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2.1 Growth performance III: Economic Report on Africa 2007

Guest post by: United Nations Economic Commission for Africa

Article Overview: Higher but more volatile growth in oil-rich African countries

2.1 Growth performance III: Economic Report on Africa 2007

The recent oil boom has attracted new foreign investments in oil exploration and
production and more African countries (Chad and Mauritania) have joined the club
of net oil exporters. Oil-exporting African countries as a group contributed 57.5
per cent of the continent’s 5.7 per cent growth rate in 2006, compared to 53.4 per
cent in 2005 (figure 2.3). Thus, the recent increase in oil prices has increased the
dominance of oil producers in the continent’s overall growth, overshadowing the
improvements observed among non-oil countries (from 4.6 per cent in 2005 to 5.2
per cent in 2006).

Non-oil GDP in the eight oil-exporting SSA countries increased at a higher rate in
2006 (6.5 per cent) relative to oil GDP (5.6 per cent), but its contribution to overall
GDP growth is still small (IMF 2006a). This, together with the fact that many oilexporting
African countries (e.g. Angola and Equatorial Guinea) are accumulating
large, idle foreign currency reserves, is a manifestation of the need for these countries
to use oil revenues more rapidly to enhance domestic investment and economic
diversification. Efficient management of oil revenues for economic diversification is
essential for oil-exporting African economies to reduce their vulnerability to oil price
shocks, ensure that gains from oil revenue are broadly shared, and achieve sustainable
growth.

In addition to increased aid flows and debt reduction, improved economic management
and increases in non-oil commodity prices have more than offset the negative
impact of high oil prices on the real GDP of African oil importers. On average,
these countries maintained a positive and rising real GDP growth rate during 2004-
2006. The growth impact of higher oil prices was particularly moderate for non-oil
and non-mineral-rich economies, where growth performance improved from 4.1
per cent in 2005 to 5.8 per cent in 2006 (figure 2.4), thanks to debt relief and
increased aid flows, improved agricultural performance and high agricultural commodity
prices. The growth rate in non-oil, mineral-rich African countries was virtually
unchanged in 2006 relative to 2005, as the gains from the higher prices of
minerals were dampened by the effects of rising oil prices.

Given that energy and oil intensity of GDP are expected to increase with per capita large increases in energy and oil demand in the future as their incomes rise. Consequently,
these countries need to reduce their dependence on oil by making use of alternative
sources of energy, especially hydropower, and by utilizing cost-effective technologies.
However, alternative energy sources are unlikely to have a major role in energy
supply in the short run since they require relatively large initial capital outlays and have
a long gestation period. Thus, in the short run, these countries need to adopt strategies
to rationalize the use of oil and improve the efficiency of their energy systems.

Oil-importing countries will suffer severe adverse effects if higher oil prices persist
in the medium term (see box 2.1). To minimize the effects of high oil prices on
inflation and macroeconomic stability in general, governments should adopt consistent
and prudent policies, and resist the temptation to increase domestic borrowing
to finance oil-price-induced increases in budget deficits. Sustained prudential
macroeconomic and financial policies consolidate macroeconomic policy credibility,
which is critical for oil importers to attract more external capital flows to ease financial
constraints. In the meantime, the international donor community and international
financial institutions should provide special support to oil-importing, lowincome
African countries to mitigate the impact of higher oil prices. In particular,
debt relief and additional non-debt-generating external financing of fiscal deficits
are critically needed for assisting the oil-importing countries to sustain economic
growth and achieve the MDGs. In the absence of such support, the efforts of macroeconomic
reforms over the last two decades and the opportunities created by the
HIPC Initiative will be wasted.

Impact of sustained higher oil prices on growth and progress towards the
MDGs in low-income, oil-importing African countries

Sustained higher oil prices will slow down growth and progress towards the MDGs in lowincome,
oil-importing African countries. Oil-importing African countries are characterized by high
oil-intensity of primary energy sources as well as inelastic oil demand. Higher oil prices raise
production costs leading to lower output as well as tighter financial constraints. Governments
are forced to decrease expenditure on infrastructure and social services in order to finance the
higher oil bill. Moreover, higher oil prices fuel domestic inflation, increase fiscal deficits, and
worsen the balance-of-payments position as well as the terms of trade. This can undermine
economic performance directly as well as indirectly through increased uncertainty.

Although oil-importing African countries have recorded positive overall GDP growth in the
past few years, they are experiencing mounting internal and external imbalances. Strong commodity
demand, good macroeconomic management, better agricultural performance, improved
political governance in many countries and increased aid flows and debt relief are the key factors
that helped them to maintain overall growth momentum. However, as a result of the recent hike
in oil prices, the share of fuel imports in the merchandise imports of oil-importing African countries
rose significantly, leading to notable increases in the current account deficits. Moreover,
oil-importing countries faced sustained, large terms-of-trade losses.

Mounting budget deficits and inflationary pressure in oil-importing African countries disproportionately
affect the poor because of lower employment prospects and lack of safety nets.
Budget constraints may also force governments to introduce user fees for social services and to
raise the prices of public utilities such as electricity and water.

The critical challenge for oil-importing African countries is to reduce their dependence on
oil by promoting alternative sources of energy. It is particularly critical for these governments to
strengthen growth policies, including industrial strategies that promote diversification of production
and exports. The international donor community and international financial institutions
should provide special support to oil-importing African countries to mitigate the impact of higher
oil prices. In particular, debt relief and additional non-debt-generating external financing are
critical to allow these countries to sustain economic growth and accelerate progress towards
the MDGs.

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  1.8 References: Economic Report on Africa 2007
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Article Tags: African countries, commodity prices, GDP growth, growth rate, growth rate, oil countries, oil intensity, oil price, oil price shocks, oil prices, oil producers, oil revenue, oil revenues, real GDP growth rate



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