-1-June 2006

Impact of High Oil Prices on AfricaImpact of High Oil Prices on Africa

22ndnd Meeting of the Infrastructure Consortium for Africa, Meeting of the Infrastructure Consortium for Africa, Addis Ababa,19-20 June 2006Addis Ababa,19-20 June 2006

-2-June 2006

I. Evolution of the price of oil

II. Expected Impacts

III. Policy Implications

IV. Conclusion

OutlineOutline

-3-June 2006

Trends in price of crude oilTrends in price of crude oil

Monthly Average Price (US$ per barrel)

0

10

20

30

40

50

60

70$ p

er

barr

el

• 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-June 2006

Impacts of high oil price onImpacts of high oil price on

.

Growth

Inflation

Fiscal Balance

External financing gap

Terms of Trade

-5-June 2006

Impact on Growth: Oil exporters key Impact on Growth: Oil exporters key beneficiariesbeneficiaries

Region 1997-2003 2004 2005(e) 2006(p) 2007(p)

Oil-exporting countries 4.7 6.0 5.5 6.9 6.3

Non-oil-exporting countries 2.9 4.7 4.4 4.9 4.8

Source: AEO 2005-06; (e) estimates; (p) projection.

-6-June 2006

Considerable variations among the oil Considerable variations among the oil producing countries producing countries

3

4

5

6

7

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Real G

DP G

row

th

Oil Exporting Countries Total Africa

0 5 10 15 20

GabonCameroon

TunisiaLibya

NigeriaEgypt

AlgeriaChad

Equat. GuineaSudanCongoAngola

Real GDP Growth 2005Source: African Economic Outlook 2006Source: African Economic Outlook 2006

Performance of oil producers

(%)

(%)

-7-June 2006

But some oil importers performed better But some oil importers performed better than expectedthan expected

2

2.5

3

3.5

4

4.5

5

2000

2001

2002

2003

2004

2005

2006

2007

Oil Importing Countries

0 5 10

Oil importersMadagascar

ZambiaKenya

South AfricaSenegal

MaliBurkina FasoOil exporters

UgandaGhana

EthiopiaTanzania

Mozambique

Real GDP Growth 2005

Sources: African Economic Outlook 2006Sources: African Economic Outlook 2006

Best Performers in 2005 (%)

(%)

-8-June 2006

TThanks to rising commodity prices and hanks to rising commodity prices and increased productionincreased production

40

80

120

160

200

240

280

Petroleum Gold Copper Aluminium

Sources: African Economic Outlook 2006Sources: African Economic Outlook 2006

-9-June 2006

Impact of Oil Price Increase on Inflation in 2005

0

1

2

3

4E

ritr

ea

Tunis

iaM

ozam

biq

ue

Uganda

Centr

al A

fric

an R

ep.

Seychelle

sB

enin

Rw

anda

South

Afr

ica

Guin

ea-B

issau

Lesoth

oC

ape V

erd

eN

iger

Guin

ea

Burk

ina F

aso

Eth

iopia

Zam

bia

Tanzania

Senegal

Maurita

nia

Mala

wi

Zim

babw

eB

ots

wana

Gam

bia

, T

he

Togo

São T

om

é &

Com

oro

sM

adagascar

Mali

Moro

cco

Nam

ibia

Djib

outi

Sie

rra L

eone

Kenya

Ghana

Buru

ndi

Mauritiu

sS

wazila

nd

Inc

rea

se

in n

fla

tio

n (

in p

erc

en

tag

e p

oin

ts)

-10-June 2006

Impact of Oil Price Increase on Inflation in 2005(for net oil exporting countries, based on shares of oil in GDP)

0

1

2

3

Equato

rial G

uin

ea

Chad

Congo, D

em

. R

ep. of

Côte

d'Iv

oire

Cam

ero

on

Gabon

Congo, R

epublic

of

Sudan

Angola

Alg

eria

Nig

eria

Egypt

Lib

ya

Incre

ase in

In

flati

on

(in

perc

en

tag

e p

oin

ts)

-11-June 2006

Inflation Effects ...Inflation Effects ...

