1. -0- June 2006 Impact of High Oil Prices on Africa 2 nd Meeting of the Infrastructure Consortium for Africa, Addis Ababa,19-20 June 2006

2. -1- June 2006 I.Evolution of the price of oil II.Expected Impacts III.Policy Implications IV.Conclusion Outline

3. -2- June 2006 Trends in price of crude oil The price of oil is expected to remain high because of Asia’s strong economic performance. Between 1990 and 2003, the demand for oil grew by 7% annually in China and India and by 1.3% in the world.

4. -3- June 2006 Impacts of high oil price on. Growth Inflation Fiscal Balance External financing gap Terms of Trade

5. -4- June 2006 Impact on Growth: Oil exporters key beneficiaries Region 1997-200320042005(e)2006(p)2007(p) Oil-exporting countries4.76.05.56.96.3 Non-oil-exporting countries2.94.74.44.94.8 Source: AEO 2005-06; (e) estimates; (p) projection.

6. -5- June 2006 Considerable variations among the oil producing countries Source: African Economic Outlook 2006 Performance of oil producers (%)

7. -6- June 2006 But some oil importers performed better than expected Sources: African Economic Outlook 2006 Best Performers in 2005 (%)

8. -7- June 2006 Thanks to rising commodity prices and increased production Sources: African Economic Outlook 2006

9. -8- June 2006

10. -9- June 2006

11. -10- June 2006 Inflation Effects...

12. -11- June 2006 Fiscal Balance: Oil importers recording deficits Region 1997- 200320042005e2006p2007p Oil-exporting countries-1.2 1.9 6.4 7.0 5.9 Non oil-exporting countries-3.1-2.6-2.4-2.7 Total-2.2-0.5 2.1 2.3 1.8 Source: AEO 2005-06; (e) estimates; (p) projection.

13. -12- June 2006 Overall fiscal position …

14. -13- June 2006

15. -14- June 2006 External balances are generally good and improving……

16. -15- June 2006 But oil importers adversely affected … Region 1997- 200320042005e2006p2007p Oil-exporting countries 3.2 11.0 15.7 15.8 14.4 Non oil-exporting countries-1.6 -3.7 -5.6 -5.7 -5.8 Total 0.7 3.1 6.8 7.2 6.3

17. -16- June 2006

18. -17- June 2006 Policy implications for net-oil importing countries Fiscal policy and poverty No evidence that subsidizing petroleum is welfare improving Subsidizing – or reducing VAT – on kerosene can soften the blow on the poor. Caution: Long run sustainability of subsidies? Monetary policy Advisable to adopt a non-inflationary monetary policy to avoid hyperinflation and maintain monetary credibility. Capital account management Obtain funds from private markets, bilateral and multilateral sources which are consistent with debt sustainability. High oil prices should be viewed as a signal to use renewable energy: December 2005 AfDB approved a $5.5 million grant for 250 solar-powered boreholes in Madagascar.

19. -18- June 2006 Policy Implications Cont’d Policy Implications Cont’d Technical assistance and donor financial support Establishing a Global Oil Fund? Coordinated action by donors (bilateral, multilateral and emerging) is required.

20. -19- June 2006 Policy implications for oil producing countries Sound and transparent management of the extra oil revenue. Make provision for future generations, e.g. savings fund. Invest in human and physical capital to increase their production possibilities. Avoid the misallocation of resources to preclude the so-called Dutch disease.

21. -20- June 2006 Conclusion Impacts of high oil price differ between net oil importers and oil exporters Appropriate measures are needed to assist net oil importers in the short run, but long term policy measures are required to cope with oil price increases For oil exporters, management and better utilisation of the oil windfall -- key to sustainable growth Role of the donors and development partners crucial

22. -21- June 2006 Thank you for your attention

23. -22- June 2006 Agenda 1Energy access and security and Africa 2Challenges and opportunities in water resource management 3Summing up and close

24. -23- June 2006 Agenda 1Energy access and security and Africa 2Challenges and opportunities in water resource management 3Summing up and close

25. -24- June 2006 Thank you