(Aerial view of Tashkent in Uzbekistan / photo: iStock)

(Aerial view of Tashkent in Uzbekistan / photo: iStock)

IMF Survey: Africa's Big Economies Can Influence, Protect Their Neighbors

October 25, 2012

Nigeria and South Africa account for one-half of sub-Saharan Africa’s GDP, and are potentially major drivers of growth for the region as a whole.

Africa's Big Economies Can Influence, Protect Their Neighbors

Containers at depot in Johannesburg, South Africa. To large extent, South Africa is shaping structure of trade within sub-Saharan Africa (IMF photo)


Intraregional trade and financing links within sub-Saharan Africa have been expanding significantly in recent years—but it is widely recognized that there is a long road to travel in terms of achieving close economic integration at the regional and subregional level.

As this integration proceeds and economic linkages deepen, the importance of spillover effects from large countries to the rest of sub-Saharan Africa, and within their own subregion, will grow: closer economic linkages inevitably imply increased exposure to shocks, both favorable and unfavorable, in partner countries.

In an interview, IMF African Department senior economist Cheikh Gueye examines Nigeria’s and South Africa’s economic linkages with the rest of the region.

IMF Survey: What are the linkages between South Africa, Nigeria, and the rest of sub-Saharan Africa?

Gueye: First, there is trade. To a large extent, South Africa is shaping the structure of trade within sub-Saharan Africa. For instance, at least 12 countries in sub-Saharan Africa export to South Africa and this represents 1 percent of their GDP.

On the investment side, we have noticed that South African companies are investing in the rest of Africa, and this has an impact in shaping trade flows.

Third, there are linkages in the financial system. Since 2005, Nigerian banks have extended their operation in many countries in sub-Saharan Africa. That is also true of South African banks.

There are also policy linkages. For instance, in the case of Nigeria, we have noted that it has some different trade policies vis-à-vis its neighboring countries, and these policies have been a source of transmission of shock from Nigeria to the other countries.

IMF Survey: What kind of an impact would an economic crisis in Nigeria or South Africa have on its immediate neighbors and on the rest of the sub-Saharan African region?

Gueye: Let us look at South Africa and its trade channel because it is quite large. South Africa is part of the SACU, the South African Customs Union.

South Africa and the other members of the SACU have what we call a customs revenue sharing formula. This means almost 50 percent of the customs revenues within the zone will go to the remaining countries of the SACU.

So, if there is a crisis in South Africa, for example a decline of imports, there will be a decrease in revenue. This will not only have trade consequences, but also fiscal consequences. These countries will experience a shock on their fiscal revenue.

In the case of Nigeria, the trade volume between this country and its neighbors is important. The main sector of trade is the grain market. It can act as a channel for the transmission of inflation.

If a price shock occurs in Nigeria, it will be transmitted to the neighboring countries via the grain market channel. In our research, we have noted that a 3 percent increase in inflation in Nigeria may have an impact of around 1 percent in neighboring countries.

We should also note that, since 2005, the Nigerian banking system has been consolidated. Banks have expanded their cross-border operations in the rest of Africa in search of yield.

For example, in 2003 there were three Nigerian subsidiaries in the rest of Africa. Nowadays, there are almost 44 subsidiaries of Nigerian banks in about 32 countries. If there is a banking crisis in Nigeria, there is a strong possibility that it will greatly impact the rest of Africa.

IMF Survey: What can these neighboring countries do to protect themselves from potential negative spillovers, without hampering regional economic integration as a whole?

Gueye: I do not think they can do much, at least in the short term. On the one hand, these economic linkages have been built through history. You cannot unwind these economic linkages so easily. Countries have to live with them, at least for now.

On the other hand, we can look at what Nigeria and South Africa can do in terms of policies to protect these neighbors from potential crises originating from their respective economies.

However, in the short term, neighboring countries will find it difficult to implement policies to stave off shocks originating from Nigeria and South Africa.