Commodities rally push growth
Business
According to the World Bank Africa Report, Pulse, growth in Sub-Saharan Africa is forecast to pick up to 2.6 percent in 2017, rising to 3.2 percent in 2018 and 3.5 percent in 2019. The turnaround is predicated on the projected rise in commodity prices and policy actions to tackle still-large macroeconomic imbalances in several countries.
The report states that the forecasts are weaker than those in October, reļ¬ecting a more moderate recovery among metals exporters and a muted recovery in growth in South Africa. Non-resource-intensive countries are expected to continue to expand at a solid pace. Overall, growth is projected to rise only slightly above population growth, a pace that is largely insuļ¬cient for creating employment and supporting poverty reduction eļ¬orts in the region.
“Growth in South Africa is projected to recover to around 0.6 percent in 2017, rising to 1.1 percent in 2018 and 2 percent in 2019. Weaker growth of private consumption and investment is expected to oļ¬set a rebound in net to oļ¬set a rebound in net exports, as the sovereign rating downgrade to sub-investment level raises borrowing costs. For Nigeria, growth is projected to rise from 1.2 percent in 2017 to 2.5 percent in (2018-19),”reads the report.
The Pulse further states: The modest turnaround will be underpinned by a gradual rebound in oil production and an increase in ļ¬scal spending. In Angola, growth is projected to increase from 1.2 percent in 2017 to 1.5 percent in 2019, spurred by a modest increase in oil production. In Nigeria and Angola, recovery in the non-oil sector will be constrained by foreign exchange restrictions and high inļ¬ation. The subdued outlook for Angola, Nigeria, and South Africa implies that per capita output will decline in these countries over the forecast horizon.
Growth will be weaker than previously projected in the CEMAC area, as oil production increases at a slower pace than previously projected, due to maturing oil ļ¬elds in several countries, and ļ¬scal adjustment reduces public investment. In metals exporters, high inļ¬ation and tight ļ¬scal policy will be a greater drag on activity than previously expected in several countries.
Indications are that growth in non-resource-intensive countries should remain robust, based on infrastructure investments, buoyant services sectors, and the recovery of agricultural production. Ethiopia and Tanzania in East Africa, and Côte d’Ivoire and Senegal in WAEMU will expand at a solid pace, although some of these countries may not reach the high growth rates of the recent past. Growth is projected to strengthen in Ghana, as increased oil production boosts exports.
PROJECTED RISKS
The economic outlook for the region is subject to signiļ¬cant downside risks, including the following on the external front: In Sub-Saharan Africa, sovereign bond issuance has become a key ļ¬nancing strategy in recent years, as countries have looked to global ļ¬nancial markets to facilitate domestic investment. Higher global interest rates could narrow the scope for this ļ¬nancing.
Sustained increases in global interest rates could reduce the ability of governments in the region to raise this level of ļ¬nance; Weakening of growth in advanced economies or emerging markets could reduce demand for exports, depress commodity prices, and curtail foreign direct investment in mining and infrastructure. Oil and metals exporters are particularly vulnerable to this risk, given their less diversiļ¬ed economies;
The change in government in the United States following the elections in November 2016 is not expected to have major eļ¬ects in the region. However, there is a risk that the United States will cut back oļ¬cial development assistance. This will hurt the region’s smaller economies and fragile states, which have strong economic ties with the United States.
Risks on the domestic front include the following: In countries where signiļ¬cant ļ¬scal adjustments are needed, especially in CEMAC countries, failure to implement appropriate policies could weaken macroeconomic stability and slow the recovery; Worsening security, drought conditions, or political uncertainty ahead of key elections pose risks to the outlook for some countries, including Kenya, Nigeria, and South Africa.
CHALLENGES
The region faces a myriad of challenges to regaining the momentum on growth. Addressing these challenges will require deep reforms to improve institutions for private sector growth, develop local capital markets, improve the quantity and quality of public infrastructure, enhance the eļ¬ciency of utilities, and strengthen domestic resource mobilization. In this report, we spotlight a few pressing challenges that several African countries are facing: a slowdown in investment, still high trade logistics costs that impede competitiveness and export diversiļ¬cation, and rising debt levels.
