Can Developing Petrostates Learn to Live without Oil?

By Maza, Cristina | The Christian Science Monitor, March 25, 2016 | Go to article overview

Can Developing Petrostates Learn to Live without Oil?


Maza, Cristina, The Christian Science Monitor


As oil prices have nosedived over the past 14 months, it hasn't been only petrostates like Saudi Arabia and Russia feeling the crunch. Developing nations like Angola, Azerbaijan, Kazakhstan, and Nigeria are also struggling to balance their budgets as deficits grow and government incomes shrink.

In a bid to survive the slump, governments are experimenting with both austerity measures and fiscal stimulus. But policy maneuvers have their limits. After oil prices fell to $30 per barrel and below, many countries turned to international institutions like the World Bank and African Development Bank in search of emergency loans.

International loans can help close budget gaps temporarily, but relying on international aid and increasing government debt is hardly a sustainable economic solution. If oil prices remain low, countries that depend almost exclusively on oil exports to fund their budgets will be forced to find new ways to diversify their economies and increase revenue streams. What now looks like an economic catastrophe may ultimately prove to be an opportunity for governments to liberalize their economies, experts say.

"Diversification is coming a little bit late, but everyone is talking about diversification now. It's a political reality," says Soren Kirk Jensen, associate fellow for the Africa program at Chatham House, an independent policy institute.

Swelling with oil revenue over the years, government leaders had little incentive to focus on economic diversification. The financial crisis of 2008 proved to be a bump in the road, and its effects were short lived for most oil exporters. In 2014, rising US production and slowing Chinese demand sent oil prices plummeting. Cheap petroleum is typically a boon for investment and trade, but this time global economic growth cooled as markets are adapting to a new era of cheap oil. This intensified the need for countries to turn to international lenders for assistance.

Some have found more success than others.

New sources of revenue for NigeriaMany countries are not asking the International Monetary Fund for loans, despite the fact that the IMF is typically viewed as the lender-of-choice in crisis situations. Instead, they're turning to the World Bank, the African Development Bank, the Asian Development Bank, and even the Chinese government for help. Most of this can be attributed to the IMF's strict conditionality, such as requiring that borrowers devalue their currency, observers say.

Nigeria, for example, used a variety of tactics over the last year to stave off the worst impacts of its shrinking budget. Flouting IMF recommendations, the Nigerian government imposed capital controls and used its reserves to shore up its currency, the naira. The government of President Muhammadu Buhari, which has been in office a little under a year, avoided currency devaluation so that imports wouldn't become too expensive. As a result, foreign exchange reserves are dwindling rapidly, and the country's rainy day fund is almost entirely depleted.

Instead, Nigeria has turned to the World Bank and African Development Bank, asking the lending institutions for $3.5 billion in loans. The amount will hardly make a dent in the $15 billion deficit the government is expected to have racked up this year.

In the meantime, capital controls continue to stunt Nigeria's economic growth, the IMF says. If the World Bank approves the $2.5 billion loan Nigeria requested, it's likely the country will be obligated to devalue its currency anyway, in addition to other structural reforms.

Aside from these short-term reforms, experts say Nigeria has a variety of options it could pursue to make its economy more sustainable and government revenue streams more diverse. Today, the government depends almost entirely on oil exports for its tax revenue and foreign exchange.

Before Nigeria's government began relying on oil the country was considered the breadbasket of West Africa, says John Campbell, senior fellow for Africa policy at the Council for Foreign Relations and US ambassador to Nigeria from 2004 to 2007. …

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