Will COVID-19 leave fuel-rich African countries gasping for breath?

As coronavirus takes its toll on Africa’s oil and gas-reliant economies, Dr Fatima Denton asks if recovery could herald an era of bold new thinking on economic diversification to reduce reliance on natural resources.

Fatima Denton's picture
Guest blog by
27 April 2020

Fatima Denton is director of the Institute for Natural Resources in Africa at the United Nations University, Ghana

Oil platforms

Oil platforms off the coast of Cameroon. Coronavirus is exposing the vulnerabilities of highly hydrocarbon-dependent African economies (Photo: jbdodane via FlickrCC BY-NC 2.0)

We are witnessing some of the most profound global changes since the Great Depression. And once more, it is the vulnerable who will suffer the worst consequences.

The current pandemic has exposed our relative unpreparedness for a global public health crisis. African nations are among those caught off guard, constrained by chronically weak health infrastructure and reliance on global value chains.

From health crisis to development crisis?

The crisis has deep implications for sectors that are vital to the development of African countries, including oil.

It is a great irony that fossil fuels, long blamed for the environmental stranglehold exacted on climate sensitive sectors, are now being left in the ground. Oil prices are at their lowest for 18 years (subscription required); global demand has slumped. The collapse of the market is pushing the global economy into recession and creating new trends.

Raw materials make up a third of Africa’s export income. Angola, Algeria, Nigeria, Libya and other countries that heavily depend on hydrocarbon sales will be the main casualties. 

Loss leads to loss 

Plummeting oil prices are just one of the COVID-19 aftershocks awaiting African countries. Despite impressive strides in economic growth, their economies are not yet resilient enough to move beyond the proverbial ‘resource curse’.

The depreciation of currencies will create complications for countries that rely on imports to maintain food supplies. Historical predation from colonial powers means even resource-rich African nations remain vulnerable to external shocks.

Running on empty

The likely halving of global economic growth (subscription required) is expected to trigger a worldwide recession. Africa’s annual growth is predicted to drop to 1.8% from a previous estimate of 3.2%.

Together, the continent’s oil-dependent economies could lose up to US$65 billion of income. Falling oil prices, exacerbated by the pandemic, are already affecting exports: in early March, Angola and Nigeria were reporting that about 70% of their April-loading cargoes of crude oil were unsold (PDF). Both countries rely on oil revenues for close to 70% of their national budget.

Trade forecasts for other hydrocarbon-sensitive economies such as Gabon, Equatorial Guinea, Algeria and Chad will be bleak. Absolute dependence on natural resources places these countries at the mercy of the world economy; when a pandemic-scale public health crisis hits, it means reduced foreign exchanges reserves, compromised social spending, and the derailing of hard-won sustainable development achievements.

A stark warning

Africa faces a triple challenge: transition towards energy security; moving towards a low carbon emissions pathway; and charting a growth and transformation plan that must lift millions out of poverty.

But coronavirus has exposed the vulnerabilities of highly hydrocarbon-dependent economies and the associated carbon exposure risks.
In a recent and widely circulated research paper (PDF) by the United Nations University’s Institute for Natural Resources in Africa (UNU-INRA), we challenged African leaders, especially of oil and gas rich nations, to consider the strong likelihood of asset ‘stranding’.

Stranded assets are those that lose value ‘before the end of their economic lifetime’. It may be that the usual means of monetising them are disrupted by changes in policy and regulatory frameworks, market forces, social or environmental conditions, disruptive innovation or security issues.

Coronavirus renders the paper’s message more stark: if global economies move to a carbon neutral world, where fossil fuels became the principal enemy, Africa will need to look to new economic activities and markets.

Managing a jump, before being pushed

With a growing number of companies and shareholders divesting from fossil fuels, the UNU-INRA research indicates that Africa may have to manage its exit from the sector if it is to avoid the economic jolts that might result from an externally-set timetable.

A managed exit is on the radar for some emerging oil and gas countries, where reliance on fossil fuel income is less entrenched. Proceeds are being strategically employed towards important safety nets, such as Ghana’s free senior high school policy.

This pandemic, unwelcome and untimely as it is, amplifies existing signals: Africa must move rapidly towards 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 recover.

Economy and ecology: working together for recovery

Climate change may not be a priority for African governments in the post-coronavirus world; but economy and ecology are two sides of the same development coin. Hydrocarbon resources such as oil and gas are metaphors for greater resource planning and will be part of an effective strategy for African economies to transition to a new model of growth.

Indeed, Africa’s energy deficit makes the energy sector an essential muscle in its growth and transformation plan. At the same time, it also says to African leaders that reverting to ‘business as usual’ post-pandemic is tantamount to re-enforcing widespread economic hardship. Recovery from this depression must recognise the vulnerability of Africa’s resource base and the need to ‘stockpile’ new diversified economic alternatives.

There are predictions that COVID-19 will derail the achievement of almost all 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.

A bold new world?

When the global economy begins to rally, African economies must not find themselves at an indefinite ‘social distance’. Rather, the post-pandemic era should be characterised by strong leadership, the rethinking of old paradigms and bold moves towards the diversification of natural resources.

For a continent that has not had its share of the carbon budget and not exercised full sovereignty in terms of energy choices, adopting new perspectives on energy futures can be considered enlightened self-interest.

As Abiy Ahmed Ali, prime minster of Ethiopia, advises: “…if the virus is not defeated in Africa, it will only bounce back to the rest of the world”.

This blog is based on an article published by UNU INRA.
 

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