2016 RECORDED DECELERATION
Economic activity decelerated sharply in Sub-Saharan Africa in 2016 to an estimated 1.3 percent growth, its worst outcome in more than two decades. This low growth rate was driven mainly by unfavourable external developments, with commodity prices remaining low, and diļ¬cult domestic conditions.
Angola, Nigeria, and South Africa experienced a marked slowdown in economic activity. A decline in oil production halted economic growth in Angola. In Nigeria, gross domestic product (GDP) contracted by 1.5 percent amid tight liquidity conditions, budget implementation delays, and militant attacks on oil pipelines. Growth in South Africa weakened to 0.3 percent, reļ¬ecting contractions in the mining and manufacturing sectors and the eļ¬ects of the drought on agriculture. Excluding these three countries, growth in the region was estimated to be 4.1 percent in 2016.
Other oil exporters struggled to cope with a large terms-of-trade shock, as activity contracted sharply. Metals exporters fared relatively better, as they beneļ¬tted from the large drop in oil prices. Nonetheless, output levels and investments in the mining sector were also hit hard and budgetary revenues fell. Average growth among the non-resource-intensive countries remained high in 2016, reļ¬ecting their more diversiļ¬ed economies. Growth in these countries was partly supported by scaled-up public infrastructure investment.
Sub-Saharan Africa is seeing a recovery of growth in 2017. Rising commodity prices, strengthening external demand, and the end of the drought in several countries are among the factors contributing to the rebound. Prices of most commodities continued to rise in early 2017, from their lows in early 2016.
The oil price increase in 2017Q1 reflects steady demand growth and the agreement between some OPEC and non-OPEC oil producers to limit output. However, persistently high global oil inventories along with an improved supply outlook by the in the U.S. shale oil sector, impose constraints in the longer term price outlook of oil prices. Metals prices are strengthening, partly reflecting increased demand from China. Meanwhile, above-average rainfalls are boosting agricultural production in countries that were hit by the El Niño–related drought in 2016 (South Africa, Malawi).
Security threats subsided in several countries. In Nigeria, the decline in militants’ attacks on oil pipelines has helped oil production to rebound. The slowdown in Angola, Nigeria, and South Africa—the region’s three largest economies— appears to have bottomed out toward the end of 2016. Nonresource-intensive countries, including those in the West African Economic and Monetary Union (WAEMU), have been expanding at a solid pace.
Several factors are preventing a more rigorous recovery in the region. In Angola and Nigeria, restrictions on access to foreign exchange continue. Although the Central Bank of Nigeria and the National Bank of Angola have recently increased the sales of foreign exchange in the interbank markets, foreign exchange liquidity conditions remain tight, and are holding back activity in the non-oil sectors. The manufacturing and services sectors remain particularly weak in both countries.
In South Africa, policy uncertainty and low business conļ¬dence continue to constrain investment. Unemployment remains very high. The recent (April 2017) downgrade of the country’s credit rating to sub-investment level by Standard and Poor’s and Fitch is likely to weigh on the country’s economic prospects. Elsewhere in the region, several oil exporters in the Central African Economic and Monetary Community (CEMAC) are facing diļ¬cult economic conditions. The contraction of activity that began in the oil sector in Chad, Equatorial Guinea, and the Republic of Congo has spread to the rest of the economy.
Although the economies of Cameroon and Gabon have not contracted—due in part to their relatively more diversiļ¬ed exports—activity has slowed notably and oil production continues to decline. Having delayed the adjustment to lower oil revenues, CEMAC countries are now embarking on ļ¬scal tightening to stabilize their economies. In Chad, the ongoing ļ¬scal adjustment has entailed signiļ¬cant reductions in recurrent and capital expenditures, which weakened domestic demand. Elsewhere, in Mozambique, the recent government default and debt burden are deterring investment.
The drought in East Africa, which reduced agricultural production at the end of 2016, has continued into 2017, adversely aļ¬ecting activity in some countries (for example, Kenya) and contributing to food insecurity in others (Somalia, South Sudan) (Current Account Deficits and Financing The current account balances of oil exporters are improving, helped by the pickup in commodity prices.
