The recent outcome of the UK referendum to leave the EU (Brexit) shocked global markets and launched the UK into a realm of political and economic uncertainty. This uncertainty will likely linger for a while, 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% of its Gross National Income (GNI) as development aid, a significant portion of which is earmarked for development in African nations. Depending on the political focus of Westminster after a new leader of the conservative party is selected, UK aid contributions may be slashed. Even if contributions are not cut for political reasons, they may be cut due to 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% and 1.5% of each country’s respective GDP. By way of comparison, UK aid represents only 0.04% of Nigeria’s GDP. A fall in aid will likely hinder the abilities of aid-dependant 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% of total African exports. This may not appear to be a substantial figure, considering that China accounts for approximately 15% 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.
The Inside Africa team would like to thank Tomisin Mosuro, Trainee, for his contribution to this blog post.