As commodity prices have surged over the past five years, sub-Saharan Africa has proved fertile ground for oil and gas finds. The boom has already fuelled what might be described as a sub-Saharan African renaissance.
In such countries as Ghana and Uganda, oil finds, once developed, should transform tiny economies into much bigger beasts. Angola, one of Opec’s newest members, has already attracted attention. But Angola’s oil boom began when it was at a much lower developmental base than where Ghana is today – especially in terms of infrastructure.
Neighbouring countries will benefit from the oil finds. Kenya, for example, will be host to a pipeline from Uganda’s oil fields to the sea. It will be able to use this to revitalize industries such as petroleum refining. One might even draw some parallels with the railway built through Kenya in the 19th century to what was at the time the ultimate goal – Uganda.
That epic venture transformed Kenya, thrusting it into the modern world. But Kenya’s ample payback for this partly uninvited and extremely expensive rail project was ultimately colonization by British settlers, which ended tragically, especially for the Kikuyu, Kenya’s most populous ethnic group.
Today, ambitious plans for the development of East Africa have again been laid. Because of this, the governments of Kenya and Tanzania are looking to international finance in the form of Eurobonds. Such plans, however, are being put together at a time when even much more stable entities finance at significantly higher costs than before.
Borrowers and lenders in sub-Saharan Africa, therefore, must take great care not to take the oil finds and the economic gains of the past five years as a guarantee for a boom in the coming five years. New-found oil fields might well bring increased revenues and foreign investment. But the amount and the timing will be unsure, especially with the oil price falling so dramatically.
Risk aversion to the 2007 Ghanaian Eurobond has risen sharply in recent months. This reflects fears that Ghana’s government, with an election approaching, is betting too much on returns from oil – at a time of intense global uncertainty.
The Seychelles, meanwhile, is already on the verge of becoming Africa’s first sovereign Eurobond defaulter this millennium. As in Ghana, the Seychelles’ main problem is the high price of food and oil – as well as an over-estimation of future export revenues.
But the predicament of the Seychelles should be a timely reminder of the great harm done by over-zealous international financing of governments of small economies. In sub-Saharan Africa, it is now more important than ever that governments and banks borrow and lend bravely but wisely.