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Oil Revenue Has Power to Transform Countries of Central Africa

Fishing boat, oil platform off Cameroon coast. Central African countries still face slow growth, poverty, despite oil wealth (photo: Johansson/Corbis)

ENERGY RESOURCE MANAGEMENT

Oil Revenue Has Power to Transform Countries of Central Africa

IMF Survey

October 3, 2012

  • Oil revenue accounts for almost half of region's economic output
  • Revenue effect limited by conflict, insufficient productive investment
  • More transparency, better governance can boost inclusive growth

Of the six countries of the Central African Economic and Monetary Community—Cameroon, Central African Republic, Chad, Equatorial Guinea, Gabon, and the Republic of Congo—five have not been able to avoid the pitfalls that often come along with natural resources wealth.

These countries have been plagued with low levels of growth, widespread unemployment, and high levels of poverty in part due to ineffective management of their oil resources.

In a new book titled “Oil Wealth in Central Africa: Policies for Inclusive Growth”, several IMF economists analyze the challenges of managing oil wealth in the region, and outline policies that could help overcome them.

In an interview with IMF Survey, Sharmini Coorey, Director of the IMF's Institute for Capacity Development and editor of the book, describes some of the challenges the Central African region faces.

IMF Survey: How important is oil exploitation in the Central African region?

Coorey: The Republic of Congo and Cameroon have been exploiting oil since the late 1950s to 1960s. For others countries such as Chad, it has only been since about 2000 that energy development took place. The Central African Republic has no oil at the moment.

However, oil is tremendously important in this region's economies. If you take the region as a whole, oil accounts for 41 per cent of the regional GDP. It is 86 percent of total goods exports and 67 percent of the region's fiscal revenue.

IMF Survey: How transformative could oil be for the economies of this region?

Coorey: If oil were properly used, it could be completely transformative. The paradox that they are in at the moment is most of these countries are middle-income countries. For example, Gabon has a per capita income in the order of $10,000 per year, and yet in terms of development, these countries are not anywhere near where they should be for their given level of income.

So, if the oil money was used well, it would be transformative. They could, at least, catch up with countries at comparable levels of income. To give you an example, in terms of the human development index, out of 169 countries, Chad is 163; the Central African Republic is 159; Cameroon is 131; the Republic of Congo is 136; Equatorial Guinea is 117; and Gabon is in ninety-third place.

We are looking at countries that really could do a much better job of developing their human resources. So we can say that the transformative factor of oil has been limited.

IMF Survey: What are the factors that have led to this situation?

Coorey: The region has faced some particular challenges. One of the most important challenges is conflict.

As you know, Chad and the Central African Republic have often been subject to conflict. Moreover, the Republic of Congo went through a civil war. These conflicts have often been on the control of resources.

The second challenge is the boom-bust cycle that these countries have also undergone. That is, when oil prices are high, spending explodes; when oil prices decline, spending does not decrease just as quickly. These countries often end up overspending, and economic problems ensue.

Earlier, I mentioned the low human development indicators. What has essentially happened is that there has not been sufficient investment in productive things like infrastructure, health, and education. This is partly because funds have been misused.

Another factor is that because oil is a very dominant sector, the economies are relatively undiverse. It is difficult for people to find employment because the oil sector only employs very few people.

The final challenge is central Africa’s low level of regional integration. Because the CEMAC countries export so much oil to the outside world, they have limited trading with each other, and especially when compared to the West African Monetary Union.

IMF Survey: Oil wealth is not always a blessing. In actual fact, countries like Nigeria have struggled in managing the resource effectively. How can the CEMAC countries avoid the pitfalls that other countries have fallen into?

Coorey: It really has not been a blessing so far for these countries but there are policies that they can apply to avoid the pitfalls.

One of the most important things is breaking what we call the procyclical fiscal policies; in other words, the boom-bust cycle. This could be done through multiyear planning of budgets and by having budgets based on sustainable oil revenue estimates rather than just the current level of oil revenue.

A second very important thing is improving governance and transparency of oil wealth. Governance has been a big issue, as mentioned before, and one way to improve the governance of oil revenues is to increase transparency.

Out of all the countries that are in this region, none of them are fully compliant with EITI, the Extractive Industries Transparency Initiative. Their budgets are some of the most opaque in the region.

They are opaque relative to other sub-Saharan Africa countries. They are some of the most opaque in the world. We think that proposing an increase in transparency in how the money is spent would improve the use of oil money.

A third aspect to look at is enhancing the growth and competitiveness of the non-oil sector. One of the most important things is to make the public investment productive.

The sad practical matter is that today these countries spend billions of U.S. dollars on public investment, yet if you go there, you will not find roads that are commensurate with the level of expense. This is something that needs to be attended to.

Governments need to implement proper project evaluation, increase their capacity to assess investment projects, make multiyear planning of budgeting, and generally plan more. These are essential to get the public infrastructure fixed.

Another important thing is investing in people. In the book, we focus on how to achieve inclusive growth and one of the most obvious and relatively easy ways of making inclusive growth is to spend your oil money on better health and education.

There is no reason why in countries at income levels of $5,000 to $10,000 a year, that mothers should be dying of childbirth, or children should die because they are not vaccinated, or that there is no access to safe drinking water. These are choices that are made. More effective spending on basic health and education would do a lot.

Finally, the business climate must be improved. Governments should have a more transparent process for setting up businesses; try to eliminate corruption, and improve the investment climate for businesses and for private investment.

It is also important to remove trade barriers. The community has very high common external tariffs. They are higher than most other countries. There are also surcharges in addition across borders. Furthermore, there need to be greater efforts to improve labor mobility.

IMF Survey: Finally, when you are on the ground and conversing with the authorities, do you see a willingness to undertake these policies?

Coorey: To some extent, there is a reluctance to move, because at the end of the day these are political choices. I think there are political factors that constrain the ability to act.

However, there are some countries that are making more progress than others. We think that with greater awareness, and also particularly of the cost of what is not being achieved, these circumstances will change.


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