Africa’s Petrostates Are Imploding – Foreign Policy (blog)

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Africa’s petrostates are crashing hard. A cool $115 in the summer of 2014, a barrel of Brent crude, the international pricing benchmark, now fetches below $40. And having failed to build massive foreign exchange reserves like Saudi Arabia or other Gulf monarchies, African oil exporters are now being forced to grapple with depreciating national currencies, mounting inflation, and deep cuts in government spending.

Some of these states are now dangerously unstable, staring down popular unrest or domestic insurgencies that left unaddressed could set them back years, if not decades, in development terms. The “Africa rising” narrative, built on climbing income levels and an emerging middle class on the continent, is now under strain.

But instead of across-the-board decline, Africa is witnessing a gradual shift in the continental balance of economic power — away from petrostates like Nigeria and Angola and toward less flashy but more diversified economies like Ethiopia and Tanzania. After decades of lavishing attention on the oil-powered economies of West Africa, investors are now flocking to the economies of East Africa, which have demonstrated their resilience to lower commodity prices and challenged outdated perceptions of Africa as resource-dependent and burdened by irredeemably poor governance.

The origins of Africa’s tectonic shift were remote — the shale boom in the United States, a refusal of Saudi Arabia and OPEC countries to cut production, and the economic slowdown in China — but its effects have been profound. Less than two years after it claimed the title of Africa’s largest economy, Nigeria is in an economic tailspin. The euphoria that swept the country after its first-ever democratic transfer of power last year has quickly given way to worries about the plummeting price of oil, which accounts for 70 percent of government revenue.

The new president, Muhammadu Buhari, has been forced to slash spending and seek $3.5 billion in emergency loans from the World Bank and African Development Bank. Economic growth in 2015 dropped to 3 percent — half the level of the previous year — and foreign exchange reserves are quickly running out. Even the president’s much-heralded efforts to weed out corruption are coming up short — in part because there’s no money to fund them, according to Nigeria’s Presidential Advisory Committee on Anti-Corruption.

Even more troubling is what a sagging economy could do to the already fragile security situation in Nigeria. Not only do fewer petrodollars make Buhari’s pledge to wipe out Boko Haram seem even more far-fetched, future belt-tightening could reinvigorate an old insurgency in the restive Niger Delta region. A decade ago, gun-toting militants of the Movement for the Emancipation of the Niger Delta scoured oil-rich creeks on speedboats, sabotaging pipelines and kidnapping oil workers for ransom. At the height of the insurgency, delta militants managed to shut down a quarter of Nigeria’s total oil production. A 2009 amnesty plan offering job training and monthly allowances helped to placate some 30,000 fighters. Oil theft and abductions didn’t fully disappear, but a fragile peace largely held after that.

Now Buhari’s cash-strapped government is phasing out the program. As payments to former militants dwindle and no new development plans are set into motion, the region could easily erupt into violence once again. Widespread unemployment, corruption, and poverty — not to mention grim environmental degradation wrought by the oil industry — amount to an explosive cocktail capable of fueling any new call to arms.

And Nigeria is not the only African petrostate on the brink. The continent’s second largest oil producer, Angola, has also felt the sting of plummeting oil prices. No other petrostate in Africa — perhaps not in the world — benefitted from the dramatic surge in oil prices over the past decade as much as Angola. Emerging from a devastating civil war in 2002, the West African nation watched the price of crude rise more than three-fold at the same time as its production doubled to nearly 2 million barrels per day. Between 2002 and 2014, the country generated a staggering $468 billion from its oil industry.

But the petrodollars were squandered. Pervasive corruption within the ruling party and a construction boom in the capital, Luanda, that ignored the rest of the country did little to develop other sectors of the economy or reduce Angola’s dangerous dependence on oil. When the bottom fell out of the oil market last year, the government was forced to slash its budget by 25 percent. Meanwhile, the loss of thousands of jobs, rising fuel and food costs, and a recent yellow fever outbreak have engendered popular resentment toward the ruling elite.

