Abstract

The continuing rise in oil prices is having profound effects on the countries in sub-Saharan African (SSA).1 This report sets out to examine those effects and answer such basic questions as: How have oil-importing countries adjusted to the increased costs? And how have oil-exporting countries used their increased revenues? The report first reviews economic developments in the region in 2006 (Chapter II) and prospects for 2007 (Chapter III). It then analyzes the implications of rising oil prices for GDP, inflation, and the poor (Chapter IV).

The continuing rise in oil prices is having profound effects on the countries in sub-Saharan African (SSA).1 This report sets out to examine those effects and answer such basic questions as: How have oil-importing countries adjusted to the increased costs? And how have oil-exporting countries used their increased revenues? The report first reviews economic developments in the region in 2006 (Chapter II) and prospects for 2007 (Chapter III). It then analyzes the implications of rising oil prices for GDP, inflation, and the poor (Chapter IV).

External Environment

The external environment has changed significantly in the past six months. Though oil prices have risen more than expected, non-oil commodity prices have also soared—to the point that the terms of trade for oil-importing countries as a group are now expected to rise by almost 2 percent in 2006 (although the generalization for the group masks large variations among individual countries). Foreign demand for goods from SSA is now expected to be somewhat stronger in 2006 than previously projected, which should help boost exports.

The Outlook for 2006

How has the changed external environment affected prospects for 2006? The expected slowdown in aggregate growth in SSA from about 5½ percent to 4¾ percent is mainly due to a temporary slowdown in oil production in several countries and the convergence of growth in South Africa to more sustainable levels. For nearly half the oil-importing countries, real GDP is still expected to grow by 5 percent or more despite the increased costs of petroleum products. And notwithstanding the pass-through of higher oil prices to consumers, inflation in SSA (excluding Zimbabwe) is actually projected to moderate, from 8¼ percent in 2005 to 7 percent in 2006. This is mainly the result of lower inflation in oil-exporting countries, reflecting the adoption of more effective stabilization policies in Angola, and falling food prices in countries like Nigeria and Chad. The continued strength of the euro has also eased inflationary pressures in the CFA franc zone.

Oil-exporting countries are saving an increasing proportion of rising oil revenue, either because that gives them an opportunity to reduce indebtedness or because their absorptive capacity is limited. But these countries also need to strengthen their fiscal institutions to enhance revenue transparency and improve public financial management systems.

Prospects for 2007

  • For 2007 the picture is promising:

  • GDP growth in the region as a whole is projected to rise to about 6 percent.

  • In oil-exporting countries, growth could accelerate to 10 percent.

  • Growth in oil-importing countries should remain steady at 4½ percent.

  • Inflation for the region (excluding Zimbabwe) is projected to fall further, to 6 percent.

There are downside risks to this promising prospect, however. Export demand could be lower if activity in the rest of the world slows against a background of global imbalances and tighter monetary policies. Growth and inflation could also be adversely affected by further increases in oil prices. In addition, political risks remain in a number of countries in SSA.

Implications of rising oil prices

Analysis of the impact of higher oil prices yields a number of policy-relevant results. Since 2003 most countries in SSA have passed a relatively large portion of higher oil prices through to domestic retail prices. Recognizing and addressing the fact that rising oil prices thus cut into the real income of the poorest population groups is a severe challenge for policymakers in countries where there are no effective safety nets for the poor. Some countries are experimenting with indirect instruments to shield the poor, such as maintaining subsidies for kerosene (given its importance in the consumption basket of the poor), subsidizing public transportation, and reducing or eliminating charges for such public services as health and education.

This report presents the results of simulations of the impact on GDP of higher oil and other fuel prices for nine countries in SSA using the Global Trade Analysis Project model. The results suggest on the one hand that oil and other fuel price increases in 2003-05 may have lowered real GDP by 0.2 to 1.0 percent, depending on national production and trade structures. On the other hand, they also show that in some countries, the impact on GDP of higher fuel prices was more than offset by rising prices for nonfuel commodities.

MDRI and the MDGs

Countries benefiting from the Multilateral Debt Relief Initiative (MDRI) are using the resources released from debt service to boost poverty-reducing investment. Nevertheless, although there has been some progress in raising per capita income in recent years, economic performance will have to improve significantly if the region is to attain many of the Millennium Development Goals (MDGs). In particular, SSA will need to accelerate annual GDP growth to at least 7 percent to attain the poverty MDG to reduce by half the proportion of people living on less than one dollar a day. The scaling-up of aid promised by the international community at the Gleneagles Summit a year ago is yet to materialize. Private capital inflows are rising as surging commodity prices and debt relief make the region a more attractive investment destination. However, countries in SSA will have to make more progress in lowering the costs of doing business if private sector activity is to flourish.

1

SSA is here defined as the countries covered by the IMF’s African Department; it excludes Djibouti, Mauritania, and Sudan, although they are included in the SSA aggregation in the IMF’s World Economic Outlook. The Statistical Appendix provides individual information for all 44 SSA countries covered by this report, but Eritrea and Liberia are excluded from the aggregations because of their data limitations.

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