African Development Bank president warns new oil producers on resource curse

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Kanika Saigal
Published on:

Kenya, Mozambique and Tanzania – new African producers – should not be complacent on Dutch-disease risks, warns Donald Kaberuka, president of the African Development Bank and respected economist.

Oil and gas discoveries are a fiscal boon for new producers, but governments should be vigilante on the risk of imbalances and reform-inertia, warns Kaberuka in an interview with Euromoney during a visit to London.

“Experience shows that when countries discover this source wealth, immediately Dutch disease sets in and there is an effect on non-tradables and there is an effect on agriculture as labour moves to these extractive industries,” he says.

“There are cases that, in spite of exporting 200 million barrels of oil per day, in some countries the number of people in poverty is still as high as 60%. Why? Because agriculture is destroyed, small jobs have been destroyed and the country is living off rent.”

Kaberuka adds: “So my advice to Mozambique, Kenya, Tanzania, all of these countries that are discovering oil, would be to watch out. Look at new ways to manage these resources. Take care of agriculture and jobs away from this sector, and make sure to diversify your economy.”

And new discoveries of oil and gas in Africa will not help with diversification of the economy, says Kaberuka. On the contrary, it is a challenge to diversification.

“In the past, when oil and gas hubs in Africa have been discovered, agriculture was the first to go and all resources were pumped into one sector,” he says. “These countries need to make sure to avoid this.”

Kaberuka’s warning comes when global commodity prices have weakened and rebalancing in China towards domestic consumption has put downwards pressure on some African countries reliant on natural-resource exports for revenues.

 
Source: Reuters 
Ghana is one country showing the strain, with a currency in free fall and a widening trade deficit as commodity prices, including gold, decline.

AngloGold Ashanti, the world’s third-largest gold producer, is considering closing its Obuasi gold mine in Ghana for two years to restructure the mine, as running costs exceed profits. Last year, costs to produce one ounce of gold from the mine reached $1,560 in the second quarter – around 23% higher than the price of bullion.

Analysts point out that, although diversification of revenue base is essential to sustainable growth, more important is good governance and due diligence in managing economic output from natural resources and other sectors. Indeed, diversification will not work if the resource sector shrinks in comparison to others. All sectors need to grow in tandem.

However, two indications that Africa on average is moving towards a more diversified economy is the increase in intra-regional trade and an increase in infrastructure development – both of which are on the up. For example, although modest, trade between African countries rose from $45.9 billion in 1995 to $130.1 billion in 2011.

“Key to remember is that Africa is not just a commodities story,” says Kaberuka. “The idea that economic growth in Africa is commodity linked is not the case. The most you can say about it is that it’s part of the story.”

However, even with the apparent pressure, Kaberuka is quick to highlight that the commodities super-cycle is not over, saying: “$100 per barrel of oil is not low, especially when you think historically prices have dropped to $20 per barrel. It’s the same story for copper. Commodity prices may be weakening, but historically prices are still strong.”