High Oil Price Brings Good Tidings, but ... the Economic Growth Rate in Sub-Saharan Africa Is Expected to Increase to 6.5% This Year. the Major Catalyst for This African Revival Is the Surge in Oil Prices, Precipitated by China and India's Insatiable Appetite for the Commodity. but Can This Positive Momentum Be Sustained over the Longer Term? Emanuel Misghinna Finds Out

By Misghinna, Emanuel | New African, June 2008 | Go to article overview

High Oil Price Brings Good Tidings, but ... the Economic Growth Rate in Sub-Saharan Africa Is Expected to Increase to 6.5% This Year. the Major Catalyst for This African Revival Is the Surge in Oil Prices, Precipitated by China and India's Insatiable Appetite for the Commodity. but Can This Positive Momentum Be Sustained over the Longer Term? Emanuel Misghinna Finds Out


Misghinna, Emanuel, New African


After reaching 4% in the 1970s, sub-Saharan GDP growth rates fell to around 2% in the 1980s and 1990s. Underlying these statistics were low investment and weak productivity growth rates. However, since early 2000, African growth has bounced back beyond the 1970s levels.

The favourable environment has made some countries in sub-Saharan Africa (SSA) increasingly attractive as destinations for private capital inflows. Net private capital inflows reached record levels in 2007, led by strong Foreign Direct Investment (FDI) inflows. However, the bulk of FDI is still focused on a few countries and targeted mainly at extractive industries, particularly the oil sector.

This is based on evidence from cross-border mergers and acquisition-related inflows. The key question is whether Africa's positive economic momentum can be sustained over the longer term. In order to answer this question, it is crucial to consider the drivers of this massive improvement and the potential constraints on further growth. Among the top 10 fastest growing economies in the world today, three are African: Sudan, Angola and Mauritania. Many SSA economies are heavily underpinned by oil. Their GDP has doubled from $ 130bn in the 1980s to $300bn today. These numbers may not be impressive relative to the economic performance of other regions, most notably Asia, but in absolute terms the trend is encouraging.

However, while the high price of oil represents unique opportunities for oil-producing countries, it constitutes a serious challenge for net oil-importing ones as it may slow down their economic progress and lead to tighter financial constraints. The high price of oil impacts directly on firms, consumers and the government. First, it increases the domestic price of petroleum products, raises the cost of many intermediate inputs, and as a result leads to higher production costs. Consequently, firms may reduce their labour demand, investment and output.

Second, as the short-run demand for oil is highly inelastic, consumers are forced to reduce their consumption of other goods and services to pay for higher energy bills.

Third, net oil-importing countries face balance of payment constraints as they must secure additional resources to pay for the higher oil import bill. Governments also face tighter budget constraints which can affect their capacity to finance social programmes. The current high price of oil would translate, as a first round effect, into higher average inflation. For example, in 2007, inflation was more than 4% for oil-importing African countries. If the price of oil were to remain at its 2008 level, instead of that of 2002, the nominal debt relief to 14 of 19 African oil-importing countries would be much smaller than the increase in their oil bill.

This is expected to get worse. A recent Goldman Sachs report states that "the possibility of $150-$200 per barrel seems increasingly likely over the next six to 24 months." This is indicative that the oil crisis could be coming to a head as inadequate supply growth becomes apparent.

The report also added that the spare capacity of the Organisation of Petroleum Exporting Countries (Opec) to cushion against unexpected supply shocks was very low. Moreover, some oil-importing countries, especially those in East Africa, have been hit by recurrent droughts which have reduced their capacity to generate hydroelectricity and forced them to ration electricity. Although many net oil-importing countries have enjoyed a healthy growth rate of 5% per year due to higher commodity prices, their growth rate would have been higher had the price of oil remained at around $30 per barrel.

The myriad implications caused by the rise of oil are significant. The balance of payments for oil importing countries is heavily affected. The average of oil imports as a percentage of total imports in oil-importing countries is 15%. This will add more strain to the economies of all importing countries in the absence of external reserves and borrowing. …

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High Oil Price Brings Good Tidings, but ... the Economic Growth Rate in Sub-Saharan Africa Is Expected to Increase to 6.5% This Year. the Major Catalyst for This African Revival Is the Surge in Oil Prices, Precipitated by China and India's Insatiable Appetite for the Commodity. but Can This Positive Momentum Be Sustained over the Longer Term? Emanuel Misghinna Finds Out
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