The question of imported energy: Low prices have helped to stabilise the exchange rate while keeping inflation in check. PHOTO | FILE
IMF’s economic outlook for sub-Saharan Africa launched last week contrasted the impacts of reduced global commodity (oil and minerals) prices on the resource-intensive nations like Nigeria, Angola and South Africa and the non-resource intensive and oil importing countries which include Kenya.
According to the IMF, the countries heavily dependent on extractive resources had their economies contracting by 1.5 per cent in 2015 as revenues from oil and minerals dwindled.
On the other hand, the less resource-dependent nations on average grew their economies above 6.0 per cent mostly on the back of reduced oil import bills.
On the global markets, oil prices fell from above $100 dollars per barrel in mid 2014 to the lowest level of about $25 early this year, before climbing back to $50 in the recent months.
Optimistic predications indicate a future price range of $50-60 in the near term. The year 2015 will probably be the year registering the lowest average oil prices.
Before the oil market collapse, Nigerian oil accounted for about 95 per cent of exports and 70 per cent of government revenues. The country has already devalued its currency as it resorts to offshore borrowing to finance key development projects.
Nigeria is also mulling selling off some of its oil and gas assets (and even presidential airplanes) to release more cash into the economy. Angola is undergoing similar budgetary re-alignments.
Let us now look at how Kenya has fared. The 2016 Economic Review indicates that Kenya oil import bill reduced by 30 per cent from Sh353 billion in 2014 to Sh243 billion in 2015.
During the same period, oil consumption in Kenya increased by 17 per cent from 5.02 million cubic meters (M3) in 2014 to 5.88 million M3 in 2015. The GDP improved only slightly from 5.3 per cent in 2014 to 5.6 per cent in 2015.
And the question is whether Kenya has fully maximised the benefits from the oil price windfall.
Is 5.6 per cent the best growth the country could have garnered from a 30 per cent drop in imported energy cost? Are there any specific policies, or strategies to maximise economic benefits from reduced oil imports? Is it possible that without the oil price windfall, the economy would have decelerated?
There are a number of smart policy reactions that oil importing countries take when oil prices drop significantly. Those countries that have subsidies on fuel products either reduce or withdraw them so as to increase government revenues and discourage wasteful use of cheap oil.
Alternatively governments increase taxes on petroleum fuels to skim off the windfall benefit and turn it into revenues. And Kenya has recently raised taxes on various petroleum products.
For countries that have strategic emergency stocks, it is when global prices are low that least-cost stocking is achieved.
Strategic stocks acquired during low prices are often used to reduce stress on energy costs when global oil prices are on a steep rise. Kenya is yet to implement its petroleum strategic stocks policy, and as such cannot significantly benefit from low cost inventories.
Reduced oil import payments have given a breathing space to the wider Kenyan economy especially in respect of balance of payments. This has helped to stabilise the shilling exchange rate, while keeping inflation in check.
It has also facilitated imports for the infrastructure development without significantly upsetting the shilling.
Low oil prices have eased energy costs to businesses and investments. Specifically, the construction and transportation sectors have significantly benefited from reduced oil prices. Registration of both commercial and passenger vehicles increased in 2015.
Abandoned agriculture
Going back to the IMF report, there is an explicit advantage in countries diversifying their productive sectors and exports to hedge against global commodity market fluctuations.
And Nigeria is already planning on diversification into agriculture and industrialization to counter-balance the domineering oil and gas sector.
Kenya has embarked on an ambitious programme to develop the extractive sectors (oil and minerals) and this should be pursed vigorously as an incremental strategic boost to the GDP.
I use the word “incremental” purposely because commodity extractives should never be pursued at the expense of agriculture and industrialisation which have far much larger capacities for increased employment, enterprise and household incomes.
Nigeria abandoned agriculture for oil and now they are paying for this major omission.
The cyclical history of the oil industry tells us that low oil prices will not persist for ever. For this inevitable and predictable fact, Kenya’s economic policy gurus will need to factor in a scenario of high oil prices in the future.
This will persuade them to maximize and not squander the “shock absorber’ impacts of the ongoing low oil prices. They should maximize value from the opportunities presented by the current windfall situation.
Normally during the times of “cheap and plenty”, extravagance kicks-in while efficiencies and conservation take a back banner. Even in times of low oil prices, we need to relentlessly pursue energy efficiencies to conserve energy value while benefiting the green climate efforts.
Efficiently using less oil regardless of level of global oil prices should be a habit we all need to internalize and practice. This is a “resource thrift culture” with wider relevance and application everywhere in our economic governance.
Wachira is director of Petroleum Focus Consultants. Email: [email protected]
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