...Towards new imperatives for natural resource diversification
Humanity is witnessing some of the most profound changes seen since the Great Depression. And again, it is the vulnerable among us who will suffer the worst consequences. We are out on a limb, witnessing the most disruptive global transformational mutations observed in the past 100 years.
Several parallels can be drawn between today’s Coronavirus and Albert Camus’ 1947 classic La Peste – translated as “The ‘Plague”, set in Oran, Algeria. True, this new Coronavirus pandemic, Covid-19, bears eerie resemblance to Camus’ plague. Written at a time just prior to the Nazi invasion of France, his rather trenchant narrative that ‘we are all living through a plague’ has disturbing prophetic resonance. But perhaps the strangest parallel is Camus’ analysis that “…plagues and wars take people equally by surprise.” Indeed, the fact is that the current pandemic has exposed our relative unpreparedness in the face of a global public health crisis of such magnitude with many countries across the globe caught off guard. Africa is often singled out as a continent used to being caught off guard, especially as a result of its chronically weak health infrastructure and its high reliance on global value chains.
The current crisis has significant implications for several sectors important to the development of African countries, not least the oil sector. Perhaps the greatest irony of it all is that fossil fuels, long blamed for the environmental stranglehold exacted on several climate sensitive sectors, are now being left in the ground due to price volatility and depressed demand. Refineries around the world are processing less crude oil. Indeed, one of the main polluting sectors has found itself on its knees as a result of reduced aviation and transport–related traffic as well as draconian measures to contain the coronavirus. Oil prices are at the lowest recorded in the past 18 years driving global demand down, pushing the globalised world economy into a recession and creating new trends.
Raw materials make up one third of Africa’s export proceeds. Africa is a carbon market risk taker as is evident in the recent fallout between Saudi Arabia and Russia, which led to the drop in oil prices before the mighty blow of the coronavirus struck oil consumption.
Oil exporting countries in Africa, not least, Angola, Algeria, Nigeria, and Libya will become the main casualties, given their high dependency on hydrocarbon proceeds to balance their books. And, as if this was not painful enough, the drop in oil prices is simply one of the many reverberations that African countries will face, long accustomed as they are, to having a poor immune system and, despite impressive strides in economic growth, have not become resilient enough to move beyond the proverbial ‘resource curse.’ For instance countries like Nigeria and Angola need oil prices to be around $60 per barrel to balance their budget, but with current prices plummeting below zero they are facing grade economic crisis.
Depreciation of African currencies will create new complications for countries who are compelled to import heavily to maintain food supplies. In addition, even with a well–endowed resource base, many countries are subjected to a history of predation and have remained vulnerable to the vagaries of exogenous shocks.
Even the most optimistic forecasts convey a world economy in distress with global economic growth being halved to 1.5 per cent (OECD figures) almost certainly triggering a world-wide recession. The UN Economic Commission for Africa (UNECA) predicts that annual growth will drop to 1.8% from a previous estimate of 3.2%. Oil dependent countries such as Angola and Nigeria could lose up to $65 billion in oil related incomes as a result of falling oil prices exacerbated by the current COVID 19 pandemic. The drop in oil demand combined with the crash in oil prices are already affecting exports. As of March 4, about 70 percent of the April-loading cargoes of crude oil from Angola and Nigeria were still unsold.
Quick or short recovery, resuscitating the world economy will require strong leadership and a keen eye kept on macro-economic fundamentals. Trade forecasts for other hydrocarbon sensitive economies such as Gabon, Equatorial Guinea, Algeria and Chad, to name but a few, will be bleak. Mature oil established economies such as Nigeria and Angola rely on oil revenues for close to 70% of their national budgets. This absolute dependence on natural resources means that many countries are at the mercy of the world economy and dwindling commodity prices – their economic rents are predicated on prevailing trends of commodity goods and when public health crises of pandemic scale strike, this reduces foreign exchanges reserves, compromises social spending and derails hard won sustainable development achievements.
Africa faces a triple challenge of transition towards energy security, moving towards a low carbon emissions pathway and charting a growth and transformation plan that will have to lift millions out of poverty. The coronavirus has made more apparent the vulnerabilities of highly dependent economies on hydrocarbon resources and the associated carbon exposure risks. The
United Nations University’s Institute for Natural Resources in Africa (UNU-INRA) research on stranded hydrocarbon assets, intended as an alert to mineral rich countries, discusses in a widely circulated paper the strong likelihoods of asset ‘stranding’. Stranded assets are “assets that become devalued before the end of their economic lifetime or can no longer be monetised due to changes in policy and regulatory frameworks, markets forces, societal or environmental conditions, disruptive innovation or security issues”. This paper was intended as a primer to send a message to African leaders, especially in oil and gas rich countries, that if global economies move to a carbon neutral world where fossil fuels became the principal enemy, then Africa will need to look to new economic activities and markets. It signalled that with a growing number of companies and shareholders divesting away from fossil fuels, Africa may have to manage its exit from the sector to avoid potential jolts that economies might succumb to if severed from the main resource artery and deprived of fossil fuel proceeds. The study showed that even in some emerging oil and gas countries, the proceeds of oil and gas are being strategically employed towards important safety nets such as Ghana’s free senior high school policy. Today, given plummeting oil prices, there is little wonder that many African economies will be left severely wounded.
It is becoming increasingly urgent for African governments to diversify their economies and create other forms of growth poles beyond their natural resources. This pandemic, as unwelcome and untimely as it is, sends strong signals to Africa to move rapidly towards promoting diversified economies given the vulnerability of the fossil fuel market, and the length of time it will take for Africa’s oil exporting countries to nurse themselves back to full recovery. Climate change may not be the top priority of African governments in the post-Coronavirus world, however, economy and ecology are two faces of the same development coin. Hydrocarbon resources are metaphors for greater resource planning and an effective strategy for African economies to enable a transition that results in a new model of growth. Indeed, Africa’s energy deficit makes the energy sector an essential muscle in its growth and transformation plan, but at the same time, it says to African leaders that business as usual post-pandemic is tantamount to re-enforcing widespread economic hardship. Recovery from this industrial scale depression must recognise the vulnerability of Africa’s resource base and the need to ‘stockpile’ on new diversified economic alternatives in order to reboot the economy.
There are new predictions that the current pandemic will derail achievement of almost all of the sustainable development goals. In Africa, where leaders are struggling to square the sustainable development circle and to manage onerous debt repayments, new health vulnerabilities in known hotspots will leave many economies gasping for breath.
With global economies heading towards a cliff edge, Dr. Rieux’s famous “common decency” retort in Camus’ Plague will go a long way to ensuring that African economies are not given a wide berth or left to go on an indefinite social distance tour. Rather, the post-corona era should start with critically revisiting old paradigms and taking bolder moves towards diversification of natural resources. But, for a continent that has not had its share of the carbon budget, and not exercised its full sovereignty vis a vis energy choices, adopting new perspectives on energy futures can be considered as enlightened self-interest. As the Ethiopian Prime Minister advises: “… if the virus is not defeated in Africa, it will only bounce back to the rest of the world..”
By Fatima Denton, PhD
Fatima Denton is the Director of the Institute for Natural Resources in Africa at the United Nations University, Ghana