## NORTH AFRICA’S HYDROGEN MIRAGE

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**Canonical URL:** [NORTH AFRICA’S HYDROGEN MIRAGE](https://www.imf.org/-/media/files/publications/fandd/article/2023/september/arezki.pdf)

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### Migration and regional context
- On June 14, 2023, a refugee boat capsized off the coast of Greece and left hundreds dead.
- In 2022, no fewer than 160,000 people attempted to cross miles of open water, according to the UNHCR.
- Almost 40 percent of them were from Tunisia or Egypt.
- More than 2,300 died.
- “The hype surrounding hydrogen may continue to distract the region’s leaders from addressing the tough domestic social issues that are behind the migration crisis.”

### Energy cooperation and post-Ukraine geopolitics
- The fallout from Russia’s invasion of Ukraine helped cement energy cooperation between the Northern Rim and the Southern Rim of the Mediterranean.
- High-level visits by leaders of Italy, France, and Germany to Algeria, Egypt, Libya, and Mauritania resulted in promises of more fossil fuel exports and new investments in extraction and transportation, including pipelines.
- Such investments will ensure that fossil fuels from the Southern Rim keep flowing north to Europe.
- At the same time, Europe’s push for industrial policy and economic sovereignty is working to limit integration, creating new risks for North African countries.

### Renewables and regional capacity
- Decline in the cost of producing renewable energy has driven increased investments in renewables.
- Egypt and Morocco are ramping up renewable energy.
- Morocco built the Noor-Ouarzazate complex, the world’s largest concentrated solar power plant, covering 3,000 hectares.
- Algeria and Mauritania are gearing up to install large solar and wind projects.

### Hydrogen hype, projects, and infrastructure
- Hydrogen types defined in the text:
  - “Gray hydrogen” is produced from natural gas but without carbon capture and storage.
  - “Blue” hydrogen adds carbon capture and storage but costs are higher.
  - “Green hydrogen” is produced using nuclear power, biomass, or renewable energy like solar or wind; its costs are still relatively high.
- Projects costing billions of dollars are under consideration in Mauritania, Algeria, Egypt, and other countries.
- A German developer and Mauritania signed a memorandum of understanding with a consortium for a $34 billion project with annual capacity of 8 million tons of green hydrogen and related products.
- A proposed Mediterranean pipeline among Portugal, Spain, France, and Germany would supply 10 percent of the EU’s hydrogen by 2030.
- Energy ministries of Italy, Germany, and Austria signed a letter of support for a hydrogen-ready pipeline between North Africa and Europe involving Italy’s gas grid operator.
- Much prospective hydrogen infrastructure investment may end up in Europe, with Italy and Spain gearing up to become big producers.

### Macroeconomic implications and risks
- Mega investments could have important macroeconomic implications, especially for smaller and less diversified Southern Rim economies.
- Challenges include exchange rate appreciation and current account swings from deficit to surplus.
- Policymakers must manage contingent liabilities associated with large projects, such as failure or abandonment.
- The concentration around fossil fuels and related capital investments exposes nations to the risk of stranded assets or stringent restrictions on fossil fuel trade.
- The prospect of hydrogen exports may improve external fund balances but could also reinforce rent-seeking activities and corruption.

### Domestic governance, social issues, and development constraints
- Southern Rim countries display large differences between oil-exporting and oil-importing nations:
  - Importing nations such as Morocco and Egypt have overhauled or removed fuel subsidies or price controls, with mitigation measures such as cash or in-kind transfers.
  - Oil-exporting countries such as Algeria and Libya have tended to stick with subsidies despite high economic and environmental costs.
- Distrust of government and perceptions of corruption remain high across the Southern Rim.
- Lack of a dynamic private sector and legacy state-administered economies with large government-owned enterprises crowd out independent businesses and foster informal economies.
- State-owned banks have underpinned shadowy flows of funds supporting state-owned enterprises and limiting fair competition.
- In systems dominated by state-owned enterprises or a crony private sector, millions of young people have been left behind; unemployment is higher for individuals with more education than for those with less.
- An energy sector geared for exports will not yield the kinds of jobs needed for young people, who represent the majority of the population in the Southern Rim.

### Recommendations and policy sequencing
- The sector must show utmost transparency to limit corruption.
- Authorities should try to maximize not only revenues from hydrogen production but also benefits for citizens, including localization policies.
- Reforms must go beyond the energy sector and aim at removing roadblocks to creating decent jobs for young people.
- Sequencing to build trust:
  - Political and administrative elites and cronies should “walk the talk” before introducing changes that affect the broader population.
  - Eliminate corporate subsidies stemming from import monopolies and promote fair competition by limiting the abuse of dominant positions by state-owned enterprises or cronyism.
  - Greater transparency in the energy sector is essential.
  - Adoption of distributed solar power could blur the distinction between consumers and producers and make citizens more accepting of evolving market prices.
  - Only then could labor market restructuring and exchange rate stabilization bear fruit.
- Rekindling regional cooperation among North African nations could help create a larger market attractive to investment and support renegotiation of better trade deals with EU partners and others.

*Rabah Arezki, director of research at the French National Center for Scientific Research (CNRS) and senior fellow at FERDI and Harvard’s Kennedy School of Government.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/september/arezki.pdf_