IMPACT OF OIL PRODUCTION ON MACROECONOMIC VARIABLES OF SELECTED OIL-PRODUCING COUNTRIES IN SUB-SAHARAN AFRICA

ABSTRACT

This  study  analysed  the  impact  of  oil  production  on  the  economy  of  five  selected  oil- producing countries in sub-Saharan Africa namely, Nigeria, Angola, Gabon, the Republic of Congo and Equatorial Guinea. It estimated the impact of oil production on the real effective exchange rate, human capital development, government expenditure on final consumption, and the real gross domestic product, using panel fixed-effect model and KAO co-integration test. The analysis was done using panel data from 1990 to 2017 sourced from 2018 World Bank   Development   Indicators,   and   Organisation   for   Economic   Co-operation   and Development, 2017.  To confirm the robustness and validity of the panel regression model, the Hausman Test and cross-sectional effect was adopted. The findings revealed that the variables of each model are co-integrated and oil production exerts a significant positive impact on the real effective exchange rate. Specifically, the result shows that a percentage increase in oil production increases, real effective exchange rate by 0.97%. The result also show that oil production has a significant negative impact on human capital development, that a, percentage increase in oil production decreased human capital development, by 0.0118%. Moreover, oil production exerts a significant positive effect on government expenditure on final consumption, that is, as oil production increases, government expenditure on final consumption increases by 0.30%. Finally estimated result show that oil production exerts a significant positive effect on the economic growth. A percentage increase, in oil production in these countries, increases economic growth by 8.5%. The study suggests that an aggressive diversification of the economy, expansive spending on human capital and agribusiness with an improved value chain system to mitigate the suspected presence of resource curse or Dutch disease  for  an  effective  economic  growth  and  development.  This  is  because  positive significant economic growth does not usually account for economic development and performances.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Globally crude oil is one of the major sources of energy and has been the bedrock of emerging economies especially in poor developing nations in sub-Saharan Africa. According to global economic prospect (2017), worldwide demand for petroleum products has risen progressively over the years and will ever grow stronger, driven by the exponential population growth rate and increasing affluence among emerging economies especially in sub-Saharan Africa. These developments, prompted increase in the operations of the petroleum companies to operate in low-income countries.

Sub- Saharan Africa‟s oil production could be linked to several decades and has been rising gradually since  then,  except  for  the drop  in the  1980s  owing to  the  oil  price  shock. The statistics  of  oil production of sub-Saharan Africa from 2012 to 2017 is stated in figure1.1. Nigeria has been the highest producer in the region followed by Angola as they jointly account for 75% of total liquid fuels produced in Sub-Saharan Africa (Organisation for Economic Cooperation and Development OECD,

2017).

Figure 1.1 Crude Oil Production in MillionTonnes

140

120

100

80

60

40

20

0

2012                         2013                         2014                         2015                         2016                         2017

NIGERIA       ANGOLA       GABON       CONGO       EQUI

Source: Authors with data from (OECD, 2017)

According to World Energy Review (2017), it was expected that there will be an increase in oil production in absolute terms, from 4.2 to 5.3 million barrels per day in the near future. Oil

production is also predicted to occur in both OPEC and NON-OPEC African countries with an annual average growth rate of 1.2%, above the global average of 0.8%. Oil production is one of the major determinants of economic growth in Angola and has accounted for about two-thirds of GDP and almost 90% of government income  (OECD, 2009). Angola‟s oil reserves are estimated to last for 20 years at an output of 2million bbl/day, though potential oil fields in frontier pre-salt areas could double its reserves.

Oil companies regularly retain only about 15% of revenue; a low share by industry standards while the rest goes to the government of Angola. In Nigeria, the economy is very much reliant on oil production as 80% of government revenue is generated from oil through a level-rate of

50% tax on proceeds and a royalty of 0–12% based on the locality (OECD, 2009). While oil exports from the Republic of Congo and Equatorial Guinea are less in contrast with Nigeria and Angola, the sector accounts for a significant share of GDP in both countries (50% and

37% respectively).  According to the OECD (2009) oil production accounted for more than ninety-eight percent of export gains and about eight-three percent of income generation to countries under the study.

New oil wealth could be the reason for the concurrent decline of other economic sectors. A lurch towards a static economic model fueled massive migration to the cities which led to increasing poverty. A collapse of fundamental amenities and socioeconomic services since the

1980s was as a result of this trend and by 2000 Nigeria’s income per capital plunged almost one-quarter of the income in mid-1970s, just below the value during the period of independence. The estimated oil reserve of the countries under study is represented in figure

1.2

Figure 1.2: Crude Oil Reserve in Millions (bbl)

Source: Authors with data from (OPEC 2017)

Nigeria as a member of the OPEC has its crude oil production averaging around 2.2 million barrels per day (EIA, 2013). Notwithstanding insignificant corporate relationship among indigenous communities, indiscriminate destruction of oil infrastructure, severe ecological damage, and unique security problems within the oil-producing regions continue to plague oil sector as we witness here in Nigeria and other producing countries. Gabon also is an upper- middle-income country and being the fifth largest oil producing country in Africa has had strong economic growth over the past decade, driven by its production of oil and manganese. The oil sector has accounted for 80% of exports, 45% of GDP, and 60% of fiscal revenue on average over the past five years.