Oil exports are rebounding in Nigeria on the back of an uptick in oil production. In metal exporters, the positive impact of an improvement in metals prices is being oļ¬set by a rise in investment related imports. Current account deļ¬cits remain high in several non-resource-rich countries (including Rwanda and Uganda). In these countries, capital goods imports have also been strong, reļ¬ecting ambitious public investment agendas. Capital inļ¬ows in the region are rebounding from their low level in 2016, which saw foreign direct investment fall and Eurobond issuance decline.
A strengthening of cross-border ļ¬ows this year should help ļ¬nance the still-elevated current account deļ¬cits. Gross foreign direct investment in Nigeria edged up in the fourth quarter of 2016, after declining in the ļ¬rst three quarters. Nigeria was able to tap the Eurobond market twice at the start of the year, reļ¬ecting improved investors’ sentiment.
More broadly, in a global environment characterized by low ļ¬nancial market volatility and increased investor risk appetite, sovereign spreads have generally narrowed across the region, with the notable exception of Ghana, where spreads rose because of concerns about ļ¬scal policy slippages (ļ¬gure 1.4). Sovereign spreads widened on South African debt in the wake of recent political developments and credit rating downgrade. Exchange Rates and Inflation The rebound in commodity prices and improved growth prospects in some countries have helped stabilize commodity exporter currencies.
However, with the Nigerian naira and Angolan kwanza remaining ļ¬xed against the U.S. dollar, the imbalance in the foreign exchange market remains substantial in both countries. Among metals exporters, the Congolese franc depreciated sharply against the U.S. dollar in the second half of 2016, with weakness continuing in 2017, reļ¬ecting heightened political uncertainty as well as loss of foreign reserves in the Democratic Republic of Congo. A debt crisis in Mozambique sharply lowered the value of the metical against the U.S. dollar in the second half of 2016, and the currency remains weak. Annex 1B explores foreign exchange market pressures in Sub-Saharan Africa.
Inļ¬ation in the region is gradually decelerating from its high level in 2016, but remains elevated. Although a process of disinļ¬ation has started in Angola and Nigeria, inļ¬ation in both countries remains high, driven by a highly depreciated parallel market exchange rate. Inļ¬ation eased in metals exporters, because of greater currency stability and lower food prices due to improved weather conditions (Namibia, Zambia). In Mozambique, inļ¬ation was in high double digits in February.
In nonresource-intensive countries, inļ¬ationary pressures have picked up in East Africa, as the drought led to an increase in food prices—notably in Kenya. However, in countries where the drought has been less severe, inļ¬ation has remained within the central banks’ targets. Inļ¬ation continues to be low in most CEMAC and WAEMU countries, reļ¬ecting the stable peg to the euro. The low inļ¬ation environment in Tanzania, Uganda, and Zambia allowed their central banks to cut interest rates at the start of the year. Bank of Ghana also cut its policy rate. Although inļ¬ation in Ghana remains in double digits, it has narrowed from over 19 percent in 2016, to around 13 percent in January.
Fiscal Positions Countries across the region face the need for ļ¬scal consolidation to narrow ļ¬scal deļ¬cits and stabilize government debt. Although commodity prices have recovered some ground, commodity exporters (especially oil exporters, such as Angola and Equatorial Guinea) are still running sizable ļ¬scal deļ¬cits. The ļ¬scal balances of non-resource-intensive countries worsened in 2016, reļ¬ecting elevated investment spending levels.
Widening ļ¬scal deļ¬cits and, in some cases, sizable exchange rate depreciations have resulted in rising public debt levels in the region. Large non-concessional borrowing for infrastructure development has led to high debt servicing costs in several countries. South Africa’s 2017/18 budget reaļ¬rms the government’s commitment to ļ¬scal consolidation, with the introduction of a new personal income tax bracket to mobilize additional revenue. It remains to be seen whether the stance of ļ¬scal policy will be aļ¬ected by political developments.
