The UK referendum decision to leave the EU shocked global markets and launched the UK into a realm of political and economic uncertainty. This uncertainty will linger as the UK decides how it will conduct itself in its post-Brexit world. In this environment, investors operating on the African continent are trying to answer a complex and important question: how will Brexit impact Africa?
The UK has pledged 0.7 per cent of its Gross National Income (GNI) as development aid, a significant portion of which is earmarked for development in African nations. Priti Patel, the International Development Secretary in Teresa May’s post-Brexit government has recently suggested that some of Britain’s £12bn foreign aid budget will be diverted to help win post-Brexit trade deals. As an independent member of the World Trade Organisation, the UK will need to negotiate trade deals with more than 50 countries and financial help offered to poorer countries may be an important bargaining tool.
Even if contributions are not cut or diverted for political reasons, they may be affected by the impact Brexit has on the UK economy. If Brexit causes a recession (as many economists have predicted) the UK’s GNI will fall, which will lead to decreases in foreign aid. It is expected that nations such as Sierra Leone and South Sudan will suffer the most, as recent figures suggest that UK Aid represents 4.4 per cent and 1.5 per cent of each country’s respective GDP. By way of comparison, UK aid represents only 0.04 per cent of Nigeria’s GDP. A fall in aid will likely hinder the abilities of aid-dependent nations to push forward with development initiatives.
Foreign Direct Investment
This uncertainty also increases the risk of certain African nations seeing foreign direct investment from UK entities fall. If the UK goes into a recession, it is unlikely that UK entities will have the appetite to increase investment in Africa. According to the IMF’s Coordinated Direct Investment Survey (CDIS), the UK is amongst the top five economies providing inward investment into Uganda, Zambia, Botswana, and Nigeria. Of these nations, UK FDI makes up the highest percentage of GDP in Zambia, making it the most likely to feel the effects of a decrease in investment from the UK.
Trade is an area where there is potential for significant change in a relatively short time. Figures from the Office for National Statistics (ONS) show that African exports to the UK account for approximately 4.8 per cent of total African exports. This may not appear to be a substantial figure, considering that China accounts for approximately 15 per cent of Sub-Saharan African exports. However, the UK leaving the EU may significantly impact certain African economies in the short term. For example, Kenya exports a significant percentage of its flowers to the UK. Consequently, Kenyan flower exporters would have to absorb any losses caused by a contraction in the UK economy triggered by Brexit, and will be concerned by the uncertainty surrounding the basis on which they will trade.
What are the opportunities?
Brexit provides a unique opportunity for African nations to join together (perhaps by using the regional African trading blocs) to leverage their position and collective bargaining power to negotiate more advantageous trade deals. There have been suggestions that the UK should forge closer links with the Commonwealth nations, including major African economies such as South Africa, Ghana and Nigeria.
The manner in which the UK will approach negotiations with African nations is still to be seen: however, it is clear that agriculture will be a main topic of discussion. The EU’s Common Agricultural Policy (CAP) which heavily subsidises EU farmers and in turn, negatively affects the competitiveness of African farmers, has been criticised. On this issue, African nations are likely to find themselves in a better bargaining position against both an isolated UK, and an EU offering a single market reduced by the UK’s absence. Tanzania has already taken the first step in announcing that it will not sign the proposed Economic Partnership Agreement between the EU and the East Africa Community, in the belief that it can achieve a better deal following Brexit. African nations will do their best to negotiate the removal of any limitation on the ability of African farmers to export their produce, particularly as agriculture is one of the key ways African nations are seeking to diversify their export base.
The full impact of Brexit on Africa is yet to be seen, uncertainty is likely to linger for a while, and the nations that are highly dependent on the UK are more likely to scramble to take whatever deal the UK offers. Nonetheless, Brexit provides a unique opportunity for African nations to flex their collective political muscle and negotiate more advantageous trade deals, and it should not be missed.
The Inside Brexit team would like to thank Tomisin Mosuro, Trainee, for his contribution to this blog post.