Faced with plunging economic prospects, the Angolan government has become hypersensitive about any sign of dissent. A Luanda court recently sentenced 17 youths, including popular rapper Luaty Beirao, to multiyear prison terms for allegedly planning to overthrow the president in a reading group on nonviolent resistance. It is a clear indication that the 36-year-old regime has begun to fret that without the record oil earnings, severe inequality and poverty may boil over into popular protest.

Other major oil producers in Africa, like Equatorial Guinea, Gabon, Sudan, and South Sudan, though never regional juggernauts, are now in similarly precarious situations. But their slumping economies have opened up space for a new group of more balanced emerging economies, including Ethiopia and Tanzania, to emerge as leaders on the continent.

Ethiopia is Africa’s second-most populous country after Nigeria. An oil importer, Ethiopia grew at an astonishing rate of nearly 11 percent annually between 2004 and 2014, according to government figures. Technological advancements in its agriculture industry in particular spurred development, helping decrease the number of people living in poverty by 33 percent over the past decade. (By contrast, even with tens of billions of petrodollars pouring into its coffers, Nigeria actually experienced a rise in poverty over the same period.)

Taking its cue from China, Ethiopia made significant investments in infrastructure and created special industrial zones to attract foreign investment as rising wage and production costs push low-skilled manufacturing out of Asia. The governing Ethiopian People’s Revolutionary Democratic Front also mirrors Beijing through its authoritarian one-party rule, epitomized by its sweeping electoral victory last year in which it won every seat in parliament. Despite allegations of human rights abuses by security forces and ongoing protests against the government in the central Oromia region, Ethiopia’s economic and developmental achievements have not been upended.

But authoritarianism is not the only political model in Africa producing positive economic results. Tanzania is another non-oil-driven African economy on the rise. Newly elected Tanzanian President John Magufuli, unlike his counterpart in Angola, José Eduardo dos Santos, commands widespread popularity as a result of his anticorruption drive and thrifty thinking on government spending. (He slashed the salaries of high-level civil servants.) His predecessor, Jakaya Kikwete, oversaw a gradual reduction in poverty during the last decade, accompanied by steady economic growth. Although Tanzania is partially reliant on exports of gold, it is budding construction, communication, and finance sectors that have driven its roughly 7 percent annual GDP growth over the past three years, a pace that is predicted to continue.

The list goes on: Rwanda, Kenya, and Uganda have all gradually built their service and industrial sectors. As members of the East African Community, a regional trade bloc, each of these economies is set to grow by 5 percent or more this year. And many of these countries are sitting on energy resources of their own — resources they are well-positioned to exploit should oil prices rebound in the future. Uganda and Kenya have made significant oil discoveries in the past decade, which will likely come into production by 2020, and Tanzania is exploring and developing substantial new gas reserves. But unlike their counterparts in West Africa, which have produced oil for more than half a century through periods of political instability and war, these East African countries will bring their newfound resources to market in political and security situations that are relatively stable.

As growth in Africa’s petrostates fades, the persistent gains in the more robust economies of East Africa will increasingly attract the attention of multinational corporations and international investors in search of new opportunities. Overall, foreign direct investment in Africa fell by a third in 2015, but it continues to surge into sectors like telecommunications and financial services — and it is East Africa’s more diversified economies that are better positioned to cash in on rising private equity investment in these sectors.

None of this discounts the fact that some sectors in Africa’s petrostates, like the entertainment industry in Nigeria, offer pockets of growth. But it will be East Africa that leads the way. Countries like Ethiopia, Kenya, and Rwanda have transformed into regional powerbrokers and are increasingly becoming key international partners for the United States, the European Union, and China. If oil prices stay where they are, the gradual weakening — and possible implosion — of Africa’s petrostates will shift the center of economic power on the continent from west to east, redefining international perceptions of Africa’s potential and reinvigorating hope for its future in the process.

Image credit: ROBERTO SCHMIDT/AFP/Getty Images

Africa’s Petrostates Are Imploding – Foreign Policy (blog)