Region could see 4% GDP contraction over 10 years
Sub-Saharan Africa stands to lose the most in a severely fragmented world compared to others, the IMF said. Photo: iStock Sub-Saharan African economies can suffer a permanent decline of up to 4 per cent of the gross domestic product after 10 years if the world were split into isolated trading blocs centred around China or the United States and the European Union (EU), warned International Monetary Fund (IMF), a United Nations agency.
The region stands to lose the most in a severely fragmented world compared to others, said the IMF estimates, Geoeconomic Fragmentation: Sub-Saharan Africa Caught between the Fault Lines, released May 1, 2023.
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Economic and trade alliances with new economic partners, China, India and others, have benefited sub-Saharan Africa, the financial agency noted. But the recent rise in geopolitical tensions has adversely affected it.
Escalation of current geopolitical tensions would see countries in sub-Saharan Africa hit by higher import prices or even lose access to key export markets, according to the IMF. This would mean that half of the region’s international trade value could be impacted.
The region’s financing options have deteriorated significantly over the past year. The acceleration in the tightening of global monetary policy, prompted by the rapid pickup in global inflation after the onset of Russian invasion in Ukraine, has led to higher interest rates worldwide.
Borrowing costs for sub-Saharan African countries has also increased, both on domestic and international markets.
Sub-Saharan African region could lose an estimated $10 billion of foreign direct investment and official development assistance inflows, which is about half a per cent of GDP a year (based on an average 2017–19 estimate), the IMF stated.
The financial agency advocated the need for strategic decoupling, a scenario in which the sub-Saharan African region would fare better and continue o trade freedly if only the US/EU cut ties with Russia.
In this scenario, trade flows would be diverted towards the rest of the world, creating opportunities for new partnerships and possibly boosting intra-regional trade.
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The IMF advised countries in sub-Saharan Africa to build resilience by strengthening the ongoing regional trade integration under the African Continental Free Trade Area, which will reduce tariff and non-tariff trade barriers, strengthen efficiency in customs, leverage digitisation and close infrastructure gaps.
The countries can expand financial inclusion, build a broader domestic investor base and increase attractiveness to a larger set of external investors by upgrading domestic financial market infrastructure, the agency suggested. This can be through digitisation, transparency and regulation and expanding financial product diversity.
Sub-Saharan African countries can try to identify and nurture sectors that may benefit from trade diversion to take advantage of the potential shifts in trade and FDI flows.
IMF also pointed out that the multilateral institutions will need to continue to facilitate dialogue among nations to promote economic integration and cooperation.
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