|
|
| CAN STRUGGLING AFRICA ECONOMIES SURVIVE ESCALATING PRICES? |
8/1/2008 |
|
By: Pamalick Secker:
It is today an open secret that most demonstrations in the West African region are caused by the sky-rocketing prices that hit the region, the continent and the world at large. The escalating oil and rice prices are pushing many African civil servants to the edge. African economies like most others across the globe are certainly feeling the pressure that escalating oil prices are putting on them as these economies have, over time, become increasingly energy-intensive. Over the last two years, the price of oil has risen astronomically. The reasons behind this unprecedented price escalation are incontestably high demand from East Asian countries, especially China whose economy is expanding at a phenomenal rate, the Iraq factor, and disruptions in other major oil-producing countries like Nigeria. In 2004 alone, China’s economy is said to have grown by 15.4 per cent compared to 3.8 per cent for the rest of the world and there are no indications that Chinese demand for oil will decrease or even stagnate in the near future. On the contrary, it is expected to grow and price will continue to rise, making it very difficult for many cash-strapped oil-importing African countries to meet their energy needs. While escalating oil prices represent a unique opportunity for many oil-producing countries, including those in Africa, these upward prices trends are definitely a serious challenge for net oil importers in the continent, as their recent economic progress and development may be rolled back. This situation may result in tighter financial constraints in many oil-importing countries, especially those in East Africa which are still dealing with severe and recurrent droughts which have, unfortunately, reduced their capacity to produce hydro-electricity. High oil prices will exert a heavy toll on the finances of many oil-importing African countries. Increasing oil prices spells real economic danger for these countries as many companies faced with higher energy bills may attempt to cut down on cost and one way of achieving this is to lay off some workers. In the event of such a situation, governments of the affected countries will see their tax bases eroded. Lay-offs in one sector of the economy could have huge and devastating effects on the entire economy and many African countries. Some of these countries are already caught up in the throes of an economic crisis, may have to deal with more complex economic and political situations.
Lower employment prospects and higher inflation rates will obviously lower the purchasing power of
the poor and this will have a ripple-effect on the entire economy. Clearly, higher petroleum cost will increase commuting cost, and in the case of agricultural economies, which many African economies are the cost of getting the harvest to the markets will rise, pushing therefore the cost of food up and making it well beyond the means of the underprivileged who, prior to the escalating oil prices, were already living in very stringent financial circumstances. One other danger that escalating oil prices might pose to many African economies stems from the fact that even development banks such as the Africa Development Bank (ADB), which finances many projects on the continent, will be affected. Firstly, many ongoing thermal power production projects are being implemented on the basis that oil, the main input in those power plants, will be affordable. Higher energy prices will certainly affect a number of other key inputs which affect both the rate of return of existing projects and the choice of future ones. Infrastructure programs will cost more because construction materials are energy-intensive and this will reduce the Bank’s ability to handle many development projects in the continent. This situation is certainly bad news for many struggling African economies which have benefited from projects financed by ADB. The financial injections that ADB-financed projects bring to their economies may be reduced or even saturated if world oil prices remained a huge challenge to the global economy.
The economic outlook for many oil-importing African countries appears to be grim due to increasing oil prices, there is still some hope on the horizon. High energy prices should be viewed by many oil-importing African countries as a signal to reduce heavy reliance on oil. Making use of alternate clean energy resources will be one way oil-importing African countries can adopt to survive the escalating oil prices in the long-run. These countries also need to adopt appropriate macro-economic polices as a means to survive the pressure current oil prices are exerting on their economies. Rather than consider escalating oil prices as a death sentence on their economies, leaders of struggling African economies
should view this situation as a wake-up call for them to seek alternative energy sources that can help sustain their fragile economies. The Lower employment prospects and the higher inflation rate will lower the purchasing power of the poor who have fewer instruments to hedge against the oil price increase. The biggest impact will be through higher price of kerosene which is used for cooking and lighting. The poor will also be affected by higher transportation costs. Clearly, higher petroleum
costs will increase commuting costs and, especially in the case of agricultural economies, the cost of getting the crops to the markets. Governments should resist the temptation to provide subsidies
to offset the high price of energy. Subsidies constitute a serious drain on public finances, especially
if the high price of oil persists. They will have to be financed through higher taxes, or external borrowing which will generate a higher debt burden. Although kerosene is considered an inferior good, it is not clear that subsidizing it is the best means to protect the poor because it is difficult to prevent non-poor from consuming kerosene. Discretionary fiscal response should be limited since it may be difficult to remove it in the future when situation returns to normalcy.
The developed world has hardly covered itself in glory on this matter either. In particular legitimate questions might be asked of Western countries’ commitment to what has become known as the “Washington Consensus”. Part of the reason why a number of African countries are now back on the verge of starvation is that developed nations, through their International Monetary Fund (IMF) conduit, actively encouraged many African governments to cut farming subsidies and focus instead on producing cash crops for export and by so doing, open up their previously closed economies. That the plan has backfired is made obvious by the fact that many countries are now struggling to grow sufficient food to meet basic levels of domestic demand. Whilst the UN falls back on its World Food Programme to raise sufficient funds to feed the starvation zones, what is really required is greater research and development, improved credit facilities and ultimately a “green revolution” similar to that which took place in parts of Asia. This does not imply that the Asian experience is without its own pressure right now. Rising raw material prices, in particular rising food prices, are now causing real hardship and what represents a cause for shoppers in developed economies to grumble is a matter nothing short of life and death for the millions less fortunate around the world. This note considers what many emerging countries are doing and why their actions, far from alleviating the problem, are actually making matters worse. Worried by the global rising cost of food items, especially rice, which has affected Africa negatively with its attendant hardship on the people, the Africa Rice Center (WARDA) has pledged its readiness to assist member states manage the situation through what it called, “a combination of short-term actions reinforced by medium to long-term strategies.” Rice is one of the staple food items in Africa. Ironically, the bulk of it is imported mostly from Asia. As a result of the effect of climate change, most of the world highest producers of rice like Thailand have decided to put on hold, the exportation of the commodity in order to satisfy local needs. Despite several efforts of domestic production of rice, Africa has not been able to meet local market demands, forcing many of the countries in the continent to rely on import. The effect of the temporary stoppage of rice export from Thailand and other Asian countries have led to the high prices of imported rice in most African markets taking it out of the reach of many consumers. Today many African governments like the Gambia are emphasizing on their “back to the land” campaign to maintain food sufficiency. Africa imports more than one-third of the rice traded
in the world.
|
|
|
|
| Comments | Post your comment |
|
|
|
