11 July 2018

Ethiopia: Oil Is Not a Curse

Photo: Daily Monitor
(File photo).

What makes oil, or any other resource, a blessing or a curse is how that particular country manages to use it. And the benefits oil brings to Ethiopia far outweighs the risk of it.

Following Ethiopia's government recent announcement that the country is starting oil production, there have been some arguments heard in some quarters, citing how oil can bring with it economic stagnation, corruption and conflict.

Indeed, the concerns are valid. After all, the notion of the resource curse, or the paradox of plenty, goes back to Adam Smith, where creating plenty of revenue from minerals like oil has brought, in many instances, unintended harm rather that widespread benefits.

We have seen it bringing conflict to countries; from Nigeria and Angola to Venezuela, among many other countries, although the situation in some of those countries have improved. We have also seen it bringing adverse environmental impact, and damaging the livelihood of local communities in the process.

However, there are some economic facts we need to consider here. Despite, its consecutive economic growth, reports are stating that Ethiopia is currently facing a very bad forex crunch that is not only affecting the manufacturing sector, but is challenging the attraction of foreign direct investment (FDI). There are other economic issues as well, like government debt to GDP ratio, which is ballooning.

So, with this in mind, it is obvious that revenue is needed to lessen the burden of its forex crunch. Oil not only can bring huge amount of foreign capital earnings, it can also help the country save the foreign currency it would have spent in importing oil, which according to latest data is close to 90 billion Birr.

It also create jobs for huge number of people as it has many value chains at every level. With a country with huge number of unemployed youth, this also provides huge economic opportunity to Ethiopia.

Furthermore, creating revenue is important for a country's economic growth, and Ethiopia's needs huge amount of capital to implement its national strategic plan, the GTP II. Given that GTP defines the pathway for Ethiopia to achieve its ambitious socio-economic targets, which are interrelated, and also given that natural resources play a vital role in Ethiopia's sustainable development and are key strategic direction of the GTP, then, producing oil to generate massive amount of revenue is very important.

In addition, it will majorly boost the export revenue of the country by broadening its export goods portfolio, and also lessen the country's dependence on agriculture commodities for export. And this will majorly bolsters the government's revenue, which will allow it to sponsor the ongoing huge socio-economic projects.

However, enjoying the economic benefits oil brings to the country demands a smart management and use of the resource. It should be noted that producing oil does not guarantee economic growth as resource-abundant countries have experienced lower growth than their counterparts over the last four decades.

The country has to establish an inclusive development where the population, and especially the local community become beneficiaries from. This is the only way to create a stable, conflict-free extraction and production of oil. Also, in order to circumvent economic phenomenon like 'Dutch disease', the government must spend the revenue in long-term economic objectives, rather than a gold rush type of move, as it is the only way to make sure the economy will not be oil dependent.

In the end, the use of any natural resource is a balancing act. Attending to the current urgent need of the country, whilst taking into account the interest of the future generation of this country.

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