Oil producers in Sub-Saharan Africa (SSA) have been asked by the International Monetary Fund (IMF) to maintain 10-year fiscal surpluses of up to 1% annually.
According to a recent article by the IMF’s African division, the oil producers in the area should aim for buffers between 5 and 10% of GDP to handle significant fluctuations in oil prices.
The IMF predicts that oil revenues may fall precipitously as nations switch to low-carbon energy sources. The piece claims:
“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 article cited the IMF’s October 2022 SSA Regional Economic Outlook to highlight how pro-cyclical fiscal policies and insufficient savings are fueled by volatile oil prices.
According to the report, oil exporters in SSA have been spending more than 100% of their oil revenues on average since 2011, necessitating increased borrowing or depleting financial assets to maintain spending in the future during hard times.
For nearly half of the oil exporters in sub-Saharan Africa, the IMF predicts that these trends will likely persist through 2022.
Effects of oil price volatility:
Sub-Saharan African oil exporters have historically experienced slower growth dynamics, expanding 2 percentage points less annually from 2011 to 2020 than non-resource-intensive nations and experiencing nearly twice as much growth volatility.
According to the World Bank, which was cited in the IMF report, total debt service in oil exporting nations was also nearly twice as high as in other sub-Saharan African nations in the most recent ten years.
President Muhammadu Buhari requested the National Assembly’s approval on Wednesday, December 21, for a N819.54 billion supplemental budget to repair the infrastructure that the floods of 2022 in various states had destroyed. Nigeria’s total debt will increase to N22.57 trillion as a result of the additional debt.
The IMF states that the top priorities for resource-intensive economies to make up for anticipated revenue shortfalls are to increase public spending effectiveness, increase domestic revenue, and reform energy subsidies.
The Fund also promotes the elimination of energy subsidies, which support higher-income groups by averaging 21% of GDP in oil-exporting nations in sub-Saharan Africa.
The following actions are recommended by the IMF for resource-dependent nations to address their fiscal challenges:
- Reduce debt and build financial buffers.
- Create incentives for renewable energy production.
- Improve the business environment and strengthen governance and institutions.