Buffers insure against volatile crude prices and lower debt risks
Oil exporters in sub-Saharan Africa should target buffers of around 5 to 10 percent of gross domestic product to manage large swings in oil prices. For many countries, this means they will need to maintain annual fiscal surpluses up to 1 percent per annum over a 10-year period.
As noted in our latest Regional Economic Outlook, oil prices have fluctuated from lows of $23 per barrel to a peak of $120 over the last two years, resulting in highly uncertain revenues in oil-dependent economies. However, most oil exporters in the region haven't accumulated enough savings to insure against unpredictable oil price changes. In fact, sovereign wealth funds in sub-Saharan Africa hold assets of just 1.8 percent of gross domestic product - compared to 72 percent in the Middle East and North Africa - forcing countries to borrow or draw down financial assets when oil prices fall.
As a result, in the decade through 2020, the region's oil producers have grown over 2 percentage points slower per year than non-resource intensive countries. Debt service costs have also been almost twice as high than in other sub-Saharan African countries.
Moreover, as countries transition to low-carbon energy sources, oil revenues could sharply decline. By 2030, oil revenues in the region could fall by as much as a quarter and by 2050, by half. Building buffers now would help the region's oil exporters navigate the transition toward clean energy while managing oil price fluctuations.
Hany Abdel-Latif is an Economist in the IMF's African Department.
Henry Rawlings is a Research Assistant in the IMF's African Department.
Ivanova Reyes is an Economist in the IMF's African Department.
Qianqian Zhang is an Economist in the IMF's African Department.