As COVID-19 continues to spread across the continent and barrel prices face sustained volatility as a result, there has never been a more critical time for oil- and import-dependent economies to prioritize diversification initiatives, with several African countries having implemented such initiatives following the crash in commodity prices in 2014.
In the Central African sub-region, countries including Gabon, Republic of Congo, Chad, Angola and Equatorial Guinea will be among the economies hit hardest due to their respective proportion of oil exports to total exports. With a barrel price hovering around $30 and a contraction in both demand and price, a 50% reduction in oil export revenues is projected. Collectively, economies within the Economic Community of Central African States are anticipated to decline by 4.7% in projected gross domestic product growth this year, as a result of the COVID-19 outbreak.
While expansionary monetary policy can offer a temporary capital injection into financial systems, such stimulus remains a short-term solution. To end the cycle of vulnerability to external shocks in the long-term, countries in the Central African region must invest in horizontal diversification of their economies through increasing the number of export products, as well as vertical diversification through developing resource- and trade-based industrialization.
In oil-dependent Equatorial Guinea, where oil accounts for over 75% of exports, a strong orientation toward economic diversification began in 2014. Following the crash in commodity prices, Holding Equatorial Guinea was founded as a public enterprise to manage and administer the state’s Co-Investment Fund to invest in profitable projects and joint ventures with the private sector, in which the company then holds a minority stake. Utilizing state budget surpluses to invest in key sectors of fishery, livestock production and agriculture, petrochemicals and mining, tourism and transport, Holding Equatorial Guinea seeks to reduce economic dependence on revenues generated by the hydrocarbons sector.
In terms of the criteria against which proposed projects are measured, projects considered for investment must stimulate local employment, provide local training, capacity-building and the transfer of skills and be financially profitable. Such criteria reflects a broader effort by governments to create enabling environments for local content by instituting policies that localize procurement, which can represent up to 60% of the total operational cost of large companies operating on the continent in some cases.
In addition to strengthening local content in the development of domestic industry, governments are also facilitating the participation of small and medium-sized enterprises in local and regional value chains. The creation of regional value chains will be critical in light of the upcoming implementation of the African Continental Free Trade Area, which seeks to create a single, liberalized market across the continent, aid in the movement of capital and people, and enhance competitiveness of member states within Africa and in the global market, among other objectives.
In Angola, where oil accounts for 89% of exports, the National Agency for Private Investment and Promotion of Exports (AIPEX) serves to identify key products to stimulate exports, promote private investment and the internationalization of companies. At the government-level, AIPEX has identified six non-petroleum products with strong potential for export, which includes tropical fruits, coffee, marble and granite, salt, fishery and honey.
AIPEX currently holds two flagship programs: one that focuses on attracting private investment, and another that focuses on exports and the internationalization of companies, with a view toward providing a “one-stop shop” resource for private investment across sectors and for the export business.
In addition to prioritizing the development of non-oil products, the country aims to stimulate other sectors through doubling down on investment within the energy sector, prioritizing development of the Angolan petrochemical sector as a means of diversification, and utilizing local companies, human resources and raw materials and goods and services in the process. While agriculture accounts for less than 20% of Africa’s gross domestic product, it accounts for 60% of the priority sectors in African trade strategies, leaving manufacturing, refining and other high value-adding sectors rarely prioritized at the country and regional level.
By removing existing barriers, lending support to producers in the form of certifications and knowledge on export conditions in different markets, and enabling access to finance, government agencies such as AIPEX seek to help companies navigate the export process, while also providing valuable infrastructure support. Going forward, both public and private sectors are expected to continue to collaborate to provide support to private enterprises and facilitate sustainable, non-oil economic growth.