SSA is a natural resource abundant country over the past fifty years, and its oil subsector has grown phenomenally.  Both  exportation  and  production  have been  increasing  enormously since viable production started in Nigeria in 1958. For example, according to OECD annual report (2016), oil production in Angola increased to 1.558 million barrels per day, Nigeria‟s rose to 2.053m per day, Rep of Congo rose to 0.257m per day, Equatorial Guinea rose to

0.289m per day and Gabon rose to 0.23million per day and according to OECD annual report (2016),the volume of oil production decreased in most of these countries due to civil unrest as shown in figure 1.1. The revenue from oil production has significantly provided opportunities for improved investment and has made the economy of most countries in SSA highly oil dependent.

Upon the considerable revenue from oil production, the economies of these countries selected in  this  study  still  grapples  with  so  many  problems  including  the  growing  rate  of unemployment, waning manufacturing production, low level of life expectancy, an alarming level of poverty and poor infrastructural development (Akinlo, 2012).  The exploration of oil as  one  of  the  major  determinants  of  economic  activities  has  caused  many  African governments, multinational oil companies, major financial institutions and governmental organisations to exploit African‟s oil reserves.  SSA is among the significant players in world oil production and its contribution to the world oil market has been on the increase over the years. However, these contributions were reduced to 4% in 2008 and 2009 in Angola due to the civil unrests. These major oil producers in sub-Saharan Africa; Nigeria, Angola, Gabon, Congo Republic and Equatorial Guinea from 2000 to 2016 took oil production as their major source of revenue generation. These countries accounted for about 77 percent of African production as a continent in relation to the global oil market of which Nigeria was the leading oil exporter with 2.05 million bpd, followed by Angola, who witnessed a reduction in production due to civil unrest that engulfed the country‟s oil production in 2014 and 2016 respectively as seen in figure 1.1.

Angola‟s hydrocarbon potential is indeed massive with proven oil reserves at about 9.5 billion barrels. In fact, it was conventionally predicted that the remaining oil reserves were around 12 to 15 billion barrels, with the bulk of it located offshore and in the Cabinda area (GEP, 2017).

Oil production could create a negative threat as a result of environmental hazards and clear economic setbacks  due to climate degradation,  and decline in other sectors  respectively. These developing countries,  relying heavily on oil exports as major source of revenue usually experience shocks, and in order to protect both firms and households from the shocks, governments often allocate large parts of the budgets to subsidising fuel and other related products, (Stanley, Kirian& Paul, 2016) .

These subsidy systems usually expose the government to significant budgetary risks, because resources that would have been allocated to government expenditures on infrastructure and developmental projects will be allocated to subsidy. According to International Monetary Fund(IMF,2001), Angola‟s 2007 budget was worth over $31billion, which was as much as all foreign aid to sub-Saharan Africa; but her under-five death rate is among the worst in the world.

1.2 Statement of Problem

It was evident in the last decade of the twenty-first century that, there was an inverse relationship between natural resources abundance and economic growth especially in sub- Saharan Africa (Auty, 2001). Developing countries with rich natural resources grow at a snail’s pace compared with those that are deficient in natural resources (Ranis, 1991; Lal and Myint, 1996). Specifically, the income per capita of the non-mineral resource countries increased by three times faster than those of the rich-resource countries. The SSA countries are natural resource-endowed, and for the past fifty years, the country‟s oil sectors have grown both in production and exports compared to contemporary countries in Africa. According to OPEC (2017), crude oil production in Africa rose to 6.6m barrels per day thus, the depressing growth of these selected oil producing countries‟  economy even with the massive revenue from oil has rekindled attention on the importance and the effect of oil production on the development activities in SSA.

According to the Nigerian National Petroleum Corporation (NNPC, 2014), crude oil production was 2.5 million barrels per day while its reserves were at 28.2 billion barrels. The significant revenue from oil production ordinarily should have provided greater opportunity

for increased economic development and investment. However, despite the huge revenue from oil, the economy still scuffles with some troubles including high unemployment rate and inadequate economic development, low level of life expectancy, high  cost of living and poverty, inflation and poor infrastructural development and Gabon‟s fiscal position worsened in  2015,  with  the  country  recording  a  fiscal  deficit  that  she  has  not  witnessed  since

1998. Despite the government‟s attempts to rein in expenditure and offset the decline in oil revenue, Gabon‟s economy stalled in 2017 and was projected to grow slowly 2017 (Akinlo,

2012). Thus, the depressing growth of the Sub-Saharan African economy in the face of huge revenue from oil has prompted interest in the negative externalities of oil production.   The oil boom in the 1970s was responsible for nonchalant attitude and neglects towards agricultural and other manufacturing industries.

