OIL exporting countries in Africa should brace themselves for even tougher times ahead as Brent crude may fall as low as $20 a barrel, analysts from Morgan Stanley say in a research note.
It’s primarily the result of recent strengthening in the US dollar, as oil is particularly leveraged to the dollar. If the currency gains 5%, oil prices may fall between 10-25%, say the analysts.
A global oil glut – driven partly by shale oil extraction in the US and overproduction– may have pushed prices to under $60 a barrel, but the difference between $35 and $55 is primarily due to the currency effect, and other “non-fundamental” factors.
Brent crude has already lost more than 11% of its value this year, in just the first week of business, closing at $33.55 a barrel on the London-Based Futures Europe exchange on Jan 8, the lowest since June 2004, and touching $33.03 on Jan 11.
Kicking oil addiction
With oil prices falling, it presents an opportunity for African oil exporters to wean themselves off their oil addiction. As a percentage of their nominal gross domestic product, some eight countries will continue to nervously bite their fingernails, with oil rents forming at least a fifth of their GDP: Republic of Congo, Equatorial Guinea, Libya, Gabon, Angola, South Sudan, Chad and Algeria.
Now, a recently-released report from the World Bank highlights just how costly that addiction is to the quality of life in resource-rich countries.
The data in the Poverty in a Rising Africa report finds a stark “human development penalty” to residing in a resource-rich country in Africa, even when controlled for income differences between countries.
People living in resource-rich countries tend to have a higher incidence of domestic violence (by 9 percentage points, compared to countries that aren’t resource rich); they also tend to have lower literacy levels (by 3.1 percentage points) and have shorter life expectancies (by 4.5 years). They also suffer higher rates of malnutrition among women (by 3.7 percentage points) and children (by 2.1 percentage points).
In other words, despite the wealth offered by natural resource revenues, citizens in those countries often experience a significantly worse quality of life.
A just-released report by Brookings Institution urges these countries to address these gaps in social policy in 2016, “though with commodity prices low this task could even be tougher than usual,” argue Kathleen Beegle and Luc Christiansen, both World Bank economists, in the Brookings report titled Foresight Africa 2016.
Some of the findings may be explained by the capital-intensive nature of the extractives industry. Resource booms generate revenues for governments, but create relatively few jobs, which increases income inequality, and makes it harder to reduce poverty on the ground.
In addition, resource-rich countries in Africa are vulnerable to stagnation in manufacturing and agricultural output, as the “easy” money from oil and minerals draws investment away from other productive sectors of the economy – a phenomenon commonly known as Dutch disease or the “resource curse”.
With that, much-needed jobs shrivel up as industries rust away abandoned, and people rush to find their own piece of the oil fortune.
A rapid influx of money into the economy will inevitably cause inflation, which distorts market prices. Luanda, for example, is the world’s most expensive city to live in, as the entire market is geared towards expatriates. That makes food unaffordable to many local residents, resulting in dismal health outcomes.
Angola is Africa’s second largest oil-producer, and sub-Sahara Africa’s third largest economy, but has the world’s highest rate of child mortality under the age of 5: 167 deaths per 1,000 live births, according to the United Nations Children’s Fund (Unicef). That’s one in six, in a country where Porsches have been flying off the shelves.
The type of infrastructure built for resource extraction – such as railways that go directly to ports, or a network of underground pipelines – isn’t the type of infrastructure that helps local people do business like transporting food from farms to markets.
That means that the transport cost of food remains high.
The glitz and glamour afforded by natural resource wealth has a spectacular aesthetic element to it.
There’s also something unique about the political economy of resource-rich countries in Africa, that reduce the incentive for the government to invest in its people – thus leading to worse education and health outcomes. Likely because if you are digging precious resources from the ground and making a fortune, labour productivity or skills are less of a big deal.
With public coffers full of money from sales of oil or minerals, governments don’t necessarily need to raise money from taxes. Nigeria, for example, has one of the lowest tax-to-revenue ratios in Africa; taxes account for just 1.6% of government revenues.
That makes it much more difficult to hold governments accountable, and no wonder the result is deteriorating schools and hospitals.
There’s also a demand aspect to the whole thing. With people making enormous fortunes overnight, the belief that hard work leads to success – like getting good grades in school – gets progressively eroded. So students, and their parents, feel less personally invested in the condition of the education system.
These factors may explain the poor education and health outcomes, but what about domestic violence – which had the largest gap between resource-rich, and non-resource rich countries?
There may be a psychological aspect to it all. The glitz and glamour afforded by natural resource wealth has a spectacular aesthetic element to it.
The result is that the “accomplishment gap” between an ordinary person on the street and an oil baron is visibly large, which leads men to feeling judged and angry – considering the way in which a man’s worth is often pegged to his financial status.
Vague and imprecise, yet pervasive, feelings of inadequacy are often taken out on the people that a man feels he has most control over: his wife, or girlfriend, and children.
But, also, as in the case of Nigeria where vast oil revenues means the state isn’t zealous in collecting taxes, that also tends to extend to lax enforcement of laws at the micro level. If the state won’t show up at the doorstep of a small business owner to collect taxes, it is unlikely to do so when he batters his spouse.
-Additional reporting by Ben Sharples, Bloomberg