By ACAEW
Africa is the most commodity-dependent continent on earth, partly because manufacturing still accounts for a relatively small share of output. Most goods are exported in a raw state without being processed, refined or having had value added to them in other ways (unlike, forexample, several Middle East oil exporting economies, which have extensive petro-chemicals sectors).
Africa is, therefore, especially susceptible to swings in global commodity prices. The commodity price boom of 2000 and the early-2010s ensured an influx of cash forAfrica’s main commodity exporters, as well as a boom in foreign investment in a range of natural resources.
As with other regions, the commodity that has the biggest impact on African countries’ finances is oil: Africa is home to some major oil exporters, including Angola, Gabon, Nigeria and Algeria. During the boom years, plentiful oil revenues permitted governments in these countries to significantly increase public sector wages and infrastructure. Unfortunately, easy money meant that these governments had little incentive to implement structural economic reforms to boost private sector development; indeed, Africa’s main oil exporters operate in the most challenging business environments in the world.
When global oil prices started collapsing in mid-2014,export and fiscal revenues plummeted, leading to a rapid deterioration in oil producers’ current account and fiscal balances, a decline in foreign exchange reserves and significant pressure on their currencies. As these countries depend on imports for most of their consumer goods,these measures are having a severe impact on consumers and are likely to lead to higher price inflation.
On the upside, the majority of African countries are net oil importers; their current accounts have therefore benefited significantly from the drop in oil prices. This dynamic is most pronounced in East Africa, as petroleum attributes a significant share of total imports for these economies– for example, oil accounts for a third of all imports in Tanzania. Oil importers in other parts of the continent are also benefitting − one North African economy gaining from the fall in energy prices is Morocco, where the current account deficit narrowed from 7% of GDP in 2013 to an estimated 2.2% in 2015. Consumers are also benefiting from lower global oil prices, although some of these benefits are being eroded by rapidly-depreciating currencies across the continent. Furthermore, even when denominated in Zambian kwacha, the worst-performing currency over the past year, global oil prices have still
halved since mid-2014.
Throughout most of the rest of East and Southern Africa, the oil price has fallen by more than 60% in local currency terms. In turn, this has a positive impact on purchasing power, by improving consumers’ ability to spend on other products. Over the short term, East and Southern African consumers will be pressured by a drought this year, which has been inflating food prices, but once the weather improves the true benefits of lower global oil prices should filter through to consumers.
Rwanda’s green economy approach is guided by the country’s green growth and climate resilience strategy that was launched in 2011. Such a strategy affects numerous economic sectors, including construction (supporting the construction of environmentally-friendly green homes), utilities (rainwater management systems that help ease pressure on water use), and power (increasing use of renewable energy).
The East Africa region more generally is embracing the use of renewable energy to leapfrog older power generation technologies, while also reducing the need to extend the national energy grid to remote villages. Kenya is now the seventh highest producer of geothermal power globally after it recently unveiled the second phase of the Olkaria geothermal plant, which added an extra 140 W to the plant’s capacity. Olkaria is now the biggest single-turbine geothermal plant in the world, with a capacity of some 280 MW. In Ethiopia, the 1,870 MW Gibe III hydroelectric project began trial electricity generation in August last year, while the country’s Grand Ethiopian Renaissance Dam (GERD), which is expected to generate 6,000 MW at full capacity, is expected to be completed
sometime in 2017. In addition, Off-Grid Electric has implemented its M-Power solar solution in Rwanda and Tanzania, with the aim of reaching one million homes in the latter alone.
Source: ICAEW