Diversifying economy key to withstanding market shocks

Over-dependence on one commodity by oil exporting African and Latin American countries has thrown them into a crisis as prices remain low.

It has been a wake up call and a learning experience for the countries which, for whatever historical reasons, have missed the opportunity to diversify their economies beyond oil.

Nigeria and Angola, for instance, have been knocking at the doors of the IMF and Word Bank for emergency budgetary support.

South Sudan, on the other hand, is already making loses as oil export revenues fall below transit costs. Venezuela has already declared a two-month emergency and risks socio-political unrest.

The treasuries of these countries are now low on foreign exchange, currencies have been devalued, and massive inflation has struck consumers.

Government projects and programmes have either been rescheduled or cancelled. These countries are belatedly introducing measures to reduce habitual wastage in government spending.

On the other side, the economies of East African oil importing countries are doing fairly well, aided mostly by low oil prices.

Although the East Africans have recently discovered oil and gas they are yet to be “spoiled” by the finds because commercialisation is still several years away.

In a way it may turn out to be a blessing in disguise because delayed development of oil resources will allow the East African nations to learn from the Nigerian and Angolan experiences.

That is, how not to over-play the oil game at the expense of the other productive economic sectors. East Africans should not allow the new oil and gas to divert economic focus from the traditional sectors, but to seek synergies between the existing sectors and the new oil and gas sector.

In the meantime, the East African economies remain buttressed by the other non-oil economic sectors now benefiting from the low cost of imported oil.

Their central banks have a fair amount of foreign exchange, buoyed by reduced oil import bills. As long as low oil import costs last, the East Africans are expected to enjoy a good measure of economic stability.

However, the budgetary and monetary planners should be thinking beyond low oil prices which are expected to have a limited shelf life.

The planners need to distinguish between the temporary economic growth, enabled by cheaper energy imports, and the likely scenario when oil prices start moving up.

Oil, like any other extractive resource, is finite; a fact that should be internalised and planned for by oil producing countries.

The Turkana fields, for example, have an average productive life of about 20 years. Oil producers should therefore plan to put aside portions of their future oil export earnings into a sovereign savings account.

This is for the rainy day when the oil resources will be depleted or when the other sectors will not be doing well. Experience shows us that it takes a lot of discipline in political and economic governance to put sudden oil and gas revenues to good use.

The much talked about “oil curse’’ is nothing but economic and political indiscipline in an environment of weak national governance and accountability systems. The oil curse has no place in a modern country.

Specifically for Kenya, oil discovery has found the country with an economy already fairly well-diversified and resilient. However, diversification is still work in progress as opportunities for further expansion remain plenty.

Oil should be seen as an additional benefit that should not reduce focus and efforts in other areas of ongoing economic growth. It should supplement but not reduce or divert economic development momentum in other areas.

Despite occasional global shocks, Kenya has remained fairly strong in areas of financial services, agricultural exports, and tourism.

However, the country is still quite far from achieving its full economic potential (expansion and diversification) and as such remains exposed to external market swings.

Dollar inflows

It is when our exports and other dollar inflows exceed imports and external obligations that we can say Kenya is comfortably shielded from external shocks.

Therefore it is the sectors that are dollar generators and those that save dollars (reduce imports) that we should mostly focus on.

And high on the list are the productive sectors —-agriculture, manufacturing, extractive resources and tourism. We always tend to over-emphasize infrastructure and energy, while these are merely part of the support system for the productive sectors.

If we lag in developing the productive sectors, then infrastructure and energy will be a misplaced effort and priority. The two should go hand and hand and allocation of resources to develop them should be comparable.

Creating and supporting a balanced and diversified economy should be the basis for our national economic planning.

It should target an economy that balances production and consumption; that cushions the country against external shocks; and which supports enterprises to create more wealth and jobs.

Oil discoveries should be an incremental blessing. It should not be allowed to divert attention from the key dollar and jobs generators which are mainly agriculture and industrialisation.

George Wachira, Petroleum Focus Consultants. [email protected].