The plunge in the global oil price to the lows of $60 or $55 per barrel, depending on whether your prefer Brent or WTI, has led to significant macroeconomic distortions in key oil-producing economies such as Nigeria and Russia.
Nigeria has been forced to revise its budget downwards to reflect the current oil prices and devalue the Naira. Subsequently, the Nigerian growth expectations have dampened.
While Russia has not yet experienced downward budgetary revisions, the significant drop in oil prices has led to a 45 per cent depreciation in its currency, the Ruble against the US dollar. In a bid to prop up the Ruble, the Russian Central Bank raised its policy rate twice within the month of December from 9.5 to 17 per cent.
While the 17 percent policy rate could potentially stave off further depreciation of the Ruble, it however raises growth-dampening expectations of the Russian economy.
Typically, both the Russian and Nigerian economies are hugely dependent on revenues from the oil and gas exports. In both economies, oil and gas production accounts for more than 70 per cent of their government spending and foreign exchange inflows. It is not surprising that the current macroeconomic malaise in both the Nigerian and Russian economies is closely intertwined with the collapse in the global oil price.
Of course the Russian macroeconomic malaise is equally accounted for by economic sanctions imposed by the European Union, United States of America and their allies.
The macroeconomic malaise in both Russia and Nigeria as a result of the plunge in oil prices is a clear reminder to the East African economies that while oil and gas will open up new sources of government revenue and foreign exchange inflows, the other sectors of the economy should not be ignored.
In any case, it would be prudent to direct the oil and gas revenues to facilitate the growth of manufacturing, services and agricultural sectors.
This could be through financing improvements, in say the infrastructural, health, and educational sectors of the economy. Such public sector investments could spur the growth of other sectors of the economy, which could compete with the oil and gas sector as sources of government revenue and foreign exchange.
In doing so, the East African region would have the necessary buffers to mitigate the extent of macroeconomic malaise in the event of a plunge in oil and gas prices.
Besides the drop in oil prices, there are also effects on the oil and gas infrastructural investments in East Africa. Low prices imply that it takes more years to make a profit on oil and gas Infrastructural investments.
Therefore, at the current Oil prices, it makes a lot of sense for governments in the East African region to negotiate mechanisms of sharing oil and gas infrastructural investments.
The author is a senior lecturer at the School of Economics at Makerere University.
Source : The Observer