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The Red Sea – a new area of prosperity

The Red Sea – a new area of prosperity

The countries of East Africa and the Gulf, bordering the 2,200km length of the Red Sea, share close geographical, historical, cultural, and political links.

Religion is obviously part of that cement, as is the arid nature of their territories. Geostrategic interests and demographic dynamics should have brought the two sides of the sea even closer. Yet, it is easy to overlook such links when assessing economic prospects.

Long-term forecasts for the region’s share of global trade remain flat. Trade forecast between the Middle East and Africa for 2050 is 10%, compared with today’s 9%.

According to the Dubai Chamber of Commerce, the total FDI into sub-Saharan Africa was merely $9.3bn from 2005 to 2014, 10 times less than the amount for North Africa. These lacklustre intra-regional trade flows mask an untapped opportunity. Today, the Red Sea, the shortest shipping lane between Asia and Europe, crossed by an average 47 ships a day, does not emerge as a catalyst for the development of the people who live on its shores. 

The Red Sea serves intense flows of dry commodities and manufactured goods, whereas agricultural products, essential for the food-insecure Gulf, could have been given priority.

Investments from the well-endowed Gulf sovereign funds are placed far away, neglecting neighbours that could offer economic complementarity, a migrant workforce and more reliable security prospects if their societies could just be richer.

Recent developments, however, point to a shifting tide. It started with King Abdullah’s announcement of a planned $500bn megacity on western Saudi Arabia’s coast. A mirror smaller city in the Egyptian Southern Sinai would also be funded by Saudi Arabia for $10bn.

Qatar, on the other hand, has struck a deal with Sudan to develop a port at Suakin, just off the coast. Djibouti, a key conduit between the Red Sea and the Gulf of Aden, has rapidly expanded its shipping infrastructure to 1.6m tons. UAE plans to expand Somaliland’s Berbera and Kenya’s Lamu ports.

Fierce rivalry for influence

These logistical developments are accompanied by a fierce rivalry for military influence. Along these coasts, as illustrated by Yemen’s civil war, the role of Africa has become more prominent.

Djibouti, with the largest diversity of foreign bases by square kilometre anywhere in the world, all of a sudden became the centre of attention in the Gulf of Aden. Proxy groups trying to intervene in internal conflicts are used by all players in the region against one another. These discoveries of mutual inter-dependence ought to be turned into peaceful opportunities for cooperation and economic activity.

For centuries, ships have moved between the coastal Gulf and the Somali and Swahili coast. Zanzibar was once the capital of the Sultanate of Oman; however, despite long-standing historical ties between the region’s port cities, nowadays visa restrictions between these countries remain high, impeding integration.

Linguistic patterns would ease this integration given that Arabic is spoken in several African countries including Egypt, Sudan, Somalia and Djibouti. Moreover, Swahili, spoken in Kenya, Tanzania, and Uganda, draws heavily from Arabic. The word Swahili
itself is derived from the Arabic sawahili, meaning “language of the coast”.

By 2030, more than a quarter of the world’s population will be Muslim – opening up a vast opportunity for Islamic finance to move from a niche area to a dynamic market.  With Africa and parts of the Middle East representing a sizeable portion of such a population boom, Red Sea states could match demographic might with influence in capital markets. In 2016, the UAE established the world’s first Sharia-compliant trade bank to bolster its ambitions to be the centre of Islamic economic finance.  Countries in East Africa already have the legal and regulatory building blocks in place to expand their standing as Islamic finance centres. Sudan’s Islamic finance sector, for example, dates to the 1970s. Kenya’s treasury announced plans to mainstream Islamic financing last year. Ethiopia, which just got its first-ever Muslim national leader, as well as Uganda, are both exploring the possibilities of Sharia-compliant banking.

A regional exchange, like that of Latin America’s Pacific Alliance, could spur the integration of these states. In late 2017, Nairobi Securities Exchange and Nasdaq Dubai joined forces to create a Sukuk sector at the former’s stock exchange.

Expanding such partnerships would provide African companies, especially those in Red Sea states, with large Muslim populations, with significant opportunities to access the Gulf’s accumulated financial wealth

Enhanced security cooperation

Beyond migration and trade, consider the enormous benefits of enhanced security cooperation. From piracy in the Gulf of Aden to Egypt-Ethiopia’s growing contention over the Nile, cooperation between Red Sea countries is more urgent than ever.

Researchers from the London School of Economics found that for every $120m seized by pirates in Somalia, the cost to the shipping industry and the end consumer is between $0.9 and $3.3bn.

While piracy in the Red Sea has been virtually eliminated in recent years due to aggressive naval patrolling, in late March 2018, pirates hijacked an oil tanker off the coast of Somalia, a first after five years.

Red Sea states should come together to develop a regional information-sharing apparatus like Five Eyes, a multilateral agreement for cooperation in signals intelligence between Australia, Canada, New Zealand, UK and the US.

Weaponry spending and military training cannot be the sole mean of ensuring regional stability. Counteracting threats through credible intelligence-sharing must be a key feature of a Red Sea regional security agenda, a prerequisite to attract investors wary of political risk. 

Isaac Kwaku Jr. (left) is Founder and Principal of Botho Emerging Markets Group, a leading African investment advisory firm.

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Written by African Business Magazine

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