Money & investment

SWEET & SOUR EFFECT OF AFRICA’S BLACK GOLD

The plummeting of global crude prices is generating ripple effects worldwide. While oil exporters are reeling from plunging revenues, oil importers are bracing for cheaper oil and the potential economic stimulus. Global economic relations may also witness profound shifts as the United States overtakes Saudi Arabia as the world's largest oil producer. Given the concentration of oil and other natural resources in Africa, it is worth examining how falling oil prices will affect the continent's economic transformation aspirations.

Much depends on the length and severity of the oil crunch. Persistent low prices will deplete foreign reserves, strain budgets, trigger cuts in social spending and other austerity measures and ensnare oil producers in new debt. Forecasts have been indecisive on the medium to long term trajectory of oil prices ranging from $43 per barrel in the first half of 2015 to $95 by year's end.

African oil producers will be hard hit with varying severity. Veteran exporters like Angola, DRC, Equatorial Guinea, Nigeria and South Sudan will be affected as they all depend on oil rents for 50 to 70 percent of their governments' revenues and more than 90 percent of export earnings. Already, Nigeria is reeling from the consequences.

The war-torn South Sudan currently receives the lowest oil price in the world, $20 to $25, due to the shocks, the low quality of its oil and the payments for using of the pipeline traversing the Sudan. Declining oil revenues and output will threaten its already precarious attempts at post-conflict nation-building.

The experience for oil-importing African countries will be different. According to IMF projections, importers will experience increase in real income on consumption and decrease in the cost of production of final goods, and consequently, on profit and investment.

Countries like Malawi which depend on foreign aid for more than a third of government revenue will have greater fiscal space, while Ethiopia's emerging manufacturing industry could be boosted from savings on oil imports.

As African countries respond differently to the oil crunch, it is clear that resource endowments and the presence of industrial policies by themselves are grossly insufficient without practical measures to ensure that the revenues count and the sustained commitment to generate shared prosperity for citizens.

The resilience of counter-cyclical safeguards to buffer the impact of sudden price swings on budgets and development spending will be tested. How African countries weather this storm will determine whether lessons have been learnt or whether the third oil boom is yet another missed opportunity.

Author: Colletor Adoyo