|Investing in Roads, housing and Water and |
electricity supplies among others
would benefit every one
COMMENTS IN RESPONSE to my article http://eaers.blogspot.com/2012/04/oil-and-gas-wealth-in-east-africa-boon.html or comments on the subject matter is positive that well managed, oil and gas windfall can boost development in east
Africa. Many have suggested ways in which to turn the windfalls into a boon for the region. here is a synthesis of their views
One of the commentators, the President of the Africa Development Bank, AfDB, Donald Kaberuka is poignant. He advised east
to avoid increasing recurrent expenditure and instead use the windfall on
development expenditure. Mr. Kaberuka was speaking in an interview with the
wire service, Reuters www.reuters.com. He
argued that increasing recurrent expenditure, especially through sharp
increases of public sector salaries will lead to high inflation and eventually
Economists and oil industry experts in
Nairobi agree with this view. They argue
that, the public sector is the single largest employer in east Africa. Sharp increases of public sector salaries,
experts argue, will increase domestic demand for goods and services which in
turn lead to high rates of inflation.
This is how it works: currently, there is a given stock of goods and services in the region. This stock ranges from food, to housing to schools and health facilities, to locally manufactured consumer goods, to power plants, oil refineries roads, railroads and similar infrastructure. In the short-run this stock is more or less fixed as it depends on the availability of other factors. To increase this stock will require expansion of production capacity and the infrastructure to produce and distribute the goods and services equitably.
The last two factors require substantial investments and time. For instance a new power generation source could take up to four or five years to come on stream. A new road may take up to four or five years to complete. Training skilled manpower could take up to 20 years. This means that it may take up to five or six years for local suppliers- be they manufacturers, real estate developers or even the government sector to adequately respond to increased domestic demand.
In a situation of sharp wage increases, this time lag will result in high prices for domestic goods and services. That is rapid domestic inflation. High domestic inflation wipes out the benefits of low or zero imported inflation.
Inflation erodes the purchasing power of the citizens, hurting most severely the poorer sections of the population, say experts. Such erosion leads to further demands for wage increases thus adding fuel to the fire.
In this situation, the poorer segments of the population that cannot compensate loss of purchasing power through further wage demands lose out. They thus become disgruntled and this could lead to a rebellion. Oil and gas finds thus become a curse to a country, say the experts, echoing Kaberuka’s sentiments.
A case is point is the conflict between the Sudanese. Both North and
South Sudan depend on oil revenues
to finance more than 80 per cent of the budget.
When Juba seceded in July last year, it
took with it 75 per cent of the oil reserves. That also meant 75 per
cent of oil revenue went with the South.
That immediately plunged
Sudan into a financial crisis since
80 per cent of her revenue came from Oil. That crisis in Khartoum,
including budget deficits, high and rising inflation has forced the strongman,
Omar-El Bashir to launch frequent raids to Juba’s
territory bombing Oil wells. This diversionary tactic won’t last long for
sooner than later, the truth will catch up with him, say analysts in East Africa.
Another example is
where the oil sector has overshadowed other sectors giving rise to inflationary
pressures that erode then citizens' purchasing power. Apart from these two,
Africa’s largest nation, Nigeria
depends on oil revenue to finance 75 per cent of her budget. “That” said, Kaberuka,
“is a mistake other oil producers in Africa
Demand for infrastructure in east
is very high due to robust economic growth of the past decade. The region is
also a free trade area known as the east African common Market. This bloc
brings together Kenya, Uganda, Tanzania,
Rwanda and Burundi. Three
other applications are pending. The regional integration has spawned demand for
intra regional infrastructure such as roads, rail roads, Ports, oil and gas
pipelines, refineries water and waste
disposal infrastructure and power grids.
Therefore say economists, where the oil and gas revenue is to be invested is already clearly defined by local demand. For the marginal segments of the region, investment in water supplies, schools and health facilities and food security are pre-requisites.
Should the oil and gas revenues be invested in these necessary areas, say experts, then oil will be a boon for east