnover, particularly in markets that serve expatriates.  Commercial and residential construction have fallen dramatically and government construction activities have halted as key personnel have been evacuated from the region.

Given that the containment of the epidemic was rather late in coming, the economic impact on Liberia's economy could well be in the $1 billion range, about one-third of the nation's purchasing power parity GDP in 2013, a situation that would be catastrophic for the nations and one that would likely require an even greater investment by the international community.