Falling Crude Oil Prices: Silver Lining For Robust Fiscal Measures In Africa?

There is no doubt that oil producing countries are reeling under extreme pressure to reconcile spending with revenues as crude oil prices continue a nose dive; reaching an 11-year low in January 2016. Demand for oil remains low relative to supply on account of a slowing Chinese economy. US gasoline stockpiles grew by 10.6 million barrels at the beginning of January 2016 - the biggest weekly build since May 1993 - and distillate supplies rose by 6.3 million barrels. Iran is expected to increase oil production by another 500,000 barrels daily and could go up to a million barrels, following lifting of sanctions on the country. This throws price expectations very wide; and the implication for this is predictable.

African producers are the worse hit by the oil crush due largely in part to their less diversified economies, over-dependence on oil revenues, lower tax effort, fiscal indiscipline and corruption among others. In spite of the lower benchmark prices of between US$50 to US$60 per barrel used by most of the countries in the 2016 budget, they are now compelled to make difficult fiscal adjustments which are not only going to be unpopular with their people, but also affect their macroeconomic outlook. The question that confronts these governments is simple – Does lower oil price provide a silver lining for introducing tough fiscal measures?

Nigeria, the leader of the pack in its 2016 Budget outlined a number of measures to address some of the challenges that plaque the country amidst the oil crush. For example, the government expressed its plan to prioritize agriculture as a way to diversify the economy away from oil, widen the tax net, and remove fuel subsidies. Ghana has already imposed new taxes and levies on petroleum products and electricity, and withdrew subsidies from petroleum. Other producers like Angola, Equatorial Guinea, and Gabon are still faced with policy dilemmas whilst their economies are suffocating from the oil squeeze. There is cause to believe that some of the fiscal measures are unpopular with the people. Ghanaian Labour Unions have already held a march to protest the new taxes and levies on petroleum, whilst making demands for increase in salaries.

The Africa Centre for Energy Policy (ACEP) was established in 2010 to contribute to development of alternative and innovative policy interventions through high-quality research, analysis and advocacy in the energy and extractives sector in Africa.

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