Savings from Oil Revenues Could Help African Producers Manage Price Swings

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By our Correspondent

Confirmed reports reaching us say that oil buffers will insure against volatile crude prices and lower debt risks among African countries producing crude oil.

Thus, oil exporters in sub-Saharan Africa have been urged to target buffers of around 5 to 10 percent of gross domestic product to manage large swings in oil prices. For many countries, this means they will need to maintain annual fiscal surpluses up to 1 percent per annum over a 10-year period.

And as noted in our latest Regional Economic Outlook, oil prices have fluctuated from lows of $23 per barrel to a peak of $120 over the last two years, resulting in highly uncertain revenues in oil-dependent economies.

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However, most oil exporters in the region haven’t accumulated enough savings to insure against unpredictable oil price changes. In fact, sovereign wealth funds in sub-Saharan Africa hold assets of just 1.8 percent of gross domestic product—compared to 72 percent in the Middle East and North Africa—forcing countries to borrow or draw down financial assets when oil prices fall.

Thus, as a result, in the decade through 2020, the region’s oil producers have grown over 2 percentage points slower per year than non-resource intensive countries. Debt service costs have also been almost twice as high than in other sub-Saharan African countries.

Hence, as countries transition to low-carbon energy sources, oil revenues could sharply decline. By 2030, oil revenues in the region could fall by as much as a quarter and by 2050, by half. So, building buffers now would help the region’s oil exporters navigate the transition toward clean energy while managing oil price fluctuations.

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