Navigating geopolitical tides: Africa’s path to trade resilience and growth

While 2022 was characterised by a myriad of shocks that led to output growth decelerating by 3.2% and a decline in global merchandise trade by 1.2% in volume and 5.2% in value, 2023 turned out to be even more challenging. The difficulties in 2022 were thought to be transitory, but deepened and were exacerbated by additional shocks such as the breakout of the Gaza-Israel conflict and restrictions on commercial ships sailing through the Red Sea.

A report by the African Export-Import Bank (Afreximbank), entitled Red Sea Attacks: Impact on African Trade and Macroeconomic Stability, highlights a reallocation of resources among countries in the continent on the basis of geopolitical alignment that had been occasioned by the Gaza conflict.

Countries that rely heavily on the Suez Canal, including Egypt and Sudan, have seen a significant drop in revenue. In contrast, countries, such as South Africa, which provide services to alternative routes, such as that around Cape of Good Hope, have benefited from increased bunkering and restocking services.

Geopolitical tension around the Red Sea is expected to dampen trade and exacerbate inflationary pressures. It may further create instability and stall the optimistic outlook for growth in the region. The prolonged Israel-Palestine conflict, and the solidarity attacks on shipping by the Houthi rebels in Yemen, may continue to disrupt trade flows through the Red Sea, thereby exerting pressure on consumer prices due to higher freight costs.

The Red Sea accounts for an estimated 12% of global trade, valued at$1 trillion, and about 15% of global shipping traffic. This route typically takes more than 95% of maritime traffic between Asia and Europe. Despite operations by the US-led Operation Prosperity Guardian maritime task force and several counter-strikes by US and UK forces, the Houthi rebels have conducted 60 assaults and attacked 50 commercial and military vessels.

The United Nations trade and development organisation UNCTAD reports that transits through the Suez Canal decreased by up to 50% year-on-year in January and February 2024. The Suez Canal Authority observed an estimated 40% year-on-year decline in revenue during the same period. IMF PortWatch estimates that shipping volumes were down by two-thirds in April 2024 compared to the previous year.

Inventories may start to accumulate, especially for exporters in regions that rely on this trade route, due mainly to delays in exports to Europe, with negative implications for their revenue streams. The ongoing crisis is also likely to slow down African trade as commercial vessels seek to avoid the Red Sea. For example, Kenya has seen an uptick in port activity as ships divert from the Red Sea route, while Djibouti has experienced a decline.

Economic resilience: thriving amid shocks

Despite the highly volatile and challenging global operating environment, African economies have shown remarkable resilience, recording output expansion of 3.2%, down from the 4% posted in 2022 and lower than the historical average of about 5% growth witnessed during the period 2011-2019 – but nevertheless recording one of the strongest output growths globally. However, most African countries continued to grapple with high inflationary pressures, debt accumulation, as well as climate change and other extreme weather events.

The impact of weather shocks on Ghana’s cocoa output, preventing growers from taking advantage of rising global cocoa prices, was well articulated in a report by Afreximbank.

These extreme weather events have intensified conversations around climate change. Equally topical is the AfCFTA and its role in expediting the growth and development of the African region.

AfCFTA: Africa’s green road to prosperity?

To contribute to these discussions, Afreximbank has concluded a study on the Climate Implications of the AfCFTA. It suggests that implementation of the AfCFTA not only increases GDP, trade, and production in Africa, but also makes it easier for countries to trade in electricity and energy-related services – resulting in lower emissions.

Effective implementation of the AfCFTA can therefore support Africa’s current development goals while

providing the continent with a gradual path towards trading renewable energy sources. For instance, by creating a unified regulatory framework, the AfCFTA can facilitate electricity trade from renewable sources such as solar power plants in the Sahara. It also suggests that full implementation of the AfCFTA by increasing intra-African trade and reducing extra-African trade allows the region to industrialise and develop without doing substantial harm to the environment.

Africa’s blueprint for sustainable growth

Africa is emerging as a pivotal geo-strategic partner for the future, given its abundant resource endowments and efforts by African countries to improve their macroeconomic fundamentals. This is positioning the continent as one of the most attractive sustainable investment destinations in the world.

The continent continues to exhibit resilience despite a challenging operating environment. Africa’s GDP growth, for instance, is expected to strengthen to 3.8% and 4.2% in 2024 and 2025 respectively, above the global average of 3.2%. Of the 55 African countries, 46 are forecast to post higher growth rates in 2024 and 2025. While inflation remains high, it has generally trended downwards in 2024 from an average of 14% in December 2023 to about 11% by the end of April 2024.

Our outlook for stronger growth is being driven by improving global growth in some of the continent’s key markets, especially China and the US. We are also seeing a gradual return of capital back into key African countries, especially substantial foreign direct investment from Middle Eastern countries, which is supporting foreign exchange stability and easing financial constraints. To mitigate risks to African countries, multilateral financial institutions such as Afreximbank have already put in place strategic interventions and provided facilities to support African countries, helping to mitigate global shocks and the effects of climate change.

The continuous implementation of prudent fiscal and monetary measures by several African countries to enhance macroeconomic stability and boost confidence; the easing of the effects of geopolitical tensions; reduced weather shocks and introduction of climate adaptation and mitigation measures; continued investment in infrastructure, energy and logistics; increases in commodity prices; and the ongoing implementation of the African Continental Free Trade Area (AfCFTA) agreement are all easing pressure on the continent and boosting African growth prospects. These measures are also improving the balance of payments and exchange rate stability, and relieving debt pressure, all of which inform our positive outlook for the continent in the near to medium term.

Our analysis on the climate implications of the AfCFTA also reveals thought-provoking developments in intra-African trade and demonstrates that promoting this is critical in dampening the impact of external shocks and global volatility. It exposes large untapped potential in intra-African trade. The products exhibiting the greatest potential include machinery, electricity, motor vehicles and parts, food products, minerals, beauty products, chemicals, plastic and rubber, ferrous metals, pearls and precious stones, and fertilisers.

Conclusion

The resilience and adaptability of African economies amid global challenges underscore the continent’s potential as a pivotal player in the future of global trade and economic stability. Despite the geopolitical tensions impacting key trade routes like the Red Sea, Africa has managed to navigate these challenges through strategic resource reallocation and leveraging alternative trade routes.

The AfCFTA emerges as a cornerstone not only in boosting intra-African trade and economic integration but also as a vital tool for promoting sustainable development and climate resilience. With anticipated output expansion, coupled with moderating inflation and improved macroeconomic stability, Africa is positioned as a prime destination for investment.

The support from multilateral financial institutions, such as Afreximbank, through various interventions, further reinforces the continent’s ability to withstand external shocks and capitalise on emerging opportunities.

As African nations continue to implement the AfCFTA and other strategic initiatives, the region is well poised to mitigate the impacts of global volatility, enhance trade balances, and sustain robust growth trajectories. Africa’s strategic response to geopolitical tensions and proactive measures towards economic integration and climate adaptation provide a strong foundation for future growth. By continuing this trajectory, African economies can achieve sustained growth, increased trade stability, and enhanced economic resilience, ultimately contributing to a more balanced and resilient global economy.