North African economies experienced three shocks in 2020 – the Covid-19 pandemic, a collapse in oil prices and a steep drop in tourism. 

Along with the impact of sharp contractions in the region's main European trading partners, real gross domestic product (GDP) growth was negative, at -1.1%, in 2020, the African Development Bank (AfDB) reports.

The AfDB notes, however, that, depending on global risks and uncertainties, the region is expected to recover quickly to pre-pandemic levels. The development finance institution (DFI) forecasts GDP growth in the region of 4% this year and 6% in 2022.

"The speed of recovery is partly expected to come from the rebound in oil prices (Algeria, Libya) and tourism (Egypt, Morocco, Tunisia), better vaccine production and distribution and strong recovery in the region’s European trade partners," the DFI notes in its 'North Africa Economic Outlook 2021' report.

Nevertheless, the region still faces a number of challenges.

The AfDB points out that Covid-19 has increased the external vulnerabilities of North African countries and markedly reduced their external buffers. The crisis has also significantly eroded fiscal space.

Further, North African countries have accumulated external debt very quickly since 2010.

"Egypt, Morocco and Tunisia have increasingly relied on sovereign Eurobond markets to meet their external financing requirements. Other countries in the region have relied on domestic debt (Algeria, Libya) or official development assistance (Mauritania) for this purpose. The Eurobond market typically has shorter debt maturities, higher interest rates and higher risk of a foreign currency crisis relative to loan terms from official Paris Club creditors," the report states.

Meanwhile, excessive domestic borrowing can lead to money creation and therefore rising inflation pressures, crowding out private investment, the AfDB says.

Algeria, Egypt, Morocco and Tunisia also face the additional risk of contingent liabilities incurred by State-owned enterprises (SOEs)," it adds.

"For instance, before Covid, these contingent liabilities were estimated at 13% of GDP in Egypt and 16% in Morocco.

"If the pandemic continues into 2022 and beyond, some countries will likely face liquidity problems in servicing debt payments. No international mechanism exists to deal with debt workouts for lower-middle-income countries, though the AfDB has proposed one for African countries, which would help avoid liquidity crises," it states.

The DFI has recommended a number of short, medium and long-term actions to assist the region.

For the short term, it recommends that North African countries limit the spread of the virus; develop capacity for debt sustainability analyses; prepare debt workout schemes should the pandemic last longer and hit harder; assess the full stock of sovereign actual debt and contingent liabilities; strengthen coordination among fiscal, monetary and exchange rate policies to monitor the direction, speed and magnitude of capital flows and their effects; and conduct public expenditure reviews to protect investment projects that are needed to restore economic growth.

For the medium term, the AfDB suggests that countries invest in digitalisation; provide support to small and medium-sized enterprises; enhance domestic resource mobilisation; deepen domestic bond markets; monitor governments' contingent liabilities; and restructure SOEs and use debt efficiently to finance productive investments.

Over the long term, countries should promote economic and export diversification; invest in public goods that are needed to ease regional disparities and foster inclusive growth; and deepen regional integration in the context of the African Continental Free Trade Area agreement.