Thursday, May 12, 2016

REPRINT: Thinking beyond the resource boom: African countries must avoid procrastination

Ramdoo, I. 2016. Thinking beyond the resource boom: African countries must avoid procrastination. ECDPM Talking Points blog, 12 February 2016.
The resource sector has entered into a new phase. Prolonged downswings in commodity prices, fuelled by (i) the double effect of slower demand from emerging markets like China and excess supply resulting from massive investments during boom years; (ii) the difficulty of developed markets to regain momentum and (iii) the tightening of financial markets are all threatening to turn what was not so long ago seen as tailwinds into headwinds, with even stronger swirls for some.
Short-term outlooks do not seem to look brighter. The World Bank’s Commodities Market Outlook predicts a further 10% decline in metals in 2016. It is difficult to predict what will happen to the price of oil, as Iran comes back onto the market, as geopolitical tensions continue to escalate and as big producers fail to agree on how to tackle the supply glut. All these laid to bare the structural weaknesses of resource-rich African countries. The current situation also exposed the financial and cost soundness of mining companies, including the major ones.

 What impacts?

Of course, not all countries have been impacted to the same extent. Net oil exporters and countries heavily reliant on mineral revenue exports are now under acute pressure from deteriorating terms of trade. Net oil importers and countries less dependent on minerals were luckier. Mining companies have also been hard hit. Uncertainty and shrinking confidence about a quick recovery on the demand side led many to put greenfield projects on hold. At the same time, weak prices have left many with fewer cash flows as earnings were absorbed by debt repayments and servicing. Further, many are probably paying the price for having gorged on cheap debts during the China-led minerals boom.

 Beyond the boom: no time to waste

In Africa, the status quo of exporting raw materials and jobs is not an option anymore. It is critical that countries refocus their attention on the sustainabilityof growth. Now is the time for countries to carefully craft diversification strategies, both within and outside the extractive sector. While posing severe challenges, the current situation is also a unique opportunity to durably move away from the current economic structures and to create more resilient economic structures.
Furthermore, the future prospects of the African continent, underpinned by a rising middle class that is expected to drive the future demand for consumables and by the need to address the lingering sheer deficits in infrastructure, energy and construction, will no doubt create opportunities to channel part of the demand for certain commodities closer to home. The African market is significant in aggregate terms, and the demographic dividend is likely to grow that market further. However, its potential is challenged by thick borders and fragmented of markets, estimated to add up 75% to the price of goods, inflating the cost of business and lowering firms productivity by about 40%. 
Therefore, better planning, and without delay, is an absolute necessity if countries want to avoid a remake of the economic disaster of the 1980s. Here the key strategy is to create, build and consolidate linkages. This includes:
(i) Fostering productive linkages, both upstream, with a strong emphasis on sustainable local content to stimulate the use of local factors of production, and downstream, when it is feasible and possibility to do so. In the short to medium term, Africa should not miss out on the low hanging fruits, such the beneficiation of low-value minerals, given the growing demand likely to arise from the construction, urbanisation and infrastructure booms. Dangote’s success story in the cement sector illustrates this. It is also important to build bridges between the extractive sector and other economic sectors, such as with the agriculture or services sectors. Dubai is a testimony of what can be achieved if strategic choices are made.
Exploring to the best spatial linkages, such as a better use or better sharing of resource infrastructures so as to unlock the potential of other economic sectors. Poor infrastructures are said to skim off at least 2% of Africa’s growth every year. Here, it is not only important to emphasise the critical importance of multi-purpose, multi-usage and multi-modal infrastructures. Countries also have to move from benefit sharing to benefit enhancement to create greater synergies with other economic activities by attracting growth poles and clusters to generate spillovers to the economy. This has enormous network effects to stimulate trade and investment flows, essential for broader economic diversification. The region of Mato Grosso in Brazil, for example, illustrates how mineral corridors can trigger large agro-industrial development. In Mozambique, the Nacala corridor has this potential and must be further enhanced.
Strong linkages must be accompanied by a set of enablers, such as a conducive business environment, scaling up the level of skills and competencies, addressing chronic barriers to productivity, investment and competitiveness, the availability of energy and other infrastructure and having a flexible labour market among others.
(ii) Furthermore, countries need strong and sustainable fiscal buffers, such as fiscal rules like in Chile to counterbalance commodity price volatility; the creation of savings funds such as sovereign wealth funds; and sufficient foreign exchange reserves. The current crisis has severely weakened the fiscal balance from resource-rich countries and with limited buffers, countries have no choice but to cut capital spending on essentials and adjust monetary and exchange rate policies to relieve pressures on the public finances and the currency. In 2015, countries such as South Africa, Ghana, Zambia, Angola and Nigeria have all seen an inevitable depreciation of their currencies.
Finally, to remain relevant, governments can’t and won’t make it alone. It is important to underscore the importance of developing strategic partnerships with the mining industry and other private sector actors, as well as with research institutions. But most importantly, while government’s role is to give policy directions, the key to creating industries and jobs lie with businesses. Governments and businesses must understand and support each other if the mining sector is to be a real vector of change.

The views expressed here are those of the author and not necessarily those of ECDPM.
In addition to the Department for International Development (DFID),United Kingdom funding, this publication benefits from structural support by ECDPM’s institutional partners Austria, Belgium, Denmark, Finland, Ireland, Luxembourg, The Netherlands, Portugal, Sweden and Switzerland.