Falling oil prices further throws African economies into turmoil

The prices of crude oil dropped below $27 for the first time in 13 years on Thursday, sending jitters across the world, as markets were sent tumbling. But it wasn’t just equity markets that were hit. The budgets of oil exporting nations, which include African countries, also tumbled with oil. Indeed, these countries are now faced with situations in which the price of crude oil has fallen as much as 40 percent below the prices their budgets were calculated upon.

Finance ministers in these affected Africa countries, would no doubt be having sleepless nights as their revenue projections are poised to suffer considerably. These might send many of them seeking loans from multilateral institutions to balance their budgets, further raising their escalating debt profile.

Nigeria’s 2016 budget, for instance, which is being debated by its parliament is already in turmoil. And this is not due to partisan politics but to falling oil prices.  The budget, which would be considerably funded by oil receipts, is based on a benchmark price of $38 per barrel and a production estimate of 2.2 million barrels per day.

Oil price benchmark

The $30.6 billion budget has a revenue projection of $19.4 billion and deficit spending of $11.2 billion. This deficit constitutes 37 percent of the budget and 2.16 percent of the GDP. President Muhammadu Buhari, in his speech to the nation’s national assembly in December, assured that the deficit would be reduced.

 

“The deficit which is equivalent to 2.16 percent of Nigeria’s GDP, will take our overall debt profile to 14 percent of our GDP. This remains well within acceptable fiscal limits. Our deficit will be financed by a combination of domestic borrowing of N984 billion ($4.9 billion), and foreign borrowing of N900 billion ($4.5 billion) totaling N1.84 trillion ($9.2 billion). Over the medium term, we expect to increase revenues and reduce overheads, to bring the fiscal deficit down to 1.3 percent of GDP by 2018,” he said

Buhari’s projection of reduced fiscal deficit, however, seems very unlikely, since oil price has fallen below the budget benchmark by 28 percent. His government is faced with the prospect of borrowing more money, which would raise the deficit ratio further and crowd out the private sector from the credit market. The other way is for his administration to whittle down spending risking economic slowdown and social unrest.

The situation in Algeria, Africa’s fourth largest economy is not far from that of Nigeria. Its 2016 budget provides a total expenditure of $79 billion and expects revenue of $43 billion. Hence it has a deficit of $36 billion, representing 46 percent of the budget. The budget, however, forecast an inflation rate of 4 percent, a growth rate of 4.6 percent excluding hydrocarbons and is based on an oil benchmark price of $37 per barrel. This shows that oil price has fallen below the budget benchmark by 27 percent. This would of course affect the country’s revenue projection forcing it to either borrow more or cut spending.

Angola, Africa’s second biggest oil exporter, is faced with a wider difference between the budget benchmark and the actual price of crude oil. Its 2016 budget of $48 billion is based on an average oil price of $45 a barrel and daily production of 1.8 million. Compared with the actual price of $27 per barrel, this reveals a fall of about 40 percent.

Egypt and Libya, two other major oil producers are poised to suffer revenue losses though they are yet to draw up a new budget due to their accounting years.

Even so, experts foresee lower growth for these oil dependent economies and a worsened balance of payment.  The currencies of these countries are also expected to depreciate against the dollar.

With oil predicted to be heading to $20 per barrel, there seems to be tougher days ahead for African economies.