As the world is witnessing the plunge in oil prices to historical lows, amid the outbreak of the coronavirus that has been crippling major economies around the world, Africa’s big oil producers find themselves in an unprecedentedly precarious situation.
Concerns over a price war between Russia and Saudi Arabia were almost put to rest in March, when OPEC and its allies – a 23-country coalition – agreed to reduce their output to 9.7 million barrels a day from May 1, in hope of stabilizing the elementary macro of supply and demand.1 However, the pandemic is keeping populations on lockdown. Therefore, the demand for oil continues to decline, leaving oil exporters without a market to offload the excess of their production.
African countries, whose economies depend heavily on oil production, have been in precarious positions since the beginning of the crisis.
Oil accounts for about 60% of Nigeria’s GDP and around 90% of its total exports. The country was recently recognized as Africa’s largest economy and was tipped to lead its West African counterparts on the path to economic sovereignty through the adoption of a new regional currency. Regrettably, the steep decline in oil prices and the fall in global demand have put Nigeria in a dire fiscal state of rising external debt and a depreciating currency. Instead of being the trailblazer that the other African countries look up to in terms of economic model, Nigeria find itself seeking loans from international organizations, as its oil exports are expected to fall more than $26 billion. On April 30, the IMF reported that it has so
far approved a Rapid Financing Instrument (RFI) of $3.4 billion, repayable in 5 years, to shore up Nigeria’s Health Care sector, as well as secure its jobs and businesses. Despite these efforts, Nigeria’s economic growth is also “expected to contract by about 3.4 percent in 2020, a 6- percentage point drop compared to pre-COVID-19 projections.”2
Another African country, Angola, which is the continent’s second biggest crude-oil exporter, has seen its bonds sink to a record low in March, as the drop in oil prices has left made the country’s economy completely vulnerable to a crisis. Like Nigeria, Angola is also heavily reliant on oil, which account for over 90% of its total exports.
Gabon is in similar positions. The oil industry contributes to 50% of its total revenue and 80% of its exports.
Nigeria, Angola, Gabon and many other African countries that over-depend on oil exports to balance their budgets, have found themselves in unforeseen detrimental situations of halted economic growth and increasing debt.
These dramatic events that have been set in motion due to the collapse of the oil prices, should serve as a learning curve for all African countries with an economic model excessively reliant on foreign markets’ consumption.
These crippling energy-based economies are the best examples that can effectively highlight the urgent need for African countries to diversify their economies. It is obvious that Nigeria, Angola, Gabon, etc. had a major economic boom, when oil prices were high. Their GDP will most likely climb back up, once oil prices improve again. Nevertheless, these countries should seek economic models that balance export needs with local transformation, manufacturing and consumption. Investing in other industries will shield their economies from total handicap, when one single foreign market suffers economic recession.