Why oil producing countries should always maintain diversified economies

The recent oil price volatility provides us with a strong warning not to over-rely on oil revenues for national budgets and development.

We have recently witnessed a number of oil-dependent countries which are facing socio-economic disorientation as revenues plummet.

One such country is Nigeria. When we studied African geography in the 1960s, both Nigeria and Kenya were successful agricultural economies that sufficiently fed their populations and exported enough produce to finance their imports.

While Kenya remained an agricultural economy, Nigeria at some point discovered oil and unwittingly prioritised it at the expense of agriculture and other economic sectors.

For nearly 60 years, Nigeria has remained heavily dependent on oil for their foreign currency requirements and for funding national budgets.
The country’s economic fortunes or failures therefore follow the plot of global oil prices.

Kenya’s is a fairly balanced economy with low exposure to global commodity dynamics.

In addition to agriculture, it has developed other key economic sectors like services (financial and communication), tourism, manufacturing, mining and energy.

Although Kenya is yet to be labelled an oil producer, it has discovered about 0.6 billion barrels of oil in Turkana basins but these are not likely to be monetised until about 2017/18.

Kenya has, however, benefited from foreign direct investment (FDI) from oil and gas investors. Without oil Kenya has performed fairly well, and can still continue to succeed without oil.

The newly discovered oil should therefore be treated as incremental to the existing GDP and should not be permitted in any way to dilute efforts and attention in the existing economic activities. We should maintain a diversified multi-sector development model.

Whereas oil has a strong capacity for raising foreign exchange revenues, it may not be a strong generator of jobs when gauged against other economic sectors.

Jobs in the oil sector peak during infrastructure development, and thereafter technology mostly takes over.

Of course an oil and gas producing nation can opt to go beyond commodity exports and multiply jobs through further value addition activities like refining, power generation, and petrochemicals.

Perhaps it is the excitement that visited Kenya after 2012 when oil was discovered in Turkana that got many of us worried.

The thought of Kenya easily diverting focus from the traditional economic sectors to embrace “easy” oil was worrying. This was the case because we did not do a good public education job, resulting in misinformation and unrealistic expectations.

Oil has been incorrectly labelled with all sorts of negative adjectives. It has been blamed for high level corruption, greed, bad politics, community and national conflicts, skewed economic planning etc.

However, it is how correctly or poorly we decide to manage oil resources that define the “morality” of oil. Many countries have managed their oil resources responsibly, while others have not.

Instruments for good oil revenue governance do exist, and have worked in those oil producing countries that decided to effectively use them.

The National Sovereign Wealth Fund proposed by Kenya is an ideal instrument for ring-fencing Kenya against the potential impacts of fluctuating oil revenues.

When correctly implemented; the fund invests pre-determined amounts of revenues for use during “rainy days” and also to benefit future generations.

The fund levels the impacts of oil price volatility through planned long term investments. In so doing, the fund protects macro-economic stability, while safeguarding the significance of the other economic sectors.

The other critical oil revenue governance instrument that an oil producing country should have in place are effective oil revenue accounting systems.

A salient media topic in Nigeria today is the $20 billion of oil revenues alleged to have corruptly disappeared.

What is happening in Nigeria is an indication of weak oil revenue accountability which can replicate in any oil producing country that does not have in place systems and commitment to prevent it from happening.

Kenya is just about to pass the petroleum laws which have safeguards to ensure responsible oil revenue accountability. However, we need to create sufficient capacity, and ensure that there is visible commitment for correct oil stocks and revenues accounting.

Finally, Kenya needs to develop the new oil sector in a manner that does not divert efforts from the other economic sectors, especially the high employment-intensive agriculture and animal husbandly.

Only this way shall Kenya continue to drive growth, investments and jobs in the context of a balanced economy.

Mr Wachira is the director, Petroleum Focus Consultants E-mail: [email protected]