By this time in 2014, all the major oil producing African countries (Nigeria, Angola, Algeria, Egypt, et al) were basking in the euphoria of high oil prices on the international market, which revolved around US$110 per barrel (for Bonny Light). In this kind of situation, it is not unusual to expect that the windfall will last for a while. But by the end of the same year, the price had dropped to US$63 per barrel. It is even much worse today that it sells for only about US$30 a barrel.
Because their economies are not diversified, these countries predominantly depend on oil export for their foreign exchange earnings, the bulk of which is used to finance international trade and debt obligations. Hence it is difficult for them to create an adequate pool of foreign exchange to meet contingencies occasioned by unexpected sharp drops in oil price. This puts a huge strain on their national currencies, which are then forced to embark on a downward spiral.
Take Nigeria, the largest oil producer on the continent, for example. Though its output stands at 2.427 million barrels per day, it is essentially a mono product economy, with underdeveloped industrial and agricultural sectors. This, obviously, is a far cry from its overwhelming capacity to produce for the entire continent and even beyond.
With a huge recurrent expenditure budget to finance annually, it is apparently one of the economies most affected by the current low price of oil. As a result, the national currency (Naira) has officially seen a 24% decline in value against the United States Dollar between April 1, 2014 and February 22, 2016 (from N160 = US$1 to N199 = US$1) – www.investing.com
It is of paramount importance to note that obtaining foreign exchange from the country’s official sources (the Central Bank of Nigeria and the Commercial Banks) is currently nearly impossible; hence businesses are forced to patronize the autonomous market, where the Dollar is reportedly selling for over N300 to US$1. This has plunged the country into one of the worst periods of inflation it had witnessed in recent history.
Lessons learned and actions required:
The vagaries of the international oil market are a familiar phenomenon to these African oil economies, hence the current situation should further serve as a reality check for them to heed the dangers of depending predominantly on a single commodity for foreign exchange earnings and start taking concrete steps towards economic diversification. The following actions quickly come to heart:
- Adequate and Reliable Electricity Supply: Electricity is still a big issue in many African countries, including Nigeria, which is the continent’s largest economy. These countries should invest more on energy infrastructure to pave the way for industrial capacity building.
- Commercial Agriculture: It is commonly said that Africa is an agrarian society by default, but only a minute fraction of the continent’s agricultural potential is currently being utilized. Hence the need for governments and other stakeholders in these countries to invest in large scale commercial agriculture to boost production for domestic consumption and conservation of foreign exchange that would have been spent on importation, while the excess products should be exported abroad to earn more foreign exchange.
- Industrial Development: One of the greatest challenges of the African oil economies is their excessive dependence on imported products, resulting from their weak industrial capacity. There is therefore an urgent need for them to invest towards the expansion of their domestic industries, and also embark on national orientation programmes to foster the use of locally made goods among their citizens. Nigeria is already playing a leading role in this regard with the “BuyNaijaToGrowTheNaira” campaign, which has already gained a lot of attention on social media.
- Minimize Waste and Maximize Value: Oil has often been referred to as a curse to Africa, due to the high level of corruption and wastage prevalent in the continent’s major oil producing countries. Thus for them to achieve economic diversification and development, these nations must seriously tackle the problems of corruption and wastage, with the object of eliminating them, or at least, reducing them to a manageable level. Finally, allocation of government projects should be based on competence, instead of the pseudo practice of using them to pay for party or government patronage.