With the Brexit divorce agreement hanging in the balance, its impact on the global economy has yet to be determined. How will it affect Africa?
It was not until the UK citizens lined up to cast their votes to stay or leave the European Union (EU) on June 23, 2016, that the sterling pound strong nation learnt that exiting would not be a walk in the park and that the marriage of convenience was more complex and intricate than meets the eye.
Once the referendum results were out, it was apparent that the UK had opted to leave the EU by a slim margin of 1.3-million votes sending the then Conservative Party Prime Minister David Cameron packing from 10 Downing Street. Theresa May the new prime minister, was expected to usher the UK into a new dawn that would see it through this momentous transition. May had to invoke Article 50 of the Lisbon Treaty which gives the exiting nation a two year grace to put together an amicable divorce agreement.
Learning from Greenland
For the UK the two-year leeway effectively started on May 29 2017, and has not afforded May ample time to close the deal with the EU. The recent effort by May on April 10, 2019 yielded a further extension to October, thanks to Brussels. Caution. Leaders of Greenland which entered a partial agreement back in 1985, have advised.
Lars Vesterbirk, Greenland?s former representative who led the EU negotiations after arctic island voted 52%/48% to exit the EU, said it took them three excruciating years to reach any finality, he told Politico?s Maia de la Baume in 2016. It could take longer for the UK, he explained.
Under EU rules Greenland had been drowning as the bulk of its catch was being distributed across Europe with little or no returns for the island. Greenland?s negotiations took 100 meetings over three years, with EU officials in Brussels, to reach a mutually satisfactory agreement, Vesterbirk said. When a fisheries deal was finally entered into, it gave the island the right to govern its fishing sector and sell its catch to other countries of its choice
This wasn?t a full exit. The Greenland treaty signalling the end of EU membership, signed in 1985, called for ?close and lasting links between the [European Economic] Community and Greenland to be maintained and mutual interests, notably the developments needs of Greenland, to be taken into account.?
This made the island one of 25 overseas countries and territories, including the Turks and Caicos Islands and French Polynesia, that are not EU members but have a special partnership with the bloc. Greenland still receives funding from the EU?s general budget through the EU-Greenland Partnership. For 2014-2020, ?217.8-million (US$246.4-million) was earmarked for cooperation with Greenland.
Never a walk in the park for UK
For the UK it has been three treacherous years since Cameron was whacked behind his ears for a promise he had made in a manifesto pledge in 2015 that led to a short-lived second term in office which was disrupted by the referendum results. Cameron had tirelessly campaigned to keep Britain in the EU bloc, a relationship that had existed since 1973 but half his party?s MPs had were ?Leave? advocates. He was also losing votes to the UK Independent Party (Ukip), which had received nearly 4-million votes – 13% of those cast – in the 2015 general election. Some Labour MPs and Northern Ireland party the DUP, were also campaigning to leave EU. So, the referendum took effect.
These days Cameron spends scribing memoirs detailing what led to this global calamity while May sits with a huge headache. This is also compounded by the fact that UK would be the first to opt out of EU fully, unlike Greenland which got home rule from Denmark in 1979, but still maintains close ties. May?s last ditch effort has secured Britain an October extension which provides her with respite but still presents a number of challenges.
A costly affair
The UK loses ?6,6-billion(US$8.7-billion) quarterly since the referendum, according to S&P Global Ratings. Despite delays of Brexit, Germany?s BMW and French Peugeot are shutting down plants, while Ford has a hard time walking the tight rope, according to the Brexit Weekly. Then there is the ?39-billion(US$5.1-billion) ?divorce bill? which will cover things such as pension payments to EU officials, the cost of relocating London-based EU agencies and outstanding EU budget commitments, this cost will depend on the exchange rate at the time of payment.
This costly exercise will mean forfeiting the security of the famous four freedoms – free movement of goods, services, capital and persons – within the EU set out in the Treaty of Rome. This means the loss of being party to a single market and collective trade bargaining power.
Norway?s Prime Minister Erna Solberg warned that there is a ?problem with referendums? for solving the EU membership question because voters engage with the question on an emotional level rather than making an assessment based on economic pros and cons. She also said to Politico that she was by no means discouraging taking constituencies? voices serious.
Chris Gilmour, an investment analyst and market commentator, predicted that May would seek a much longer extension to allow MPs to formulate an acceptable withdrawal agreement, and most possibly consider a second referendum as the first was deeply flawed with seriously mendacious statements made by the Leave campaign. ?Now that all the facts are before the British electorate, they are in a far better position to evaluate the question of staying or leaving the EU than they were in June 2016,? Gilmour told Business Unusual.
Getting out of sticky situation
Analysts believe that there are several ways May could get out of this sticky situation. There are supporters on either side, some have suggested a ?soft exit? which favours ?Remainers? while others say a ?hard Brexit? for ?Leavers? could work. The Economist, best unpacks the two.