Among oil exporters, Angola’s 2017 budget targets a stable ļ¬scal deļ¬cit, but the risks of large expenditure overruns in the run-up to the election this year remain high. In Nigeria, the government plans to increase infrastructure spending, ļ¬nanced in part through borrowing. Elsewhere, Ghana’s 2017 budget signaled a slowdown in ļ¬scal consolidation, which could increase ļ¬scal risks, given limited ļ¬scal space. Mozambique’s budget points to a moderate increase in spending. Reļ¬ecting the continued weakness of ļ¬scal balances, caused by the fall in commodity prices and the continued upward trend in government debt, the region’s rating outlook in 2017 remains negative.
FINANCIAL RISKS
Banking sector vulnerabilities remain elevated in the region, including in Angola, CEMAC countries, the Democratic Republic of Congo, and Nigeria. Foreign exchange restrictions, policy uncertainty, and weak growth have aļ¬ected the soundness of the banking sector. Non-performing loans have increased, and proļ¬tability and capital buļ¬ers have decreased. Several proactive measures have been introduced to contain risks to ļ¬nancial stability, including through increased provisioning and by intensifying the monitoring and supervision of banks. While banking system resilience needs to be strengthened, steps by banks to limit credit risks, by tightening lending standards and reducing credit to the private sector while continuing to invest in government securities, are contributing to the slow recovery in economic activity.
(Adopted from World Bank Africa report, Pulse)
Business
Botswana ranks most attractive for investment in mining
The Canadian research entity, Fraser Institute has ranked Botswana as the most attractive country for investment in mining in Africa.
In a new survey the entity assessed mineral endowments and mining related policies for 62 mining jurisdictions including Botswana.
The entity noted that in addition to mineral potential for mining jurisdictions, policy factors examined during the survey include uncertainty concerning the administration of current regulations, environmental regulations, regulatory duplication, the legal system & taxation regime, uncertainty concerning protected areas, disputed land claims, infrastructure, socio-economic & community development conditions, trade barriers, political stability, labor regulations, quality of the geological database, security, as well as labor & skills availability.
According to the survey Botswana is the highest ranked jurisdiction in Africa and the second-highest in the world for investment in mining, as a result of its favorable mining policy when compared to other jurisdictions. The survey report noted that Botswana increased its score in policy perception index and added that the score reflects decreased concerns over uncertainty concerning protected areas infrastructure, political stability, labor regulations & employment agreements. āBotswana is also the most attractive jurisdiction in Africa and top 10 in the world when considering policy and mineral potential. With the exception of Botswana, policy scores decreased in all African jurisdictions featured in the survey report.
The survey shows that Morocco is the second most attractive jurisdiction in Africa both for investment and when only policies are considered. However, Moroccoās policy perception index score decreased by almost 18 points and globally the country ranks 17th out of 62 mining jurisdictions this year, dropping out of the top 10 jurisdictions after ranking 2nd out of 84 jurisdictions in 2021 in terms of policy. The survey report noted that investors recently expressed increased concerns over the uncertainty of administration and enforcement of existing regulations, labor regulations & employment agreements, uncertainty concerning disputed land claims, socio economic agreements, community development conditions and trade barriers in the country.
The top jurisdiction in the world for investment in mining is Nevada, which moved up from 3rd place in 2021. At 100, Nevada has the highest policy perception index score this year, displacing the Republic of Ireland as the most attractive jurisdiction in terms of policy. Botswana ranked 31st last year, climbed 29 spots and now ranks 2nd. South Australia ranks 3rd, entering the top 10 jurisdictions in terms of policy after ranking 16th in 2021. Along with Nevada, Botswana, and South Australia, the top 10 ranked jurisdictions based on policy perception index scores are Utah, Newfoundland & Labrador, Alberta, Arizona, New Brunswick, Colorado, and Western Australia. āNevada ranked first this year with the highest PPI score of 100. Botswana took the second spot held by Morocco. The top 10 ranked jurisdictions are Nevada, Botswana, South Australia, Utah, Newfoundland & Labrador, Alberta, Arizona, New Brunswick, Colorado, and Western Australia. The United States is the region with the greatest number of jurisdictions (4) in the top 10 followed by Canada (3), Australia (2), and Africa (1).ā
In the survey report Fraser Institute noted that this year, Angola, Ivory Coast, Mozambique, South Sudan, and Zambia received enough responses to be included in the report. Eight African jurisdictions are ranked in the global bottom 10. Out of 62 mining jurisdictions, Zimbabwe ranks (62nd), Mozambique (61st), South Sudan (60th), Angola (59th), Zambia (58th), South Africa (57th), Democratic Republic of Congo (55th), and Tanzania (53rd). Zimbabwe has consistently ranked amongst the bottom 10 and has held that position for the previous nine years, according to the institute.
