“Will Hydrocarbon Rich African Countries be left Gasping for Breath in the Aftermath of the Coronavirus?”

...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