SOFT BREXIT – Opting for a ?soft Brexit? means that Britain will remain closely aligned with the EU to mitigate the disruption to trade. A ?soft Brexit? means staying within both the EU?s single market (like Norway) and its customs union (like Turkey). Soft Brexiteers are willing to be bound by EU rules and tariffs even though Britain will lose a say in decision making. They also accept the inevitable consequence that it will be hard, even impossible, for Britain to do any trade deals with third countries.
HARD BREXIT – The ?hard Brexit? means leaving both the single market and the customs union. Hard Brexiteers believe that staying would turn Britain into a ?vassal state? of the EU. They are willing to accept the short-term disruption and potentially high costs of breaking free from Brussels, because they believe that the long-term gains from better regulation and the striking of free-trade deals all round the world will do more than enough to offset them.
It is unclear how May?s deal will turn out but the backstop is also a sore point for May. Just recently the Democratic Unionist Party (DUP) leader, First Minister of Northern Ireland Arlene Foster met the EU chief Brexit negotiator Michel Barnier in Brussels to discuss the backstop provisions in relation to the withdrawal agreement. Ireland wants changes or the UK could face a no-deal fate. Making amendments to the agreement would prevent customs or immigration checks to be put in place at the border. Many analysts have predicted that the eventual result will be combined elements from both the hard and soft Brexit.
Brexit effect on Africa
Gilmour says a no-deal hard Brexit could be very good for Africa and many other parts of the Commonwealth. With UK?s trade investment in Africa currently standing at just more than ?30-billion, which makes it the second largest investor in Africa, Gilmour says that the continent could be an automatic go-to trade partner. May had previously warmed up to Africa, during her three nations visit to Kenya, Nigeria and SA in August 2017 even pledging to make the UK the G7?s biggest investor in Africa by 2022 and promised investments of US$4.53-billion in African economies, creating jobs especially for young people.
Gilmour adds that as things stand, Britain sources the bulk of its fruit from Southern European countries such as Spain, Portugal and Italy. If Britain crashes out of the EU, it would no longer enjoy tariff-free markets in Europe and instead would have to play by World Trade Organisation (WTO) rules. Thus deciduous fruit products from Europe would become more expensive, paving the way for Africa and other Commonwealth countries to fill the gap. Same goes for SA wines and other products.
Not so fast with Afro-optimism says Amelia Tan, a macro-economic analyst and independent communications specialist based in Singapore. Tan wrote in her Africa after Brexit report in Africa Renewal magazine that Brexit will definitely affect trade and investment as most of the trade arrangements the UK has with African countries were negotiated through the EU. This means the agreements will cease or will have to be renegotiated when the UK finally leaves the EU, she wrote in 2016. SA, Nigeria and Kenya, in that order, are Britain largest African markets that will be most affected, wrote Tan. But Gilmour says a no-deal Brexit could bring substantial gains for SA.
According to research recently released from the UN Conference on Trade and Development (UNCTAD) SA could be the fifth biggest winner after China, US, Japan, Thailand should a no-deal Brexit materialise. The country stands to gain an additional US$3-billion in exports, the research showed.
Tan writes that even with South Africa(SA) potentially standing to benefit, emerging markets and frontier asset markets will be affected because every time Britain?s economy slumps so does it have an effect its trade partners. Since the country exports 10% of its wines to the UK, the industry should brace for potential losses. The UK is currently SA?s second-biggest trading partner in the EU after Germany. In 2017 total trade between the two countries amounted to R79.6-billion (US$ 56.7-mllion), excluding gold.
Tan reports that Kenya, could witness capital flight after Brexit, leading to falling exports. This would weaken the Kenyan shilling. Kenya?s lucrative cut flower industry, for which Britain is the second-largest export market after the Netherlands, could suffer. If a trade deal between the East African Community and the EU is stalled by Brexit, Kenya stands to lose billions of shillings, which could lead to uncertainty for Kenyan exports.
Before Brexit, bilateral trade between Nigeria and Britain was worth about US$7.9-billion, and had been projected to reach US$26.6-billion by 2020. With Brexit, that projection seems too unrealistic. Nigeria is struggling against falling crude oil prices, the country?s main income source. This could plunge Nigeria?s economy. This is disastrous, considering that 96% of Nigeria?s exports are made up by oil.
SADC protects its own
Members of the Southern African Customs Union (Sacu), Mozambique group, moved swiftly to engage with the UK to limit the impact of Brexit. The group and the UK currently trade under the terms of the Southern Africa Development Community-EU Economic Partnership Agreement (EPA). Sacu member states have agreed in principle to roll over the economic partnership agreement on a bilateral basis to ensure continuity of trade following the UK?s exit from the EU.
The full impact of Brexit on Africa is yet to be determined. At this stage it is uncertain how it will pen out as all negotiations are up in the air until October.
The Brexit story is far from over. UK has received an extension until October from Brussels to come up with a possible exit deal. Business Unusual will keep a close watch on developments