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IMF Survey : Africa’s Short-term Priority: Tackle Shock of Lower Oil Prices

April 17, 2015

  • Overall outlook favorable, but oil price drop trims oil exporters’ growth prospects
  • Decline in oil prices offers unique change to reform energy subsidies
  • More economic diversification can tap strong opportunities for long-term growth

Managing the impact of sharply lower oil prices is sub-Saharan Africa’s short-term policy priority, IMF African Department Director Antoinette Sayeh said.

Factory in Lagos, Nigeria which, as Africa’s largest oil producer, may face dent in growth in wake of oil price drop (photo: Akintunde Akinleye/Reuters/Newscom)

Factory in Lagos, Nigeria which, as Africa’s largest oil producer, may face dent in growth in wake of oil price drop (photo: Akintunde Akinleye/Reuters/Newscom)


She told a news conference during the 2015 IMF–World Bank Spring Meetings in Washington D.C. that the subcontinent is set to remain one of the world’s fastest-growing regions this year.

But although the economic outlook continues to be favorable, growth would this year likely settle in the lower end of the range of the past few years, Sayeh stated, mainly reflecting the impact of the sharp decline in oil prices on the region’s oil exporting economies such as Nigeria and Angola.

Sayeh said sub-Saharan Africa is set to post another year of solid performance in 2015, and an expected growth rate of 4 ½ percent this year would leave the region’s growth performance second only to that of emerging and developing Asia.

“That said, the economic expansion this year will be at the lower end of the range experienced in the recent years. This mainly reflects the impact of the sharp decline of the oil and commodity prices that we have witnessed over the last six months,” Sayeh stated.

Hard-hit oil exporters

The oil shock would have very differentiated effects on sub-Saharan Africa’s diverse economies, she said. Oil exporters would be hard hit and, with generally limited room for maneuver on budgets, significant fiscal adjustment would dent their growth outlook.

Oil importers, conversely, stand to benefit from lower oil prices, although gains would be partly offset by lower prices for their non-oil commodity exports. But infrastructure investment and strong consumption would likely support growth there—particularly in low-income countries.

Another, more domestically induced problem area for the region is the Ebola outbreak that has affected Guinea, Liberia, and Sierra Leone. While slowly abating, the disease continues to exact a heavy economic and social toll in those countries.

In addition, security-related risks have recently come to the forefront, including in the Sahel and Kenya. “Beyond the unbearable humanitarian costs they have on societies, these incidents, if they were to escalate, would also pose serious fiscal risks and further deter domestic and foreign investors,” Sayeh said.

Rapid reversal

Externally, global financial conditions could tighten as U.S. monetary policy normalization proceeds. The large fiscal and current account deficits in some sub-Saharan African countries could leave them vulnerable to a rapid reversal in market sentiment and to a cut in external financing.

The uneven global recovery could also disappoint, notably in Europe and China—which are sub-Saharan Africa’s main trade partners.

In the short run, dealing with the oil shock will be the region’s policy priority, Sayeh declared. Fiscal spending cuts among oil exporters should focus on non-priority recurrent spending, although cuts in public investment would also be unavoidable.

“The drop in oil prices also provides a unique opportunity to advance politically difficult energy subsidy reforms across the region,” Sayeh observed. The fall in commodity prices was also a reminder to advance economic diversification.

Tremendous opportunity for long-term growth

Beyond the immediate challenges, long-term growth prospects remain very favorable for the region. But the current commodity price shock is a powerful reminder of the need to make rapid progress toward economic diversification.

Demographic trends are on the side of the region: by 2030 or so, the number of people reaching working age in sub-Saharan Africa will exceed that of the rest of the world combined. “This offers a tremendous opportunity for sub-Saharan Africa which, properly tapped, can be a strong engine for growth going forward”, Sayeh said.

Responding to reporters’ questions, Sayeh said energy subsidy reforms are politically difficult because consumers have to be convinced that whatever savings arise from cutting subsidies will be put to good use.

Show examples

“We certainly encourage our member countries to make sure that they communicate clearly to their populations about what they intend to do with the gains from subsidy reduction, and to actually show some examples of how they might use those resources, to convince people that it is worth going down that path,” Sayeh said.

Asked about policies to offset the impact of electricity shortages in sub-Saharan Africa, Sayeh noted that power outages are affecting both low-income and emerging market economies in the region.

Sayeh urged governments to make space in their budget for these and other essential development expenditures, both by boosting revenue mobilization and improving the efficiency of spending.

Sayeh also cited the use of public-private partnerships to free up infrastructure financing and to introduce private sector innovations that can improve performance. Such partnerships have risks that would also need to be properly managed in a regulatory framework that takes account of those risks, and in which procurement practices maximize returns for the public sector.

Other policy options could include power utilities generating more of their own revenue. Sayeh noted that several countries in the subcontinent have public sector power utilities that are not permitted to recover their costs through tariffs.

Sayeh said electricity tariff reforms would be an important part of a package of energy sector reforms that countries can take forward to provide more electricity.

Debt limits

Asked to identify a tipping point between ramping up infrastructure investment and possibly eroding debt sustainability, Sayeh cautioned that the bond financing tapped by some countries in the region in recent years might become more costly as the United States normalizes its monetary policy.

Sayeh noted that the IMF has been working on revisions to its debt limits policy, partly in light of countries’ need to make more room for borrowing to finance infrastructure, while at the same safeguarding borrowers’ debt sustainability.