Africa: Inflation (Consumer Price Index, Percent) - 1997-2007

6.5

7.37.5

9.79.5

12.0

10.37.9

10.7 11.2

8.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Years

Perc

ent

-12-June 2006

Fiscal Balance: Fiscal Balance: Oil importers recording deficitsOil importers recording deficits

Region 1997-2003 2004 2005e 2006p 2007p

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 -2.7

Total -2.2 -0.5 2.1 2.3 1.8

Source: AEO 2005-06; (e) estimates; (p) projection.

-13-June 2006

Overall fiscal position … Overall fiscal position …

Africa: Fiscal Balance (As % of GDP) - 1997-2007

-2.0

-3.0

-0.2

-2.5-1.9

-0.5

1.8

-3.3

-2.4

2.1

2.3

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Years

Perc

ent

-14-June 2006

Impact of Oil Price Increase on 2005 Financing Gap

0.00

0.75

1.50

2.25

3.00E

ritr

ea

Tunis

iaM

ozam

biq

ue

Uganda

Centr

al A

fric

an R

ep.

Seychelle

sB

enin

Rw

anda

South

Afr

ica

Guin

ea-B

issau

Lesoth

oC

ape V

erd

eN

iger

Guin

ea

Burk

ina F

aso

Eth

iopia

Zam

bia

Tanzania

Senegal

Mauritiu

sM

ala

wi

Zim

babw

eB

ots

wana

Gam

bia

, T

he

Togo

São T

om

é &

Com

oro

sM

adagascar

Mali

Moro

cco

Nam

ibia

Djib

outi

Sie

rra L

eone

Kenya

Ghana

Buru

ndi

Maurita

nia

Sw

azila

nd

Fin

an

cin

g g

ap

in %

of

GD

P

-15-June 2006

External balances are generally good External balances are generally good and improving……and improving……

Africa: Trade Balance (As % of GDP) - 1997-2007

0.0

-1.2

3.53.1

4.6

-2.3

1.6

5.0

5.2

1.22.3

-3.0-2.0-1.00.01.02.03.04.05.06.0

Years

Perc

ent

-16-June 2006

But oil importers adversely affected …But oil importers adversely affected …

Region 1997-2003 2004 2005e 2006p 2007p

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-June 2006

Impact of Oil Price Increase on 2005 Terms of Trade

0.0

2.5

5.0

7.5

10.0E

ritr

ea

Seychelle

sT

unis

iaLesoth

oM

ozam

biq

ue

Guin

ea-B

issau

Cape V

erd

eS

ão T

om

é &

Uganda

Rw

anda

Togo

Mauritiu

sS

outh

Afr

ica

Benin

Djib

outi

Gam

bia

, T

he

Sw

azila

nd

Mala

wi

Eth

iopia

Maurita

nia

Centr

al A

fric

an R

ep.

Zam

bia

Senegal

Nig

er

Guin

ea

Nam

ibia

Madagascar

Ghana

Moro

cco

Tanzania

Sie

rra L

eone

Burk

ina F

aso

Mali

Bots

wana

Buru

ndi

Com

oro

sK

enya

Zim

babw

e

Pe

rce

nta

ge

de

teri

ora

tio

n o

f T

oT

-18-June 2006

Policy implications for net-oil importing Policy implications for net-oil importing countriescountries

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-June 2006

Policy Implications Cont’dPolicy 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-June 2006

Policy implications for oil producing Policy implications for oil producing countriescountries

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-June 2006

ConclusionConclusion

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-June 2006

Thank you for your attention

-23-June 2006

Agenda

1 Energy access and security and Africa

2 Challenges and opportunities in water resource management

3 Summing up and close

-24-June 2006

Agenda

1 Energy access and security and Africa

2 Challenges and opportunities in water resource management

3 Summing up and close

-25-June 2006

Thank you