Higher Oil Prices and Africa’s Growth Prospects John Page The World Bank January 2006

The current oil shock – a cyclical upturn  The current rise in oil prices started in 1999  In real terms, its magnitude is now approaching the previous peak in Data sources: World Bank DECPG Price data.

Offsetting factors (1) – currency appreciation  Relative to a basket of currencies (and except recently), the dollar has depreciated by 15 to 18% since 2002  CFAF, rand have been appreciating. The US dollar exchange rate

Offsetting factors (2) – favorable terms of trade  The index of oil to non-oil commodity prices has been favorable from 2001 to early  The current increase in the relative price index is still about half of the oil shock in Data sources: World Bank DECPG commodity price data.

Offsetting factors (3) – increased aid flows Data sources: World Bank GDF and WBI database.

The overall terms of trade impact…  The income impact in is half of the 1999 shock  But cumulatively, the total effect on income is -2.3% of GDP  Still a real and permanent shock Terms-of-Trade Impacts of Commodity Price Changes Cumulative price change Oil Agricultural products Metals and minerals Manufactures Total terms of trade effect (% of GDP) Oil importers Low and middle income Low income Sub-Saharan Africa South Asia Highly indebted poor countries

Growth has been more robust  Growth in SSA during was 4.4% p.a. (versus 3% in )  13 countries grew strongly (greater than 6% p.a.), averaging 9.2% (versus 4.1% in )  16 countries grew moderately (between 3 to 6% p.a.), averaging 4.3% (4.0% in )  11 countries grew slowly (less than 3% p.a.), averaging 2.2% (1.5% in )  The 4 countries whose economies shrank in (Cote D’Ivoire, Seychelles, CAR, Zimbabwe) averaged -4.7 p.a. (versus 0.1% growth in ). However, their poor performance was attributable to non-oil related problems.

Outlook for Sub-Saharan Africa  To date, the economic impact of oil prices has been muted…  Growth will only decline slightly in 2005 and will recover in 2006  Inflation (lowest in 2 decades in 2004) has increased in 2005 but is expected to decline in 2006  The concern is that TOT may deteriorate further if non-oil commodity prices ease (Annual growth, in percent) Real GDP oil producers non-oil producers Inflation (CPI) oil producers non-oil producers Terms of trade oil producers non-oil producers Data sources: WB Africa region SPA country datasheets. Averages are unweighted.

Policy options for oil importing countries  Combination of adjustment and additional financing –The shock is viewed as permanent and many SSA countries already adjusting to higher oil prices,  Macroeconomic adjustments –Combination of macro adjustments  exchange rate policies to facilitate expenditure switching  absorption reduction through domestic demand management  Microeconomic adjustment -- energy pricing policies: –For African countries – adjustment has been mainly through prices rather than quantities –Out of 44 countries, 24 fully or extensively passed through prices –Partial adjustment in prices in 15 countries –No adjustment of prices in 5 countries

Policy options for oil importing countries (contd.)  Composition of public expenditures –Implications for budget allocations as macro. and micro. adjustments are undertaken   Key questions – –Should the budget subsidize energy prices for the poor? What mechanisms should be used and how should it be financed? – –What should be the government’s priorities, across programs and within each priority program? What programs should be maintained and which should be cut?