Falling oil prices: a curse or a blessing for Africa?

The volatility in oil prices is a wakeup call for Africa on the vulnerabilities inherent in an overly concentrated reliance on oil and gas exports. The writing is very clearly on the wall, and the need to diversify economies and expand income sources beyond the unpredictable and volatile oil sector is an urgent imperative.

Oil wealth in Africa is significantly skewed. Only one in five African statesproduce hydrocarbons. According to Oil and Gas in Africa, although new resources are discovered progressively they are not equally distributed, with a majority 38 of the 54 African countries being net oil importers. Only five out of the 54 countries are major oil and gas producers: Nigeria, Libya, Algeria, Egypt and Angola. An extended list, which features recent discoveries, boasts only 16 of the 54 countries. This translates to about 29% countries as exporters. Between June and December 2014, oil prices fell significantly, with over a 40% drop, from USD 115 per barrel in June, to USD 70 per barrel in early December. Putting into perspective the impact of falling oil prices on the continent is necessary to ascertain the benefits that can be capitalized on oil exporters, importers, and future exporters, in order to spur Africa’s growth.

An oil pipeline in Chad. Photo: Reuters

Oil: the revenue engine for foreign exchange for exporters

Most of the 29% of African countries producing hydrocarbons are heavily dependent on oil and gas revenues to finance their governments and generate foreign exchange. Oil exports account for 40-50% of GDP of Gabon, Angola and the Republic of the Congo, and up to 80% GDP in Equatorial Guinea. In Angola, Republic of Congo and Equatorial Guinea, oil accounts for 75% of government revenues. In Cameroon, oil revenue finances 25% of the national budget. Nigeria, Africa’s largest economy, relies heavily on oil exports for the generation of its foreign exchange earnings. 80% of its revenue is financed by oil, so the toll of falling prices will be significant. In South Sudan, Africa’s newest country and arguably the most oil dependent country in the globe, oil accounts for nearly a totality of exports – 80% of current GDP and up to 98% of fiscal revenue in 2012. In these countries, falling oil prices result in loss in revenues, which constitutes both an economic and a social risk.

A worker inspect facilities on an upstream oil drilling platform at the Total oil platform at Amenem, 35 kilometers away from Port Harcourt in the Niger Delta. Amenem is the hub of Total oil production with two oil well producing over 100,000 barrels of crude daily. AFP PHOTO / PIUS UTOMI EKPEI (Photo credit should read PIUS UTOMI EKPEI/AFP/Getty Images)

Falling Prices: a potential risk multiplier?

Economic Risk: Falling oil prices imply an increased budget deficit, as countries are forced to revise their budgetary oil prices downward. All exporters have had to review their prices downward by USD 10 – 25 per barrel for the 2014/2015 period, representing significant provisions for lost revenue. Nigeria and Angola required the oil price to be at USD 119 and 98 per barrel, respectively, to balance their 2014 budgets at a time when the crude was at USD 90 per barrel. The implication is that, in order to balance their budgets, governments are either forced to borrow more and at higher rates to cover deficits, or to cut back on vital capital spending on development projects and even recurrent expenditure. Falling prices depreciate the currencies of exporters,deplete their foreign reserves, affect debt servicing capacity (as dollar dominated debt becomes more expensive, in light of depreciating local currency, and credit rating of these countries may be affected with increased risk of defaulting), increased inflation on imports, especially food and consumer goods, thus affecting citizen’s savings and investment. Cumulatively, all these impacts affect the short and long term development in these countries.   

Social Risk: Socially, falling prices and accompanying budget strain may trigger cuts in social spending and other fragile safety net programmes meant for the vulnerable in society. As an example, a leading health provider in Angola focusing on HIV/AIDS has forecast that prevention spending will fall by half, due to these oil price shocks.

Not all doom and gloom for exporting countries

Falling oil prices make fuel more affordable, providing countries with an opportunity to draw down, and even end completely, fuel subsidies without the risk of social unrest, and thus free resources up for other priority sectors. To put this into perspective, fuel subsidies in Nigeria, Cameroon and Ghana cost these economies USD 7.5 billion, USD 600 million, and USD 276 million, respectively, in 2011, accounting for 30%, 12%, and 3% of budgets. This contrasts sharply with the spending in inclusive sectors like health and education. In Nigeria for instance, education expenditure received just 8% of the budget, against the 30% subsidies. Other than freeing up resources for more inclusive expenditure, the intended social impact of these subsidies may not be significant, as they mostly benefit the richest households. In 2010, 65% of subsidies in Africa benefited the richest 40% of households.

Oil importers: huge spending        

Photo: Getty

Considering that most SSA countries are oil importers (about 70%), high fuel prices almost entirely cancelled out all international development assistance to Africa. In 2011, while SSA receivedabout USD 15.6 billion in overseas development assistance, this was outweighed by the USD 18 billion cost of importing oil. Importers like Kenya, Cote d’Ivoire, Seychelles, and Ethiopia spendover 20% of their import bill on oil. This has constricted development in these countries by limiting funds available for development.  


