The Economist - 03.14.2020

TheEconomistMarch 14th 2020 35

1

“I

n the historyof any nation there are

special moments and seminal events,”

said President Uhuru Kenyatta in August.

He was celebrating Kenya’s entry to the

club of oil producers with a symbolic ship-

ment of 200,000 barrels. “The first export

of crude oil by our nation...marks a special

moment in our history,” he declared.

Politicians love oil. Selling it generates

easy money for governments; much easier

than taxing citizens, who might then de-

mand services, democracy and good gover-

nance. Petrodollars also lubricate patron-

age networks. They can be used to buy

votes, silence rivals or, if that fails, fund a

comfortable retirement abroad.

So when the price of oil fell by about

30% on March 9th, to below $32 a barrel

(see Finance section), many politicians

were aghast. Oil prices crashed because co-

vid-19 cut global demand and Saudi Arabia

opened its taps to crush high-cost produc-

ers. The consequences for other oil-pump-

ing nations will be economic pain and hard

choices. The pain will be felt in broad

swathes of the Middle East and Africa.

A rehearsal took place in 2014, when oil

prices fell by more than half. This time will

be tougher, since countries burned

through many of their cash reserves during

that crash. The most immediate impact

will be on government budgets.

Start in Nigeria, where oil accounts for

roughly 90% of exports and two-thirds of

government revenue. The finance minister

has already called for a review of the bud-

get, which was based on an oil price of $57 a

barrel. Yet austerity will prove difficult in

an economy so lethargic that it is barely

keeping pace with population growth.

There is little space for borrowing: 65% of

government revenues go to servicing exist-

ing debt. Nonso Obikili, a Nigerian econo-

mist, assumes that the government will

simply print money to pay civil servants,

which would stoke inflation.

The price war will make a mess of public

finances in parts of the Gulf, too. Oman’s

2020 budget predicted a deficit of 8% of

gdpeven with oil at $58 a barrel. Prices at

$30 would send the deficit as high as 22%.

Bahrain, a middling producer that none-

theless relies on oil for around 75% of pub-

lic revenue, had hoped to balance its bud-

get by 2022. Both will probably have to cut

spending and borrow money. Their debt

loads have soared since 2014, when years of

$100-a-barrel oil came to an end. Oman

now owes more than 60% of gdp, up from

5% in 2014, while Bahrain’s debt load

jumped from 44% to 105%.

Wealthier countries can muddle

through for years. Saudi Arabiahad bud-

geted for a $50bn deficit in 2020. Goldman

Sachs, a bank, thinks it could now surpass

$80bn; other economists put the hole at

$100bn. But the kingdom has about $500bn

in the central bank, and it can borrow

cheaply, with ten-year bonds trading at

yields of less than 4%. Saudi debt is 24% of

gdp, low by global standards. However, it is

a marked increase from 2014, when the

kingdom owed less than 2% of gdp.

Much of this debt is unproductive: Gulf

states are borrowing to sustain current,

bloated levels of spending. The new sultan

of Oman, Haitham, who took power in Jan-

uary after his cousin’s death, would like to

dole out largesse. Dubai, part of the United

The politics of cheap oil

The big squeeze

ABU DHABI

Governments in Africa and the Middle East will have to learn to live with less

Middle East & Africa

36 TanzaniaandtheWorldBank

36 BanningmotorcycletaxisinNigeria

37 Iran’sstruggleswithcovid-19

38 Lebanon defaults

Also in this section