Africa faces ‘permanent decline’ if China-West tensions rise 

Africa risks losing $10bn of foreign direct investment and official development assistance if the world splits into isolated trading blocs in the wake of US-China decoupling, warns a report from the IMF.


Image : Mandel NGAN and Noel CELIS/AFP

The IMF has warned that sub-Saharan Africa could experience “permanent economic decline” if the world were split into two isolated trading blocs centred around China and the United States and European Union.

In this “severe scenario”, says the Fund’s analytical note, sub-Saharan African economies could experience a permanent decline of up to 4% of real gross domestic product after 10 years according to estimates – losses larger than what many countries experienced as a result of the global financial crisis of 2008.

If geopolitical tensions were to escalate, countries could be hit by higher import prices and lose access to key export markets, impacting half of Africa’s international trade value. The losses could be compounded if capital flows between trade blocs were cut off due to geopolitical tensions.

The region could lose an estimated $10bn of foreign direct investment (FDI) and official development assistance inflows – around 0.5% of GDP a year, based on the IMF’s average 2017-19 estimate. The reduction in FDI in the long run could also hinder much-needed technology transfer, the Fund warns. 

For countries looking to restructure their debt, deepening fragmentation could also worsen coordination among creditors.

“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 region’s value of current international trade would be affected in a scenario in which the world is split into two trading blocs…

“In this scenario, countries that trade more with the US than with China are assigned to the US/EU-centred bloc, and those that trade more with China are assigned to the China bloc… 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% of real GDP after 10 years relative to a no-fragmentation baseline.

“Estimated losses are smaller than the losses during the Covid-19 pandemic but larger than those during the global financial crisis. Declines are larger in countries that are more integrated into global trade and in countries that initially traded more with the bloc from which they are severed.”

The note’s authors say that Africa’s increased integration with the global economy has broadly been positive. The region has formed new economic ties with partners in the past two decades –  the value of exports from sub-Saharan Africa to China increased tenfold over this period, largely driven by oil exports. Overall, sub-Saharan Africa is now almost equally connected with traditionally dominant (US and EU) and newly emerging (China, India, among others) partners, says the Fund. 

The downside is that it has become more susceptible to global shocks. With many countries relying heavily on imports of food, energy, and fertiliser, the region has suffered one of the worst cost-of-living crises in decades since global commodity prices spiked in the wake of the Covid-19 pandemic and the war in Ukraine. 

“Over the past two decades, sub-Saharan Africa has forged economic and trade alliances with new economic partners. While the region has benefited from increased global integration during this period, the emergence of geoeconomic fragmentation has exposed potential downsides. Sub-Saharan Africa stands to lose the most in a severely fragmented world compared to other regions, but there could also be potential benefits if fragmentation is limited,” the authors say. 

In particular, the Fund says that some “milder scenarios of shifting geopolitics” may create new trade partnerships for the region. 

“In 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 ‘strategic decoupling’), trade flows would be diverted partly towards the rest of the world and intra-regional trade in sub-Saharan Africa may increase. 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 relative to the baseline. Oil exporters supplying energy to Europe would especially gain in such a scenario.” 

The Fund recommends that countries strengthen ongoing regional trade integration under the African Continental Free Trade Area to help build resilience to geopolitical shocks, as well as advising that countries in the region position themselves strategically to benefit from trade diversion and potential new FDI flows.

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David Thomas

Editor of African Business.