One region profiting from Brexit? Africa

One region profiting from Brexit? Africa
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Despite crippling uncertainties, and beneath the veil of prevailing pessimism, many African countries may reap long-term economic and political benefits from Britain’s vote to leave the European Union.

Amidst a climate of global business apprehension, speculations over the implications of Brexit for Africa are on the uptake with many forecasting a decline in investment, trade and development assistance. All of this is likely to be true — but, importantly, only in the short to medium term, during which economic contingency plans could hedge the impact.

A notable leader amongst Africa’s Brexit doomsday prophets is Patrick Njoroge, Governor of the Central Bank of Kenya, who has warned of a global depression and subsequent issues for Kenya. The potential for Kenya to experience a surge in capital outflows, exchange rate pressures and damaged trade ties are also thought to be unavoidable. Nigeria, Africa’s largest economy, would face similar problems given its strong ties with the UK, which was Nigeria’s leading source of FDI in 2015.

Bloomberg has already reported plummeting stocks, bonds and currencies across Africa upon the outcome of the referendum. In countries such as Ghana and Kenya, yields on dollar bonds rose.

Further still, across the pond from Britain, the American think tank The Brookings Institution predicts an end of British “outwardness” which it expects to contribute to a reduction in trade and aid with Africa. This is a view shared by many given the anti-immigration sentiment that accompanied the ‘Leave’ campaign and the seeming lack of concern for international relations among victorious right-wing nationalists.

Long-term economic benefits

However, crucially now that the UK has voted to leave the EU, all of the country’s trade deals – brokered through the EU – will need to be renegotiated, more than 100 of which are in Africa. Whilst, this may cause lull in trade between the UK, EU, and African states – and put further pressure on economies already dealing with a drop in commodity prices, economic slowdown in China, currency volatility, political instability, and environmental woes – it could paradoxically put Africa in a stronger position in the long-term as the UK and EU will be in a weaker positions.

In a globalised economy, Britain has no option but to as-quickly-as-possible forge new trade agreements and ties with its traditional Commonwealth partners (many of which are African) if it is to mitigate the damning economic predictions of multilateral and financial institutions. As a result, Britain, once a global power, is now on the back foot and at the whim of African countries which have increasingly diverse economic ties with the Middle East, Asia, and the US through the African Growth and Opportunity Act (AGOA). Most African states are not or do not need to be dependent on the UK and the EU as export markets.

Countries across Africa, many understandably concerned about what Brexit means for them, may have a unique opportunity to take advantage of Britain’s relative urgency to secure new economic relations. Trade deals often take years to negotiate, meaning that African countries may secure more favourable terms as the UK government could concede to potentially unpropitious agreements in order to catalyse investment in the thick of a contracting GDP and isolating trade policies perpetrated by the EU.

In addition, African economies may benefit from the withdrawal of the UK from the EU’s Common Agricultural Policy (CAP) which has subsidised uncompetitive UK farmers. The approximate 60% of Africa’s population who work in the agricultural sector may now be able to take advantage of a removed hurdle to trade with the UK, that is unless a resurgence in protectionist policies ensue or the UK introduces its own version of CAP.

Short-term uncertainty

Conversely, demand from the UK and EU is expected to decrease which could provide a blow to some African countries, particularly South Africa, whose fourth largest export partner is the UK. Its economy is already in dire straits and its leading companies are dual listed on the London Stock Exchange. In the absence of a proper trade agreement with the UK, and with the EU-SADC Economic Partnership Agreement failing to satisfy, tariffs will undermine South African export opportunities to the UK.

Other SADC countries, The Democratic Republic of Congo, Botswana, Madagascar, Malawi, Mauritius, Zimbabwe and Zambia would face similar issues and another complex multilateral trade deal may take years to negotiate.

Nonetheless, much of African agricultural products are not in competition with British ones meaning that Kenya’s horticultural industry, for example, would likely recover from initial problems.

Regardless of promising economic rays of sunshine, it should be noted that in the immediate and short-term, global market uncertainty and defunct trade agreements will cast dark shadows over most African countries. This is particularly true for those that largely rely on raw commodity exports, like Nigeria and Angola, as the Bloomberg Commodity Index drops by 1.2% and crude prices fall again to below USD 50 per barrel (24th June 2016).

Political and security implications: Not all bad

Furthermore, Brexit may result in significant cuts to the ring-fenced development budget which could be reversed in light of Britain’s economic plight and inward looking politics. At present, 0.7% of Britain’s GNI goes toward development assistance, but even if this is sustained, as the economy declines so too will development financing in absolute terms. More importantly, the UK may also cut defence spending in light of an impending recession, which could cause reduced UK influence in Africa, enhanced by isolation from EU-led diplomacy.

Yet, on a positive note, Brexit also carries with it the kinetic energy capable of fundamentally altering African geopolitical landscapes. Notably in the Horn of Africa, it is likely that Brexit will change how the UK intends to engage with the region which may be beneficial.

By example, within the EU, the UK opposed the institution’s decision to cut African Union Mission to Somalia (AMISOM) funds by 20% in January 2016, which has propelled Uganda to announce it would withdraw its troops from Somalia by December 2017 and also caused Kenya to threaten withdrawal in May 2016. These actions would considerably undermine the progress that has been made thus far against Somalia-based terrorist group Al Shabaab.

But with the UK functioning as an independent donor and ally in the region, it has the potential to cultivate a conducive security environment and help restore stability in the Horn. This potential can be realised if it manages to wield greater influence than the European External Action Service. The UK is likely to make efforts to do so in order to re-assert its place internationally.

Similarly in West Africa, outside of the EU, the UK could more effectively coordinate with the US military to combat terrorist group Boko Haram in north-eastern Nigeria. This is a point that MP James Duddridge, the UK Minister for Africa, emphasised when speaking to RFI, expressing his support for the Leave campaign. Duddridge also asserted that the UK may be able to more productively deploy development assistance through DFID rather than through the European Development Fund. This might better support strategic objectives – rather than controversial EU-coordinated decisions like providing development assistance to Eritrea, widely is regarded as a destabilising force in the Horn.

There is an accurate consensus amongst analysts that uncertainty is the prevailing issue for African countries following Brexit, but uncertainty should not be misconstrued as certain negative. For the UK and the EU, many studies corroborate that Brexit does not bode well for either entity. Conversely for many African countries, the opposite may prove to be true in due course — politically and economically — precisely because of the mess that the UK and the EU have found themselves in.

Categories: Brexit, Sub-Saharan Africa

About Author

Elliot Kratt

Elliot is a Freelance Analyst with The Economist Intelligence Unit. Prior to this, he held positions in a number of risk consultancies and has worked in East and West Africa. He has been quoted by journalists with the Financial Times and Wall Street Journal. Elliot holds a first class BA (Hons) in International Relations from the University of Leeds. All views expressed are his own.