Transcript Impact of High Oil Prices on Africa

Higher Oil Prices and Africa’s Growth
Prospects
John Page
The World Bank
January 2006
The current oil shock – a cyclical upturn

The current rise in oil prices started in 1999
In real terms, its magnitude is now approaching the previous peak
in 1979-80
Crude oil price 1970-November 2005
80
70
60
50
price /bbl

Current price
Price in 2000$ by US GDP
deflator
40
30
20
10
0
Data sources: World Bank DECPG Price data.
Offsetting factors (1) – currency appreciation
CFAF, rand have been appreciating.
115
The US dollar exchange rate
110
Real effective exchange rate
105
100
95
90
85
Nominal effective
exchange rate
80
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
Relative to a basket of currencies (and except recently), the
dollar has depreciated by 15 to 18% since 2002
Exchange rate of $US to a basket of currencies

Offsetting factors (2) – favorable terms of trade

The index of oil to non-oil commodity prices has been
favorable from 2001 to early 2004.
The current increase in the relative price index is still about
half of the oil shock in 1999-2000
Oil and commodity prices in SSA
Ratio of Oil to non-oil
commodity price
230
Price indices

180
Metals and Minerals
130
Agriculture
80
Raw materials
30
1
5
9
1
5
9
1
5
9
1
5
9
1
5
9
1
5
9
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5
9
1
5
9
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2
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2
2
Data sources: World Bank DECPG commodity price data.
The overall terms of trade impact…
Terms-of-Trade Impacts of Commodity Price Changes



The income impact in 200405 is half of the 1999 shock
1999-00
2001-03
2004-05
120.3
18.9
88.0
Agricultural products
0.3
15.7
8.9
But cumulatively, the total
effect on income is -2.3% of
GDP
Metals and minerals
25.0
10.2
47.9
Manufactures
-5.0
3.0
10.4
Still a real and permanent
shock
Total terms of trade effect (% of GDP)
Cumulative price change
Oil
Oil importers
Low and middle income
-1.8
-0.1
-0.9
-3.8
-0.9
-2.9
Sub-Saharan Africa
-2.5
1.4
-1.2
South Asia
-3.9
-1.5
-2.7
-4.3
1.5
-3.3
Low income
Highly indebted poor
countries
Growth has been more robust





Growth in SSA during 2003-04 was 4.4% p.a. (versus 3% in 1999-2000)
13 countries grew strongly (greater than 6% p.a.), averaging 9.2%
(versus 4.1% in 1999-2000)
16 countries grew moderately (between 3 to 6% p.a.), averaging 4.3%
(4.0% in 1999-2000)
11 countries grew slowly (less than 3% p.a.), averaging 2.2% (1.5% in
1999-2000)
The 4 countries whose economies shrank in 2003-04 (Cote D’Ivoire,
Seychelles, CAR, Zimbabwe) averaged -4.7 p.a. (versus 0.1% growth in
1999-2000). However, their poor performance was attributable to non-oil
related problems.
Outlook for Sub-Saharan Africa




To date, the economic
impact of oil prices has
been muted…
Growth will only decline
slightly in 2005 and will
recover in 2006
Inflation (lowest in 2
decades in 2004) has
increased in 2005 but
is expected to decline
in 2006
The concern is that TOT
may deteriorate further
if non-oil commodity
prices ease
2004
2005
2006
(Annual growth, in percent)
Real GDP
5.4
4.2
5.6
oil producers
9.2
6.4
8.0
non-oil producers
4.8
3.8
5.2
Inflation (CPI)
10.6
17.0
7.5
oil producers
9.7
7.6
7.2
10.7
18.4
7.6
Terms of trade
1.0
-0.8
-2.2
oil producers
6.7
10.0
2.2
non-oil producers
0.1
-2.6
-2.9
non-oil producers
Data sources: WB Africa region SPA country datasheets. Averages are unweighted.
Policy options for oil importing countries

Combination of adjustment and additional financing
– The shock is viewed as permanent and many SSA countries already adjusting to
higher oil prices,

Macroeconomic adjustments
– Combination of macro adjustments


exchange rate policies to facilitate expenditure switching

absorption reduction through domestic demand management
Microeconomic adjustment -- energy pricing policies:
– For African countries – adjustment has been mainly through prices rather than
quantities
– Out of 44 countries, 24 fully or extensively passed through prices
– Partial adjustment in prices in 15 countries
– No adjustment of prices in 5 countries
Policy options for oil importing countries (contd.)

Composition of public expenditures
– Implications for budget allocations as macro. and micro. adjustments are
undertaken

Key questions
– Should the budget subsidize energy prices for the poor? What mechanisms
should be used and how should it be financed?
– What should be the government’s priorities, across programs and within
each priority program? What programs should be maintained and which
should be cut?