The ongoing developments between regions and countries mainly due to the Russia-Ukraine war are likely to hurt Sub-Saharan Africa most if it persists for long, according to a team of experts at the International Monetary Fund, (IMF).
The recurrent trade wars between the US and China, the standoff between the East and the West over the Korea Question, and the Iran-West differences among others are influencing the division of the world into two parts, one allied to Russia and the other to the US.
The experts now say Sub-Saharan Africa could stand to lose the most if the world were split into two isolated trading blocs centered around China or the United States and the European Union.
They pray that this worst-case scenario does not come to pass.
“In this severe scenario, sub-Saharan African economies could experience a permanent decline of up to 4 percent of real gross domestic product after 10 years according to our estimates,” losses larger than what many countries experienced during the Global Financial Crisis.
Economic and trade alliances with new economic partners, predominantly China, have benefited the region but, according to the IMF, they have also made countries reliant on imports of food and energy more susceptible to global shocks.
These shocks include disruptions from the increased trade restrictions following Russia’s invasion of Ukraine.
“If geopolitical tensions were to escalate, countries could be hit by higher import prices or even lose access to key export markets—about half of the region’s value of international trade could be impacted,” says the analysis by Marijn A. Bolhuis, Hamza Mighri, Henry Rawlings, Ivanova Reyes, and Qianqian Zhang, research and economic experts at the IMF.
They say that the losses could be compounded if capital flows between trade blocs were cut off due to geopolitical tensions.
“The region could lose an estimated 10 billion dollars of foreign direct investment (FDI) and official development assistance inflows, which is about half a percent of GDP per year (based on an average 2017–19 estimate).”
The reduction in FDI, in the long run, could also hinder much-needed technology transfer.
This will also make it worse for countries looking to restructure their debt, because of deepening geo-economic fragmentation which will worsen coordination problems among creditors.
On what could be done, the experts say that the region would fare better if only the US and EU cut ties with Russia and sub-Saharan African countries continued to trade freely.
In this scenario, termed “strategic decoupling”, trade flows would be diverted towards the rest of the world, creating opportunities for new partnerships, and possibly boosting intra-regional trade.
Because some African countries benefit from access to new export markets and cheaper imports, the region as a whole would not incur a GDP loss.
Oil exporters supplying energy to Europe could even gain, the experts say.
This analysis is based on the April 2023 Regional Economic Outlook of the IMF.
To better manage shocks, the experts say, the countries need to build resilience by strengthening the ongoing regional trade integration under the African Continental Free Trade Area.
This will require reducing tariff and non-tariff trade barriers, strengthening efficiency in customs, leveraging digitalization, and closing the infrastructure gaps.
Deepening domestic financial markets can also broaden sources of financing and lower the volatility associated with relying too much on foreign inflows.
To take advantage of the potential shifts in trade and FDI flows, countries in the region can try to identify and nurture sectors that may benefit from trade diversion, for example, in energy, while commodity exporters in the region could potentially displace much of Russia’s energy market share in Europe.
-URN
