Monday, 2 April 2012

Oil and Gas wealth in east Africa? A boon or bane?


An offshore rig: drwaing out the family jewels in Tanzania

SINCE CRUDE OIL WAS discovered in Uganda in 2006, the school of pessimists in east Africa has grown by leaps and jumps. This school pre-supposes that the discovery of Oil in east Africa will be a bane “a curse” as they put it. Consequently, the pessimists opine, they have to set up watchdogs to ensure that east Africa does not slide into anarchy due to the discovery of oil. As the discovery of oil and natural gas are becoming common place in the region, we expect more of the “prophets of doom” to come on stream.

Mine is not to discuss the merits or otherwise of this school. Mine is to discuss the conditions on the ground in the region and whether they breed the seeds for future chaos or not.

My thesis is: Oil and natural gas finds are a boon for the region and also the world. It is this paper’s thesis that the conditions on the ground in east Africa favour a boon from oil rather than a bane. The Political, economic, and social conditions favour prudent management of family jewels in east Africa.

Let’s start with the market conditions in the world. There are indications that there is enough supply of crude oil to meet world demand. However, there is a strange phenomenon going on in the market, Crude prices are high, suggesting that supply does not meet demand.  This means that any new oil finds will find a ready market. Even east Africa and the neighbouring countries are a big enough market oil found in the region

But there is enough crude to meet world demand therefore the price per barrel should be lower. Dr Darmawan Prasodjo, PhD - writing in the petronomist  www.petronomist.com says that the high crude price reflects a fear premium arising from fear of instability in the middle East. He estimates this premium to be in the region of US$27 per barrel. The implication here is; crude oil production in east Africa, depending on the quantity produced could have a stabilising effect on the world market prices. That is a potential benefit to the world.


Back to east Africa. The region has enjoyed robust economic growth over the last decade averaging 4.5 percent. This growth was driven by sectors as agriculture, tourism, trade, manufacturing and services. Generally revenue collection has been on the rise reducing the region’s dependence on donors.  Such economic performance suggests that economic drivers in east Africa are diverse. Only Newly independent South Sudan depends on oil to fiancĂ© nearly 80 percent of her budget.

This suggests that Oil revenue, whenever it comes, would not only supplement existing sources of public finance but also bouy economic growth. Oil, whenever it is found will be an additional cog in the wheel which will probably reduce the planner’s nightmare of raising resources to meet public needs.

Already, there are indications that the governments in the region are thinking ahead. Tanzania is considering a law that will set up a sovereign wealth fund to absorb additional Natural gas revenues. Kenya has also indicated that it will set up a separate account to collect Turkana oil revenues. That is an indication that the region is thinking ahead how to manage Oil revenues.
Such moves give confidence that additional revenue from resources will be prudently managed. There is no reason to belief that Oil and LNG revenues will be mismanaged since the same people managing our meagre resources will be the same ones managing additional resources.

Assuming prudent management, east Africa should start with eliminating foreign debt. As at the end of 2010, foreign  in east Africa stood at about US$21 billion broken down as follows: Kenya $6.2  bn  www.centralbank.go.ke; Tanzania $10.011 billion www.bot-tz.org and Uganda $4.6 billion www.finance.ug

In the last decade prudent management of our meagre revenue has seen east Africa reduce donor dependency significantly. Tanzania has already passed the 50 per cent mark and so has Uganda. In Kenya, donor dependency, especially on budget support has been reduced to a paltry six per cent of US$ 13 billion budget-the largest budget in the region. This trend has also witnessed faster completion of development projects because donor funding is a major culprit in project delays and associated cost-overruns.

Another yoke that prudent management of oil resources will eliminate or substantially reduce is trade deficits. Country reports by the respective central banks show that by the end of last year overall balance of payments deficit stood at US$5.1 billion. Tanzania’s BOP position was the worst in at US$4.3 billion. Uganda was second at US$686.3 million and Kenya was third at US$144 million. Trade deficits were worsened by the rapid rise in Crude oil prices. 

Consequently the discovery of LNG and Crude oil in east Africa will shave off a large chunk off the regions BOP deficits. Deficits will not be entirely eliminated considering that the region has to import capital goods for its development. However, they could be significantly reduced.

The local currencies will also gain from increased accumulation of foreign exchange from Oil and LNG exports. Currently the local currencies-the shilling- weakens with every rise in the price of crude for it increases demand for foreign currencies to buy crude oil.  Crude oil exports have the opposite effect on domestic currencies. Further a significant driver of domestic inflation worldwide is the price of crude. East Africa is not an exception. Crude exports have an opposite effect. So once crude oil exports begin, inflation caused by high crude prices will be contained.

In the meantime, oil discoveries will spawn investment into the sector that will begin to filter into the general economy even before the first barrel is exported.  There will be investment in downstream, mid-stream and upstream infrastructure. See http://eaers.blogspot.com/2012/03/eastern-africa-coast-emerging-fossil_28.html. This will create local employment and increase consumption of local goods.

 The last decade of high commodity prices has resulted in rapid growth of the GDP in east Africa. It is expected that crude oil exports will boost the already robust economies and hasten the pace of development.  Such a robust growth has to some extend liberated east Africa from the clutches of so-called donors. Oil and LNG finds and exports would further enhance this independence by increasing the cash flows so that government can respond to public development needs with a degree of certainty.



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