The institute noted that considering both policy and mineral potential Zimbabwe ranks the least attractive jurisdiction in the world for investment. āThis year, Mozambique, South Sudan, Angola, and Zambia joined Zimbabwe as among the least attractive jurisdictions. Also in the bottom 10 are South Africa, China, Democratic Republic of Congo (DRC), Papua New Guinea, and Tanzania. Zimbabwe, China, Democratic Republic of Congo, and South Africa were all in the bottom 10 jurisdictions last year. The 10 least attractive jurisdictions for investment based on policy perception index rankings are; (starting with the worst) Zimbabwe, Guinea (Conakry), Mozambique, China, Angola, Papua New Guinea, Democratic Republic of Congo (DRC), Nunavut, Mongolia, and South Africa.ā
The Fraser Institute on annual basis conducts an annual survey of mining and exploration companies to assess how mineral endowments and public policy factors affect exploration investment.
Over half of the respondents who participated in the recent survey (57 percent) are either the company President or vice-president, and 25 percent are either managers or senior managers. The companies that participated in the survey reported exploration spending of US$1.9 billion in 2022, according to the institute. The institute indicated that as part of the survey, questionnaires were sent to managers and executives around the world in companies involved in mining exploration, development, and other related activities, to assess their perceptions about various public policies that might affect mining investment.
The institute noted that the purpose of the survey is to create a report card that governments can use to improve their mining-related public policy in order to attract investment in their mining sector to better their economic productivity and employment.
The institute noted that while geologic and economic evaluations are always requirements for exploration, in todayās globally competitive economy where mining companies may be examining properties located on different continents, a regionās policy climate has taken on increased importance in attracting and winning investment. āThe Policy Perception Index or PPI provides a comprehensive assessment of the attractiveness of mining policies in a jurisdiction, and can serve as a report card to governments on how attractive their policies are from the point of view of an exploration manager.ā
Business
Inflation drops to 7.9 percent in April
Botswanaās inflation rate dropped to 7.9 percent in April 2023, a 2.0 percentage drop 9.9 percent in March 2023, Statistics Botswanaās consumer price index reported on Monday.
The main contributors to the annual inflation rate in April 2023 were Transport (2.7 percent), Food & Non-Alcoholic Beverages (2.2 percent), and Miscellaneous Goods & Services (0.9 percent).
The inflation rates for regions between March 2023 and April 2023 indicated a decline of 2.3 percentage points for Cities & Townsā, from 9.9 percent in March to 7.6 percent in April.
The Urban Villagesā inflation rate registered a drop of 1.8 percentage points, from 9.7 percent in March to 7.9 percent in April, whereas the Rural Villagesā inflation rate was 8.6 percent in April 2023, recording a decrease of 1.8 percentage points from the March rate of 10.4 percent.
The national Consumer Price Index realised a rise of 1.1 percent, from 128.2 in March 2023 to 129.7 in April 2023. The Cities & Towns index was 129.7 in April 2023, recording a growth of 1.2 percent from 128.2 in March.
The Urban Villages index registered an increase of 1.2 percent from 128.4 to 130.0 during the period under review, whilst the Rural Villages index rose by 0.9 percent from 127.9 in March to 129.0 in April 2023.
Four (4) group indices recorded changes of at least 1.0 percent between March and April 2023, specially; Miscellaneous Goods & Services (5.5 percent), Alcoholic Beverages & Tobacco (1.8 percent), Food & Non-Alcoholic Beverage (1.2 percent), and Recreation & Culture (1.2 percent).