Falling oil prices: a revenues recovery opportunity in Africa

Falling oil prices represent a substantial recovery of the region’s revenues and could boost growth. Estimates suggest the plunge in oil prices could boost the region’s growth to 5% in 2015, up from4.5% in 2014. Due to savings, the IMF notes that importers will experience increases in real income on consumption, and a reduction in cost of production, thus increased profits and opportunities for investment. For instance, reduced import bills for, among other countries, Djibouti, Benin and Malawi, will save over 11%, 6% and 5% of their GDPs, respectively. Countries like Malawi, which depend on foreign aid for over a third of government revenue, will have greater fiscal space, while savings on oil imports may boost Ethiopia’s emerging manufacturing industry.

This positive trend among importers is reflected in financial performance indicators, like the stock markets, where these countries have seen an increase in number of portfolio investors and an accompanying surge in performance of their markets. For instance, while stock markets in importers like Tanzania, Uganda and Kenya have risen by 22%, 18% and 9.4%, respectively, since the oil price plunge began, in Nigeria the benchmark stock index has fallen by 24% in this period.

Future exporters

As early as 2017, the African continent may have new exporters, among them Kenya, Uganda,Niger, Chad and Ghana. For these countries, falling prices constitute a significant decline inexpected profitability of their investment. This should be interpreted as a need to avoid over dependence on the oil sector for economic growth, which may lead to neglect of inclusive sectors like agriculture, healthcare, education, infrastructure and ecosystems, which can unlock opportunities for further growth in other sectors.

A re-look at investment in neglected sectors to harness inclusivity 

Recouping incomes from abolished subsidy programmes and taxation on imports could go a long way in bridging the resources gap needed to ensure Africa develops these sectors and achieves inclusivity.

Agriculture is a sector that employs up to 60% of labor in the continent, and growth in this sectorcan reduce poverty twice as fast as growth in other sectors. In addition, women produce up to 80%of food and the majority of farmers are rural, poor small holders. Increasing productivity in this sector will contribute significantly toward inclusive poverty reduction in African society, with extreme poverty in the continent being at 50% and rising, with inhabitants living on less than USD 1.25 a day. By investing in ecosystems and working with nature rather than against it, Africa can unlock the significant potential underpinning food production, embracing agribusiness and adding value that will unlock income and job opportunities downstream in the value chain.

Photo: Milton Grant/UN

UNESCO estimates that  25% of students in poor countries are unable to read a complete sentence. Such statistics portend a continued trend of exclusion in Africa’s socio-economic development. UNESCO estimates that SSA will need an additional USD 4 billion annually, until 2020, for salaries to primary school teachers, and up to USD 26 billion annually to achieve universal education.

Vector borne diseases, like malaria, as well as malnutrition, increasingly compound the continent’s health outlook. Africa bears 60% of the global burden of malaria, and malnutrition also contributes to more than half the deaths of children below five years. Generally speaking, Africa is not a healthy continent and it lags behind the rest of the world in all the indicators of health. Few African countries are able to spend the WHO recommended USD 35 per person for minimum healthcare. For a reserved population figure of 900 million, this may translate to a minimum of up to USD 31.5billion investment required to uplift Africa’s healthcare. 

Policy implications

Africa can convert the falling oil prices into a dividend only if appropriate policies are embraced.

Oil exporters spend over USD 8 billion in subsidies, up to 65% of which benefit the most affluent households. With the falling prices making petroleum more affordable, these countries have an opportunity to reform their fiscal policies and wean their populations off of subsidies and reinvest recovered funds into more inclusive areas, like agriculture, infrastructure, education and healthcare. 

Falling prices bring with them reduced inflation. The current fall is expected to be sustained in the medium term, meaning prices may remain low but dissipate by the end of 2016. In the interim period, countries should work to loosen their monetary policies so as to expand supply of money and make it easily accessible, so as to encourage additional investment in areas like agriculture.

For all groups of countries, sustained falling prices are expected to intensify demand and hence consumption of oil, as oil-intensive production processes are expected to peak. Increasing tax on oil imports will help curtail temporary run-away demand, hence limiting carbon emissions while simultaneously generating incomes for governments, which should then be put into developing inclusive sectors. 

The volatility in oil prices is a wakeup call for Africa on the vulnerabilities inherent in an overly concentrated reliance on oil and gas exports. The writing is very clearly on the wall, and the need to diversify economies and expand income sources beyond the unpredictable and volatile oil sector is an urgent imperative. Investing in ecosystems, health, infrastructure and education could provide an opportunity to broaden the reach of the economy to wider segments of the community. Seizing this opportunity now presents a promising pathway to a more sustainable, prosperous and socially just future for all Africans.


Written by How Africa

Leave a Reply

Your email address will not be published.


These are the two safest and easiest African countries to do Business

Check Out The 10 Best Luxury Hotels in Africa