HomeIndustry SectorsFinance and PolicyFlagging energy commodity prices are dragging down African economies

Flagging energy commodity prices are dragging down African economies

Energy commodity prices are not expected to return to pre-COVID-19 levels any time soon, says the World Bank. This is negatively affecting African economies.

While metal and agricultural commodities have recouped losses caused by the COVID-19 pandemic, energy prices are expected to stabilise below pre-pandemic levels next year, according to the World Bank’s semi-annual Commodity Markets Outlook report.

Oil prices fell dramatically in the early stages of the pandemic as lockdowns across the globe led to a drastic decrease in travel of all kinds. The price of oil has only partially regained pre-pandemic price levels while agriculture prices remained relatively unaffected by the pandemic. The number of people at risk of food insecurity though, has risen as a result of the broader effects of the global recession.

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Ayhan Kose, World Bank acting vice president for equitable growth, finance & institutions and director for the Prospects Group: “The impact of COVID-19 on commodities has been uneven, and could have lasting effects for energy markets. When declines in commodity prices are short-lived, policy stimulus can buffer their impact.”

“However, when prices remain depressed for an extended period, policymakers need to find solutions so their economies can adjust smoothly to a new normal. Because of COVID-19, the new normal for oil-exporting emerging and developing economies arrived earlier. In the post-COVID world, these countries need to be more aggressive in implementing policies to reduce their reliance on oil revenues,” said Kose.

Energy commodities price dip affecting African economies

Several economies in Africa are sustained by the extractive industry, with most national budgets dependent on mining and petroleum exports.

Oil prices are expected to average $44 per barrel in 2021, which is more than the estimated $41 per barrel in 2020. Demand is expected to rise slowly as tourism and travel will continue to be constrained by health concerns. Global economic activity is anticipated to return to pre-pandemic levels only by 2022.

The World Bank’s report posits that energy prices overall, which also includes natural gas and coal, are expected to rebound sizeably in 2021, which is an upward revision from the April 2020 forecast. A resurgence of the pandemic though would result in more lockdowns and less consumption. Coupled with delays in vaccine development and distribution the situation suggest lower energy prices are forecast.

The African Development Bank’s African Natural Resources Centre and the African Legal Support Facility recently hosted a dialogue looking at government and extractive sector responses. Specifically, the session focused on how effective and sustainable the responses of South Africa, Ghana, Nigeria and Kenya are.

Group executive director of Nigeria’s National Petroleum Corporation, Umar Isa Ajiya, pointed out national oil companies should set aside risk funds to minimise the impact of unforeseen events. Nigeria’s heavy reliance on oil revenues, oversupply and the dramatic fall in demand has impacted its economy. “The federal government has had to cut its expenditure and reschedule debt, where necessary,” said Ajiya.

James Ng’ang’a, acting secretary of petroleum at Kenya’s Ministry of Energy and Petroleum, said the pandemic has led to difficulties in contract negotiations with oil and exploration companies.

More positive outlook for extractive commodities

In separate presentations, Antonio Pedro, director of UNECA Central Africa, and Claude Kamemba, executive director of South Africa Resource Watch, urged governments and industry players to implement the Africa Mining Vision (AMV) to curb the impact of the pandemic on the sector.

AMV is a policy framework created by the African Union in 2009 to ensure that Africa utilises its mineral resources strategically for broad-based inclusive development. But 8 years after its introduction, implementation remains slow and there is a low level of awareness of the framework among key stakeholders in the mineral sector.

Read more:
South Africa reveals recovery plan for mining and energy sector

Advisor to Ghana’s Land and Natural Resources Minister, Ben Aryee, said the future of the country’s sector is looking bright though. “Gold has become a safe-haven and an investment of choice for many investors as gold prices continue to increase due to economic uncertainty,” said Aryee.

Ghana plans to launch a $400 to $500 million Initial Public Offer at the London Stock Market in October, taking advantage of the precious metal’s strong performance this year.

The World Bank’s Commodity Markets Outlook is published twice a year.

Theresa Smith
Theresa Smith is a Content Specialist for ESI Africa.