Moving Away from Oil Dependence: Africa's Diverse Economies Offer Examples of How to Adapt Economic Policy for Strong Future Growth

By Mbu, John | African Business, March 2016 | Go to article overview

Moving Away from Oil Dependence: Africa's Diverse Economies Offer Examples of How to Adapt Economic Policy for Strong Future Growth


Mbu, John, African Business


2015 HAS BEEN AN ANNUS HORRIBILIS FOR SEVERAL economies in Africa. First, currencies across the board have depreciated dramatically against the dollar. Second, prices of almost all major commodities have crashed, which has had huge impact on government revenues. Third, China's slowdown has put a damper on Africa's economic growth.

As a result, Africa's economy will grow by 3.75% --lower than the 5% average of the last decade--and is expected to grow slightly higher in 2016 at 4.25%. While certain trends can be seen, recent economic events have affected Africa's economies very differently with huge variations in economic growth for 2015.

The most striking feature of the high growth economies is that except for Cote d'Ivoire, which exports cocoa and coffee, these economies are not producers and/or exporters of commodities. In particular, they are net oil importers.

Oil subsidies represent about a third of total government expenditure in most African economies, so the significant plunge in the international price of crude oil, from $110 in March 2014 to less than $35 today has been a blessing for net oil importers. Thus, allocations for oil subsidies have been reduced and channelled to other important sectors of the economy, resulting in higher economic growth rates.

Conversely, major oil exporters such as Nigeria and Angola were not so lucky. Major commodity exporters such as South Africa, Botswana and Ghana were also severely affected. These economies experienced wider fiscal deficits (as was the case in Nigeria, where it almost doubled from 2% of GDP in 2014 to 3.9% of GDP in 2015), wider current account and external trade deficits, and significant currency depreciations (for example, the South African rand lost over 50% of its value in early December 2015). Contrasting growth rates between the 2015 winners and the 2015 losers have some lessons for African economic policy in 2016 and beyond.

The first is that commodity exports are not the only catalyst for economic growth in Africa. As can be seen from the 6%-plus economic growth rates in Ethiopia, Rwanda, Cote d'Ivoire, Mozambique and Tanzania, economic prosperity can be achieved through sound economic policies, particularly through targeted investments especially in the infrastructure sector, and not just through the exports of commodities.

African countries need to increase infrastructure investment components of their capital investment budgets. Although debt levels have been rising in several countries as a result of increased infrastructure spending, present levels are still sustainable. …

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