Posted on Thursday, 18 June 2015 17:05

Smart thinking in a crisis

By Patrick Smith

Governments should use lower prices to cut fuel subsidies in favour of a targeted approach.


Crisis, what commodity crisis? Such a question is understandable from a banker on Wall Street.

The 50% fall in oil prices in the last six months of 2014, or even the 63% fall in iron ore prices and 38% drop in copper prices over the past three years, do not look threatening if your trade is moving and investing other people's money.

But it is more complex for Africa's finance ministers. The events of last year have wreaked havoc with the budgets of Africa's 11 oil-exporting economies. Partly because of the free-fall in oil prices, Nigeria's new government faces a financial crisis.

In oil-importing countries, especially those with local refineries, lower oil prices will help. But almost all of Africa's economies, which are strongly tied to the export of primary commodities, will take a hit.

The World Bank warns that the commodity super cycle – fuelled by China's urbanisation and industrialisation – is petering out after some 20 years of boom.

According to Francisco Ferreira, the Bank's chief economist for Africa, export income will fall by an average of 18% across the region this year.

Governments should treat the price shock as permanent, advises Ferreira, as Africa's economies are much more vulnerable than other regions to commodity price shifts.

For Antoinette Sayeh, Africa director for the International Monetary Fund, the bigger issue "is the need to make more rapid progress towards economic diversification and structural transformation to ensure strong and durable growth".

The difficulty here is how governments – under tougher financial conditions – will raise the investment they need.

What should be the response?

First, governments should tackle the illicit financial flows – conducted through transfer pricing, tax avoidance and grand corruption in procurement – linked to resource projects. Africa is losing well over $50bn per year from these outflows according to the high-level panel that reported to the African Union in January.

Second, governments must sharpen their public investment and trade policies. As countries face downward pressure on their currencies, their farmers and manufacturers could benefit from more competitive export prices, lower fuel costs and more competition among contractors.

Third, oil and gas producers should use the lower world prices to cut blanket fuel subsidies – which have generally enriched oil traders – in favour of a targeted programme of cash transfers to help the poorest.

Fourth, those energy producers should step up efforts to use those resources for local projects, especially to generate electricity. Richer governments could go further and expand exploration for resources whose prices are more likely to rebound in the near future.

Yet the volatility of commodity prices means governments will try to build in a margin for manoeuvre, even if reserves are much lower – and debt higher – than at the time of the 2008 financial crisis.

There is a final warning on commodities that might also concentrate minds on Wall Street.

Gloomier market analysts argue that forecasts of continuing low prices for copper could presage a wider economic slowdown. ●

Subscriptions Digital EditionSubscriptions PrintEdition









Music & Film



Keep up to date with the latest from our network :


Connect with us