Africa was looking forward to a renaissance in continental trade through the widely anticipated implementation of the landmark African Continental Free Trade Agreement in 2020. However, the onset of the coronavirus coupled with entrenched political and security barriers to trade have offset this vision and dealt the heaviest blow to the continent’s economy in 25 years.

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One year ago, we released our first assessment of supply chain risks in Africa (See SPECIAL FEATURE: SUPPLY CHAIN RISK IN AFRICA) in which EXX Africa outlined how geopolitical developments can affect African trade. While such developments continue to threaten the continent’s supply chains, without doubt, the most prominent risk that has emerged has been the onset of the novel coronavirus (COVID-19) and associated regulations, disruption, and other barriers to trade.

This year’s report provides an in-depth examination of how the virus has impacted African trade, whilst also touching on some of the ongoing political and security threats across the continent.

COVID-19 IS THE PRIMARY THREAT TO AFRICAN SUPPLY CHAINS IN 2020

The measures that countries have adopted around the world in response to the COVID-19 pandemic have had an unprecedented effect on trade this year as a result of a unique combination of shocks to both global trade supply and demand. According to the latest data published by UNCTAD, the pandemic cut global trade values by three percent in the first quarter of 2020 and this decrease is estimated to accelerate to a decline of 27 percent in the second quarter.

Africa is expected to be severely impacted by this slowdown. In 2017, the share of trade in the continent’s GDP was 56 percent while the share of its exports to the rest of the world ranged from 80 to 90 percent, indicating that the continent is both heavily dependent on trade and, specifically, trading outside of Africa.

Yet, it is these external trading partners that have been the most impacted by the pandemic to date. Studies conducted by the OECD now predict that the trade effect of the pandemic will be felt in three successive waves across Africa: Firstly, from China, secondly from western states (particularly the EU) and, finally, from within, as Africa locks down.

External shock from China and the impact from the commodity price drop

Looking at the first wave, many African states are heavily dependent on trade with China for their economic survival. Yet, in the first quarter of 2020, China’s GDP contracted by 6.8 percent from the previous year — the largest decline since official quarterly GDP records began in the early 1990s – resulting in a 14 percent drop in African trade with China over this period. In some countries, the reliance on trade with China is disproportionately high (see figure 1). These states – almost all of which are least developed countries (LDCs) – do not have viable alternative sources of revenue rendering them highly vulnerable to this exogenous shock that is set to deepen in the second quarter.

The above decline has been exacerbated by the drop in commodity prices across all commodities – with the exception of gold – this year. In 2019, 90 percent of SSA countries were considered commodity-dependent (see figure 2) compared to 66 percent in MENA, 50 percent in Latin America and 50 percent in East Asia and the Pacific. Many African states are therefore facing a twin shock of a drop in demand and a drop in the price of commodities as a result of the pandemic. This has been felt acutely in the relationship with China, as the main products that Africa exports to China are raw commodities such as crude oil, iron ore, cotton, and diamonds.

External shock from Europe and impact on manufacturing

The second wave has been felt by the economic slowdown and physical lockdown of many Western countries, particularly in the EU. Much like China, both the EU and US have faced major slowdowns in the first quarter of 2020 with the Eurozone contracting by 14.4 percent and the US by 4.8 percent. Moreover, those countries that were most impacted by the virus in the Eurozone are Africa’s biggest trading partners and include the likes of the UK, Spain, France, Germany, the Netherlands, and Italy. This slowdown is expected to affect many Small Island and North African states the hardest (see figure 3) who are the most dependent on the EU for trade.

Much like with China, Africa’s largest exports to Europe are commodities. However, the EU is Africa’s most important supplier in terms of industrial machinery, manufactured goods and transport equipment. Thirty-five percent of such goods are sourced from Europe, followed by 16 percent from China and 14 percent from the rest of Asia, including India.

Because of factory shutdowns in Europe, China, and the US – the centres of global value chains (GVC) – Africa will therefore not only lose out in terms of its raw commodity exports, but it will also face a decreased availability of manufactured goods imported into the continent. SSA economies that have been transitioning or are well integrated into manufacturing, including South Africa, Kenya, Ethiopia, Lesotho, and Eswatini (Swaziland), are expected to be the most affected in this regard.

Internal shock from Africa’s own lockdown

The third shock to African trade is endogenous and has been caused by the implementation of its own continental lockdowns.

In response to the pandemic, most African countries moved swiftly to contain the virus by enacting a state of emergency (at least 17 states), imposing a lockdown or curfew (at least 27 states), closing borders (at least 41 states) and implementing travel bans (at least 42 states). These measures ground most economic activity to a halt, cutting off African trade to global and regional trading partners.

While the share of intra-African trade is low compared to other regions (recalling here that 80-90 percent of African exports venture outside of the continent), it is a growing and important economic activity. Indeed, the majority of intra-African trade is informal and contributes to the income of some 43 percent of Africa’s entire population through the trade in agricultural goods and other primary products. In Uganda, for example, this type of trade accounts for between 15 and 30 percent of exports. While some freight is still being allowed to cross borders in Africa, the regulations are cumbersome, and allowance is often made for agricultural and food products only.

The second most traded good within the continent is manufactured goods. In fact, they make up a much higher proportion of regional exports than those leaving the continent—41.9 compared to 14.8 percent in 2014. As such, intra-regional trade in manufactured goods across the continent is also expected to be impacted this year.