The Miscellaneous Goods & Services group index registered an Increase of 5.5 percent, from 125.5 in March to 132.5 in April 2023. The rise was largely due to a growth in the constituent section indices of Insurance (11.2 percent) and Personal Care (2.1 percent).
The Alcoholic Beverages & Tobacco group index rose by 1.8 percent, from 126.5 in March 2023 to 128.7 in April 2023. The increase was owing to the rise in the constituent section indices of Alcoholic Beverages (1.9 percent) and Tobacco (1.1 percent).
The Food & Non-Alcoholic Beverages group index increased by 1.2 percent, from 136.6 in March to 138.2 in April 2023. The rise in the Food group index was attributed to the increases of; Vegetables (3.9 percent), Fish (Fresh, Chilled & Frozen) (1.7 percent), Coffee, Tea & Cocoa (1.5 percent), Milk, Cheese & Milk Products (1.5 percent) Fruits (1.4 percent) Meat (Fresh, Chilled & Frozen) (1.1 percent), Mineral Waters, Soft Drinks, Fruits & Vegetables Juices (1.1 percent) and Food Not Elsewhere Classified (1.0 percent).
The Recreation & Culture group index registered a growth of 1.2 percent, from 108.9 in March to 110.2 in April 2023. The rise was owed to the general increase in the constituent section indices, particularly; Recreational & Cultural Services (8.2 percent).
The All-Tradeables index recorded an increase of 0.9 percent in April 2023, from 134.2 in March 2023 to 135.4. The Non-Tradeables Index went up by 1.5 percent, from 120.1 in March to 121.8 in April 2023. The Domestic Tradeables Index moved from 131.8 in March to 133.3 in April 2023, registering a rise of 1.1 percent.
The Imported Tradeables Index realised a growth of 0.8 percent over the two periods, from 135.0 in March to 136.2 in April 2023. The All-Tradeables inflation rate was 10.3 percent in April 2023, registering a drop of 2.4 percentage points from the March 2023 rate of 12.7 percent.
The Imported Tradeables inflation rate went down by 3.1 percentage points from 12.4 percent in March to 9.3 percent in April 2023. The Non-Tradeables inflation was 4.6 percent in April 2023, a decline of 1.4 percentage points from the March 2023 rate of 6.0 percent. The Domestic Tradeables inflation rate registered a drop of 0.3 of a percentage point, from 13.4 percent in March to 13.1 percent in April 2023.
The Trimmed Mean Core inflation rate went down by 2.1 percentage points, from 9.2 percent in March 2023 to 7.1 percent in April 2023. The Core Inflation rate (excluding administered prices) was 8.3 percent in April 2023, a decrease of 0.6 of a percentage point from the March 2023 rate of 8.9 percent.
Business
IMF warns of GDP decline in Sub Saharan Africa
A new report by International Monetary Fund (IMF) has warned that countries in Sub Saharan Africa including Botswana could record significant losses in Gross Domestic Product (GDP) as a result rising geo-political tensions among major economies in global trade.
Recent trends show that there is a deepening fragmentation in global economy, following US-led NATO war against Russia in Ukraine and trade war between US and China.
According to some local trade analysts the fragmentation of global economy leading to competing (US/EU bloc and China bloc could result with Sub Saharan Africa losing markets for some of its export commodities. The trade analysts noted that US & China are failing to implement an agreement, intended to stop the trade war and address some of the US fundamental concerns that instigated the war. USD34 billion worth of Chinese goods intended for the US market reportedly expired in July 2022 while US President Joe Biden administration was still reviewing import tariffs while another USD16 billion worth of goods expired in August, and a third batch of goods worth approximately USD100 billion expired in September. The analysts indicated that as a result of the trade war, the manufacturing sector at the US and China could lower production of goods, resulting with subdued demand for exports of raw materials and other commodities such as minerals from Botswana and other Sub Saharan countries.
