Economic Growth in Sub-Saharan Africa Could Permanently Decline if Geopolitical Tensions Escalate

IMF News, May 1, 2023

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Authors: Qianqian Zhang, Ivanova Reyes May
Published: May 1, 2023

Key findings

Sub-Saharan African economies could experience a permanent decline of up to 4 percent of real gross domestic product after 10 years in a severe scenario where the world is split into two isolated trading blocs centered around China or the United States and the European Union.
About half of the region’s value of international trade could be impacted if countries lose access to key export markets or face higher import prices due to escalating geopolitical tensions.
The region could lose an estimated $10 billion of foreign direct investment (FDI) and official development assistance inflows, which is about half a percent of GDP a year (based on an average 2017–19 estimate).
Losses from such geoeconomic fragmentation could be larger than what many countries experienced during the Global Financial Crisis.
The reduction in FDI in the long run could hinder technology transfer needed for development.
Deepening geoeconomic fragmentation could worsen coordination problems among creditors for countries looking to restructure their debt.

Scenarios and projected outcomes

Severe bifurcation scenario (two isolated trading blocs): up to 4 percent permanent GDP decline after 10 years; roughly half of trade value affected; $10 billion annual reduction in FDI and official development assistance (about 0.5 percent of GDP a year).
Strategic decoupling scenario (US/EU cut ties with Russia while sub-Saharan African countries continue to trade freely): trade flows are diverted towards the rest of the world, creating opportunities for new partnerships and possibly boosting intra-regional trade; the region as a whole would not incur a GDP loss; oil exporters supplying energy to Europe could even gain.

Impacts on trade and investment

Existing economic and trade alliances, predominantly with China, have benefited the region but increased reliance on imports of food and energy, making countries more susceptible to global shocks (for example, disruptions from the surge in trade restrictions following Russia’s invasion of Ukraine).
Geopolitical escalation could lead to higher import prices and loss of export market access.
Cutoffs in capital flows between trade blocs could reduce FDI and official assistance by about $10 billion annually (about 0.5 percent of GDP a year, average 2017–19).

Policy recommendations — Building resilience

Strengthen regional trade integration under the African Continental Free Trade Area by:
- Reducing tariff and non-tariff trade barriers.
- Strengthening efficiency in customs.
- Leveraging digitalization.
- Closing infrastructure gaps.
Deepen domestic financial markets to broaden sources of financing and lower volatility from reliance on foreign inflows.
Identify and nurture sectors that may benefit from trade diversion (for example, in energy); commodity exporters could potentially displace much of Russia’s energy market share in Europe.
Use trade promotion agencies to identify opportunities, build skills and export capacity, and re-orient production to take advantage of new trade flows.
Improve the business environment by lowering entry, regulatory, and tax barriers to attract investment and support export growth.
Multilateral institutions should continue to facilitate dialogue among nations to promote economic integration and cooperation.

Uncertainties and context

The exact outcomes of fragmentation and polarization, and whether these trends will continue, are uncertain.
Some countries may gain from shifting trade patterns while others may face permanent losses; outcomes depend on the nature of decoupling and countries’ ability to adapt.
This Country Focus is based on an analytical note in the April 2023 Regional Economic Outlook for Sub-Saharan Africa.

By Qianqian Zhang and Ivanova Reyes — May 1, 2023. Authors of the underlying analytical note: Marijn A. Bolhuis, Hamza Mighri, Henry Rawlings, Ivanova Reyes, and Qianqian Zhang.