The International Monetary Fund (IMF) has asked oil producers in Sub-Saharan Africa (SSA) to maintain annual fiscal surpluses of up to 1% per annum over 10 years.
An article published recently by the African department of the IMF said the region’s oil producers need to target buffers of around 5 to 10% of gross domestic product to manage large swings in oil prices.
Why this is necessary: The IMF believes that as countries transition to low-carbon energy sources, oil revenues could sharply decline. The article states:
- “By 2030, oil revenues in the region could fall by as much as a quarter and by 2050, by half. Building buffers now would help the region’s oil exporters navigate the transition toward clean energy while managing oil price fluctuations.”
- The October 2022 SSA Regional Economic Outlook from the IMF was cited in the article, drawing attention to the fact that volatile oil prices drive pro-cyclical fiscal policies and insufficient savings.
- The report stated that since 2011, oil exporters in SSA have spent on average, more than 100% of their oil revenues in the years they accrue, requiring greater borrowing or drawing down financial assets to sustain spending later in bad times.
- The IMF projects that such patterns are likely to continue through 2022 for almost half of sub-Saharan African oil exporters.
Effects of oil price volatility: Oil exporters in sub-Saharan Africa have historically faced slower growth dynamics, growing 2 percentage points slower per year than non-resource-intensive countries from 2011 to 2020 and with almost twice the growth volatility.
The IMF report cited the World Bank as saying that total debt service in oil exporters was also almost twice as high as for other sub-Saharan African countries in the latest decade.
Nigeria’s rising debts: On Wednesday, December 21, President Muhammadu Buhari sought the approval of the National Assembly for an N819.54 billion supplementary budget to fix infrastructure destroyed by the 2022 floods across various states. The additional debt will raise Nigeria’s debt profile to N22.57 trillion.
For the record: The IMF says that improving public spending efficiency, mobilizing better domestic revenue, and reforming energy subsidies remain top priorities for resource-intensive economies to compensate for expected revenue shortfalls.
The Fund also advocates for the removal of energy subsidies, which amount on average to 2½% of GDP in sub-Saharan African oil exporting countries and support higher-income groups.
The IMF advocates for the following action steps for resource-dependent countries to manage fiscal challenges:
- Reduce debt and build financial buffers.
- Create incentives for renewable energy production.
- Improve the business environment and strengthen governance and institutions.