In its April 2023 regional economic outlook report titled, āGeo-economic Fragmentation: Sub-Saharan Africa Caught between the Fault Linesā IMF indicated that recent data shows that rising geo-political tensions among major economies is intensifying economic and financial fragmentation in the global economy. The IMF cautioned that countries in Sub Saharan Africa could lose the most as a result of fragmented world.
The IMF stated that while countries in Sub-Saharan region benefited from increased global integration during the last two decades, the emergence of geo-economic fragmentation has exposed potential downsides. āSub-Saharan Africa has benefited from the expansion of economic ties over the past two decades. The region has formed new economic ties with non-traditional partners in the past two decades. Riding on the tailwinds of Chinaās globalization since the early 2000s, the value of exports from Sub-Saharan Africa to China increased tenfold over this period, largely driven by oil exports, according IMF adding that China has also emerged as an important source of external financing. Ā The US and EU still supply most of the regionās foreign direct investment (FDI) stock, with China accounting for only 6 percent of it as of end-2020, according to IMF.
IMF stated that overall, the expansion and diversification of economic linkages with the major global economies benefited the region. āThe regionās trade openness measured as imports plus exports as share of GDP doubled from 20 percent of GDP before 2000 to about 40 percent. This doubling, together with buoyant commodity prices, among other factors, contributed to the growth take-off during this period, boosting living standards and development.ā
IMF noted that overall, sub-Saharan Africa is now almost equally connected with traditionally dominant (US and EU) and newly emerging (China, India, among others) partners and warned that the downside of increased economic integration is that sub-Saharan Africa has become more susceptible to global shocks. āSub-Saharan Africa stands to lose the most in a severely fragmented world compared to other regions. In the severe scenario of a world fully split into two isolated trading blocs, sub-Saharan Africa would be hit especially hard because it would lose access to a large share of current trade partners. About half of the regionās value of current international trade would be affected in a scenario in which the world is split into two trading blocs: one centered on the US and the EU (US/EU bloc) and the other centered on China.ā
IMF indicated that under a severe āgeo-economic fragmentationā scenario, trade flows would adjust over time. āBut as the region loses access to key export markets and experiences higher import prices, the median sub-Saharan African country would be expected to experience a permanent decline of 4 percent of real GDP after 10 years. Estimated losses are smaller than the losses during the COVID-19 pandemic but larger than those during the global financial crisis.ā
IMF warned that disruptions to capital flows and technology transfer could bring additional losses. āSeparately from the trade simulation results, in a world where countries were to cut off their capital flow ties with either bloc consistent with the preceding severe scenario, the region could lose about $10 billion of Foreign Direct Investment (FDI) and official development assistance inflows, equivalent to about half a percent of GDP a year, based on an average 2017ā19 estimate. In the long run, trade restrictions and a reduction in FDI could also hinder much needed export-led growth and technology transfers.ā
IMF meanwhile said not all is bleak as some milder scenarios of shifting geopolitics may create new trade partnerships for the region. āIn a scenario in which ties are cut only between Russia and the US/EU while sub-Saharan African countries continue to trade freely (referred to as āstrategic decouplingā), trade flows would be diverted partly towards the rest of the world and intra-regional trade in sub-Saharan Africa may increase.ā
IMF recommended that countries in Sub Saharan Africa should build resilience that requires strengthening regional integration and expanding the pool of domestic resources to counter potential external shocks: According to IMF trade experts strengthening the ongoing regional trade integration under the African Continental Free Trade Area could help build resilience amid external shocks. Greater integration will require reducing tariff and non-tariff trade barriers, strengthening efficiency in customs, leveraging digitaliĀzation, and closing the infrastructure gaps, according to the experts.
The experts also recommended that countries in the region should deepen domestic financial markets as that can broaden the sources of financing and lower the volatility associated with excessive reliance on foreign inflows. āBy upgrading domestic financial market infrastrucĀture including through digitalization, transparency and regulation, and expanding financial product diversity, sub-Saharan African countries can expand financial inclusion, build a broader domestic investor base. Improving domestic revenue mobilization is critical to reducing the share of commodity-linked fiscal revenues.ā