IMF: Small Trading Blocs Could Result In A 4% Decline In Sub-Saharan Africa’s GDP

Small Trading Blocs

Nigeria is located in Sub-Saharan Africa, which the International Monetary Fund (IMF) has warned could suffer the most from a division of the world into two separate commercial blocs centered around China or the United States and the European Union (EU).

Countries on the African continent that are not regarded as belonging to North Africa are referred to as Sub-Saharan Africa.

A permanent decrease in real gross domestic product of up to 4% in sub-Saharan African economies after ten years, which is greater than what many nations suffered during the Global Financial Crisis of 2008–09, is predicted to occur, according to estimations released on Monday.

It was noted that while trade and economic ties with emerging nations, primarily China, have benefited the region, they have also made nations that rely on imported food and energy more vulnerable to external shocks, such as the spike in trade restrictions that followed 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,” the IMF stated.

The lender issued a warning that losses might increase if cash transfers across trade blocs were interrupted because of geopolitical unrest.

“The region could lose an estimated $10 billion of foreign direct investment (FDI) and official development assistance inflows, which is about half a per cent of GDP a year (based on an average 2017–19 estimate). The reduction in FDI, in the long run, could also hinder much-needed technology transfer.”

The IMF highlighted that if geoeconomic instability grew, it was possible that governments looking to restructure their debt would also experience worsening coordination issues with creditors.

It argued for the necessity of strategic decoupling, arguing that the region would fare better if only the US and EU severed connections with Russia and sub-Saharan African nations were allowed to conduct unrestricted commerce.

In such a case, trade flows would be redirected in the direction of the rest of the globe, opening doors for new collaborations and perhaps enhancing intraregional commerce.

This is “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 IMF recommended that countries develop resilience in order to effectively manage shocks.

“This can be done by strengthening the ongoing regional trade integration under the African Continental Free Trade Area, which will require reducing tariff and non-tariff trade barriers, strengthening efficiency in customs, leveraging digitalization, and closing the infrastructure gaps.”

The IMF remarked that “deepening domestic financial markets can also broaden sources of financing and reduce the volatility associated with relying too heavily on foreign inflows.”

It also stated that in order to benefit from future changes in trade and FDI flows, governments in the region should look for and support industries that could profit from trade diversification “for example, energy. Commodity exporters in the region could potentially displace much of Russia’s energy market share in Europe.”

“Countries can also rely on trade promotion agencies to help identify potential opportunities, build the necessary skills and capacity for exports, and eventually re-orient production to take advantage of new trade flows. Improving the business environment, such as by lowering entry, regulatory, and tax barriers, could also help.”

The lender added that multilateral organizations will need to keep facilitating international discussion in order to further economic cooperation and integration.

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