Commodity price crash hits Africa’s fortunes

Africa’s impressive average economic growth of around 5 per cent over the 14 years to 2014 saw economists toasting to the continent’s development potential PHOTO: COURTESY

Just three years ago, most of the world’s fastest-growing economies were in Africa.

Among them were Angola, Chad, Ethiopia, Mozambique, Nigeria, Rwanda and Sierra Leone. A middle class was emerging, led by young, tech-savvy entrepreneurs who bought flashy cars, new houses and the latest smartphones.

Africa’s impressive average economic growth of around 5 per cent over the 14 years to 2014 saw economists toasting to the continent’s development potential.

Buoyed primarily by high commodity prices and marginal exposure to global financial markets, the African economy as a whole was largely undisturbed by the 2009 global financial crisis. Steady flows of foreign direct investment assured a sustainable growth trajectory.

During that period, China, India, Brazil and European countries scrambled for a slice of Africa’s investment opportunities.

The Brookings Institution, a Washington DC-based think tank, stated in 2013 that it was a mistake not to “leverage the potential that Africa presents as a market for American goods.”

Even the Economist, a usually restrained UK publication, splashed an ‘Africa rising’ title on its December 11, 2011 cover, which depicted a silhouette of a child flying a kite of an African map.

DIRE STRAITS

But a precipitous crash in commodity prices is changing that upbeat African narrative. Already, Angola, Liberia, Mozambique, Nigeria, Sierra Leone and Uganda – the African countries that depend most heavily on commodities, such as oil, gold, diamonds, bauxite, rutile, timber and copper – are in dire straits.

Economists also attribute this sudden reversal of fortune to other factors, such as volatile global financial markets, weaknesses in global growth, particularly in China, Brazil and India, rising borrowing costs and severe infrastructure constraints (particularly of electricity supply) in many countries.

But it is the plunge in commodity prices that has dealt the most devastating blow.

The price of oil plummeted from $100 (Sh10,000 at current rates) a barrel in 2013 to $26 (Sh2,600) a barrel in February 2016, and then back up to around $50 (Sh5,000) currently.

Without sufficient oil earnings, Africa’s oil producers, particularly Nigeria, Angola, Equatorial Guinea, Libya, Algeria and Egypt, face serious economic head winds.

For Nigeria and Angola, Africa’s largest producers, oil proceeds account for more than 90 per cent of exports and more than 70 per cent of the national budget.

With low per-barrel prices, economic growth in all of Africa’s oil-exporting countries fell from an average of 5.4 per cent in 2014 to an average of 2.9 per cent this year.

Copper-producing countries have not fared any better as prices dropped to their lowest level since 1998. The World Bank reports that in February 2016, “copper prices declined by almost a third from their peak in February 2011 to $4,595 [Sh459,500] per tonne.”

Tsidi Tsikata, who led an International Monetary Fund (IMF) assessment mission to Zambia in March this year, has issued a bleak report: “The Zambian economy is under intense pressure,” he warns, calling for action to regain macroeconomic stability.

Losing money

More than half of Zambia’s copper producers are losing money, and big players in the country have closed shop, with thousands losing their jobs.

The Zambian economy is currently growing at 3 per cent, down from 7 per cent in 2014.

Although some analysts see a rebound in the Chinese economy, in recent years China, which buys up to 40 per cent of copper worldwide, has not been able to afford huge purchases due to an economic slowdown.

Sierra Leone is grappling with falling prices of iron ore, even as it recovers from the Ebola epidemic. African Minerals, a London-registered mines company, used to manage the iron ore mines in Tonkolili, northern Sierra Leone, which are worth over $1 billion (Sh100 billion). Tonkolili has the biggest iron ore deposit in Africa and the third largest in the world.

The fall in commodity prices represents a significant shock for the sub-Saharan African region, as fuels, ore and metals account for more than 60 per cent of the region’s exports.

In 2011, iron ore sold for $191 (Sh19,100) per tonne, but it fell to $45 (Sh4,500) per tonne in June 2016. Iron ore is Sierra Leone’s economic lifeline.

“The iron ore price decline affected macro-financial stability and reversed the country’s remarkable positive growth trajectory,” said the African Development Bank.

Ordinary citizens feel the impact in currency depreciation and rising inflation. The value of Nigeria’s naira fell from 150 to 450 naira to the dollar between January 2014 and October 2016. The Sierra Leonean currency faced the same fate, declining to 6,500 leones to the dollar, from 5,000 leones a year ago.

Nigeria’s currency depreciation means it has lost the right to call itself Africa’s largest economy.

After rebasing (a process of adopting new prices to measure a country’s GDP output) in 2014, the Nigerian economy was reported to be worth $488 billion (Sh48.8 trillion).

With the naira’s depreciation due to a decline in export earnings, the economy has shrunk to $296 billion (Sh29.6 trillion), according to data released in August by the IMF.

Skyrocketing prices of goods and services without a commensurate increase in earnings could affect food prices and stoke social unrest across Africa, experts fear.

Commodity-dependent countries are faced with huge budget deficits, which is why Angola, Ghana and Zambia have received or are intensely negotiating IMF bailout loans.

Nigeria is overhauling its tax system to increase revenues, aggressively fighting corruption and recovering stolen money stashed in foreign banks, and at the same time intends to borrow money from China and local banks. The country wants to sell off some of its national assets, including energy and oil corporations.

Last March, Sierra Leone announced a 30 per cent cut in recurrent government expenditures, suspended financing for capital projects and the purchase of official furniture, eliminated travel allowances for government officials and began implementing a 50 per cent cut in vehicle maintenance allowance, among other measures.

However, Herbert M’cleod, a leading Sierra Leonean economist, says, “It is bad policies and bad management that have brought us here,” and recommends using proceeds from mining to boost jobs creation and power supply and to construct roads, among other things.

The Ugandan government has scrapped gasoline and diesel subsidies, suspended construction of new roads, banned non-essential foreign travels and stopped the launch of a new airline. Zambia is cutting subsidies on electricity and agricultural inputs.

South Africa, whose largest exports are iron ore, coal, gold and other minerals, is also affected by the fall in commodity prices, and joins Liberia, Gambia and other countries implementing various austerity measures.

Good news

The Economic Commission for Africa (ECA) has over the years been encouraging countries to industrialise by diversifying away from commodities and, at the least, to add value to their commodities.

As oil-exporting countries deal with economic anxieties, low oil prices are good news for oil importers like Kenya, Rwanda and Tanzania. It means these countries spend less and can redirect excess funds into critically needed infrastructure, such as roads, bridges and energy. Robust growth in these economies will continue, forecasts the World Bank.

Going forward, mitigating efforts will require good financial management and increases in revenue generation locally, experts say.

There may yet be a silver lining: experts expect the impact of current belt-tightening policies in Africa to kick in in the medium to long term, providing a cushion for national budgets.

Also, countries will learn the lessons of commodity price movements and will be more inclined to continue diversifying their economies. — Africa Renewal