The International Monetary Fund (IMF), has emphasised the need for extractive industry dependent nations to focus on structural reforms to support the diversification of the economies away from the commodities.
This, it noted, would put the onus on better mobilising domestic revenues, increasing the quality of public investment, and improving the business climate to promote the development of the private sector and diversify the export base beyond commodities.
In a paper titled: “Weathering the Commodity Price Slump”, IMF said Nigeria and the Republic of Congo, the largest and the fourth largest oil exporters in sub-Saharan Africa, respectively, have experienced highly volatile terms of trade. According to IMF, as in the case of Nigeria, the steep fall in oil prices since mid-2014, has resulted in pronounced declines in fiscal and external buffers in the Republic of Congo, and caused economic growth to slow.
It stated that many sub-Saharan African countries’ dependence on extractive commodity exports has increased in recent decades, with about half of the region’s countries now considered net commodity exporters.
IMF noted that so long as commodity prices continued rising from the turn of the century onward, this proved a boom in terms of higher foreign exchange earnings, fiscal revenues, and foreign direct investment inflows— helping support the very strong growth momentum at the time.
He said that the generalised decline in commodities prices, first with metal prices starting in 2011, and oil prices since mid-2014, has triggered sizable deteriorations in the terms of trade for many of these commodity exporters.
“But policies have a strong role to play to help those countries weather the commodity price slump taking into account the expected persistence of the shock. For countries that are not part of a monetary union, exchange rate flexibility coupled with supportive policies should be the first line of defense. In the face of a large permanent commodity terms-of- trade shock implying durably reduced fiscal revenue from the extractive sector, countries have no choice but to undertake fiscal adjustment to close macro-economic imbalances.
Fiscal and external buffers can and are being used where available to smooth the pace of the adjustment, but as these diminish, fiscal deficits can become unsustainably large and balance of payments pressures can force disorderly adjustments.
Fiscal adjustment efforts should mobilise revenues outside extractive sectors, as well as focus on streamlining recurrent spending to preserve growth-friendly capital investments.”
He continued: “In addition to gradually rebuilding policy buffers and persevering with efforts to strengthen policies as commodity prices recover, efforts should focus on structural reforms to support the diversification of the economies away from commodities. This puts the onus on better mobilising domestic revenues, increasing the quality of public investment, and improving the business climate to promote the development of the private sector and diversify the export base beyond commodities.”