The International Monetary Fund (IMF) has issued a warning that Nigeria could potentially lose an estimated $10 billion in foreign direct investment and official development assistance inflows due to geopolitical tensions.
The IMF’s country focus on Sub-Saharan Africa, which was released on Monday, stated that the figure represents around 0.5% of the nation’s annual Gross Domestic Product (GDP).
In the report, the Washington-based lender said, “The losses could be compounded if capital flows between trade blocs were cut-off because of geopolitical tensions. The region could lose an estimated $10 billion of foreign direct investments and official development assistance inflow is about half a percent 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 went on to say that if geopolitical tensions were to escalate, countries could be hit by higher import prices or even lose access to key export markets. It added that about half of Sub-Saharan Africa’s value of global trade could be impacted.
The Washington-based lender also said that Sub-Saharan Africa could stand to lose the most if the world split into two isolated trading blocs centered on China or the United States and the European Union. The IMF further stated that the region’s economy could experience a permanent decline of up to four percent of its gross domestic product after 10 years.
“Sub-Saharan Africa could stand to lose the most if the world were to split into two isolated trading blocs centered around China or the United States and the European Union. In this severe scenario, sub-Saharan African economies could experience a permanent decline of up to four per cent of the real Gross Domestic Product after 10 years. According to our estimates, these are losses larger than what most countries experienced during the global financial crisis.”
According to the IMF, economic and trade alliances with new economic partners, predominantly China, have benefited the region.
The report also stated that economic trade alliances have also made countries reliant on imports of food and energy more susceptible to global shocks, including disruptions from the surge in trade restrictions following Russia’s invasion of Ukraine. The IMF called for strengthening the African Continental Free Trade Area to better manage these shocks properly.
“To better manage shocks, countries need to build resilience. 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. Deepening domestic financial markets can also broaden sources of financing and lower the volatility associated with relying too much on foreign inflows. To take advantage of the potential shifts in trade and FDI flows, countries in the region can try to identify and nurture sectors that may benefit from trade diversion like energy. Commodity exporters in the region could potentially displace much of Russia’s energy market share in Europe.”
IMF advised countries in the region to rely on trade promotion agencies to help identify potential opportunities and build the necessary skills and capacity for exports.
“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 by lowering entry, regulatory, and tax barriers could also help. What the exact outcomes will be from fragmentation and polarization, and whether these trends will continue are uncertain. What is clear, however, are multilateral institutions will need to continue to facilitate dialogue among nations to promote economic integration and cooperation.”
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