Different Stages Of The Dutch Disease

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As the crude oil price heads in the direction of US$70/b, we take the opportunity to comment on the efforts at, and challenges of diversification for some of Nigeria’s fellow producers. This month the Algerian government has taken draconian steps to tackle fiscal and current-account pressures. It has banned imports of an estimated 900 products, having earlier imposed 30% tax and duty increases on some of them. The list includes cell phones, building materials, vegetables, and chocolate.

The share of oil and gas exports in total exports in Algeria (95%) is similar to Nigeria’s. However, the list of banned items does not seem influenced by import substitution policies. This is a temporary measure that the authorities would be happy to abandon if a recovery in oil revenues permitted. Algeria has a high import requirement and an elite reluctant to open the economy.

N.B: Dutch disease is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the country’s other products less price competitive on the export market.

In October Moody’s downgraded Angola, another candidate for diversification, from B1 to B2 (the equivalent of B with Fitch and S&P). Like Nigeria, it saw a recession in 2016 (-0.7% growth, compared with -1.6%).

At the start of the oil price slide in mid-2014, Angola’s macro legacy was rather weaker. Its governments have historically been large spenders, with total expenditure averaging 39% of GDP in 2010-15. There was not, therefore, the choice of aggressive fiscal expansion to kick-start the economy, Nigeria-style. The debt burden is far greater, too: public external debt in 2016 reached 42% of GDP, and Moody’s saw a peak for the total debt of 54% this year.

A combination of planning and inheritance have favored Nigeria: a very good package for external debt relief in the 2000s, the fx reforms since Q1 2017, a huge population and a predominant non-oil economy. Radical thinkers (not our style) might add the FGN’s refusal ever to borrow from the IMF.

Straying into the political economy, these producing nations share a track record of poor governance. Abdelaziz Bouteflika has been president of Algeria since 1999, suffered a stroke in 2013 and has become a declining influence. João Lourenço, the president of Angola since August, has made some sweeping reforms in the management of the economy to enhance efficiency but is no advocate of the inclusive government.

Tens of members of the Saudi princely and business elites have been staying against their will in the Ritz-Carlton Hotel in Riyadh since November until they surrender what the authorities insist are their corrupt gains over decades.

The length of this oil price recovery is unclear but at some point, the market will again slide. Nigeria’s adjustment, while limited, looks relatively good.

 

FBNQuest

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