Finally, perhaps the biggest casualty from COVID-19’s impact on African trade has been the halt in the African Continental Free Trade Agreement (AfCFTA) which was due to establish a continent-wide free movement of goods starting on 1 July 2020. The African Union Commission has now proposed postponing the launch until 1 January 2021.

POLITICAL AND SECURITY THREATS IMPACT SUPPLY CHAINS

While COVID-19 poses the most significant threat to supply chains this year, geopolitical threats remain a constant concern.

In our previous report (See SPECIAL FEATURE: SUPPLY CHAIN RISK IN AFRICA), we demonstrated how geopolitical instability frequently results in the planned or unexpected closure of land, sea, and air routes, affecting the movement of goods and services. According to a survey by the World Economic Forum, it is such instability that is one of the leading causes of concern of global supply chain disruption (see table 1).

There have been countless instances of such geopolitical disruption in Africa over the past year. While COVID-19 has resulted in the vast majority of disruptions in the first half of 2020, a few notable geopolitical case studies have been carried over from 2019. These include:

  • Political unrest and conflict:
    • In February 2019, Rwanda unilaterally closed its borders with Uganda over a diplomatic feud with President Yoweri Museveni. Sixteen months later this closure remains in effect, even after an attempt to normalise relations in a virtual conference in early June 2020 (See RWANDA: REGIONAL TRADE TENSIONS AND FAST RISING DEBT RAISE ECONOMIC CONCERNS).
    • In September 2018, the borders between Eritrea and Ethiopia were opened with the hope that trade, transport and telecommunications would be restored between the two nations after 20 years of a frozen war. However, in April 2019, Eritrea unilaterally decided to close its borders with Ethiopia again (See ERITREA: STUMBLING BACK INTO ISOLATION). These borders remain shut today.
  • Illicit trade and organised crime:
    • In September 2019 the Sudanese ruling transitional council closed the country’s borders with Libya and the Central African Republic (CAR), citing ‘security and economic’ threats to Sudan, specifically the illegal crossing of vehicles into the country from Libya. At the time of writing, these borders remained closed.
  • Export/import restrictions:
  • Terrorism:
    • In July 2019, Kenya moved to close its border with Somalia reportedly in response to the threat posed by Al Shabaab. At the time, the Kenyan government noted that the closure was indefinite, and the border remains closed nearly one year later today.
  • Maritime piracy:
    • The Gulf of Guinea once again emerged as the number one global piracy hotspot in 2019 with nearly half (64) of all reported incidents occurring in this region. While the rise in piracy has impacted shipping, it has also had a knock-on effect on inland trade and the health of local economies (See GULF OF GUINEA: TRENDS AND COMMERCIAL IMPACT OF PIRACY ATTACKS).

Impact of volatile oil and gas demand

Despite the May 2020 rebound in oil prices, the oil and gas industry in Africa remains at risk of disruption. Industry players are initially moving to slow the pace of production, seeking to expand storage capacity, and attempting to market products through amended purchase agreements and financial hedging instruments. However, at least 30 oil and gas projects are being reviewed and some are at risk of being suspended or halted all together.

New projects in both established markets like Nigeria, Angola, and Algeria, and in nascent producers such as Senegal, Mauritania, Uganda, and Mozambique, are at greatest risk of indefinite delays, divestments, and outright cancellation. Norway-based energy consultancy Rystad Energy projects that oil production in Africa could be cut by 200,000 barrels a day over the next five years, and then perhaps falling further, by over a million a day.

Only a few commercially viable projects are expected to proceed, such as France’s Total’s USD 15 billion financing deal for its LNG project in Mozambique that is due to start exporting in four to five years. Other project’s like Aker Energy’s troubled Pecan project in Ghana will be postponed indefinitely. The long-delayed Nigeria LNG Train 7 development is set to be pushed back further. In April, BP declared force majeure on Phase 1 of its Greater Tortue Ahmeyim cross-border LNG project offshore Senegal and Mauritania.

INSIGHT

African exports and imports are projected to drop by at least 35 percent this year with an estimated loss of around USD 270 billion in trade. The primary reason for this drop is the onset of COVID-19. Moreover, the disruption to the global economy through GVC, the abrupt fall in commodity prices and associated fiscal revenues, and the enforcement of lockdowns in African countries will result in an economic contraction across the continent not seen for a quarter of a century.

The countries that are expected to be the most impacted are those that are commodity-sensitive, particularly in oil. These include Algeria, Angola, Cameroon, Chad, Equatorial Guinea, Gabon, Ghana, Nigeria, and the Republic of the Congo. In addition, for countries like Nigeria and Angola, the continent’s largest hydrocarbons producers, oil revenues represent more than 90 percent of exports and more than 70 percent of their national budgets, suggesting that the fall in prices and loss in trade will likely hit them in a similar proportion. As regional powerhouses, such shutdowns and contractions will have a major knock-on effect on smaller, landlocked economies, as will the lockdown and slowdown in South Africa that is expected to face a contraction of six percent this year.

At the time of writing, many African countries continued to impose some sort of lockdown in an attempt to contain the virus – particularly as COVID-19 has yet to take hold in many economies. What we have seen over the first six months of 2020 has therefore likely compromised just the first two phases of the virus’ impact on African trade as the final internal effect has yet to fully materialise. Moreover, even while countries start to lift their own restrictions abroad and get ‘back to business’, there remains the real risk of a second surge in COVID-19 towards the end of the year with a high likelihood of a return to lockdowns. This volatility threatens to impact African trade in the long term that many estimate will take at least two years to recover.

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