On the negative aspects of crude oil production, these could be measured with respect to the immediate communities in which the oil wells are located. Some of these communities still undergo environmental degradation, and this leads to insufficient means of livelihood and other socioeconomic factors. With no doubts, significant proceeds or income are received from both domestic sales and exportation of petroleum products, and this has a substantial effect on the growth of the country‟s well-being. However, over dependency on this, brings hardship and, higher cost of living to the society. The over reliance on oil production by these selected countries have brought serious pressure on the exchange rate and external reserve. Upon the oil production in Republic of Congo, the country is still very poor country more than half of population living below the poverty line and relying on subsistence agriculture and with  many  economic  challenges  such  as,  youth  unemployment,  outdated  infrastructure, bureaucracy, corruption and non-diversified industrial sector

Currency appreciation as result of over dependence on oil production poses negative effect on the economic growth as domestic products will appear expensive in the global market and, the excessive pressure on  foreign  reserve  as  a result  of  over dependency on  oil  export  and importation of practically every other consumable goods leads to high rate of inflation or cost of living.   The organisation of suitable institutions, mechanisms and policies would ensure efficient use of oil revenue for sustained economic growth, but the reverse is the case in sub-

Saharan Africa. This is as a result of resource curse and corruption usually experienced in poor mineral-resourced countries.   According to GEP (2017), Economic Growth in Sub- Saharan Africa is expected to pick up to 2.6 percent in 2017 and to 3.2 percent in 2018, predicated on moderate rising commodity prices and reforms to tackle macroeconomic imbalances. Per capita output is projected to shrink by 0.1 percent in 2017 and to increase to a modest 0.7 percent growth pace over 2018-19. At these rates, growth will be insufficient to achieve poverty reduction goals in the region, particularly if constraints to more vigorous growth persist.

It was gathered that natural resource abundant economies have tend to grow more slowly than economies without substantial resources (Auty,  2001b, Raines, 1991,  Sachs and Warner,

1995, 1997,Lal and Myint, 1996). Their studies distinguished natural resource dependence (RD) and natural resource endowment (RE), where RD hurts economic growth rates, confirming the results of the resource “curse” literature. RE, however, promotes economic growth.  Most  importantly,  in  examining  the  channels  through  which  natural  resources transmit  to  the  rest  of  the  economy,  some  empirical  studies  have  given  support  to  the existence of Dutch disease. These include studies on Bolivia (Auty&Evia, 2001), and Venezuela (Auty, 1994).

A major problem with all of these papers is that they tend to predict a monotonic effect of resources on development that is not always consistent with the cross-country evidence (Acemoglu, Johnson & Robinson, 2002). For instance, in 2008, poor developing countries economy in Africa received about 14.12% of total foreign direct investment (FDI) inflows from developing economies worldwide compared with 23.26% for developing economies in America, (UNCTAD,2008).

Furthermore, FDI has remained concentrated in the Republic of Congo and Equatorial Guinea and other selected countries because of the presence of natural resources. These countries are likely to continue receiving 80% of the region‟s FDI in the near future .The increase in the exchange rate due to inflows of revenues from abroad or influx of foreign currency exerts adverse effect of other sectors or industries resulting to the known Dutch disease (OECD,

2015).    Also Robert (1991), showed that education and the creation of human capital were very much responsible for both the differences in labour productivity and the overall levels of technology in the world. Moreover, this has been a spectacular reason why education and human capital gained their current recognition in the field of economic growth and development. Nations like Hong Kong, Korea, Singapore, and Taiwan have achieved unprecedented rates of economic growth while making significant investments in education.

1.3 Research Questions

1.   What is the impact of oil production on the real effective exchange rate of the selected countries in SSA?

2.   What is the impact of oil production on human capital development in sub- Saharan

Africa?

3.   What is the impact of oil production on the level of government expenditure on final consumption in SSA?

4.   What is the impact of oil production on economic growth in SSA?

1.4 Objectives of the Study

The broad objective of this study is to determine the impact of oil production on the economic growth of oil-exporting countries in sub- Saharan Africa and the specific objectives include;

1. To determine the effect of oil production on the real effective exchange rate of the selected countries in SSA.

2. To investigate the effect of oil production on human capital development in SSA.

3. To determine the effect of oil production on government expenditure on final consumption.

4. To ascertain the effect of oil production on economic growth in sub- Saharan Africa

1.5 Research Hypotheses.

Ho1: Oil production has no significant impact on the real effective exchange rate in SSA Ho2 Oil production has no significant impact on human capital development in SSA.

Ho3: Oil production has no significant impact on government expenditure on final consumption in sub-Saharan Africa.

Ho4: Oil production has no significant impact on economic growth in the selected SSA

countries

1.6 Scope of the Study.

The study selected five major oil-producing countries in sub-Saharan (Nigeria, Gabon, DR Congo, Equatorial Guinea and Angola) and used a panel data from 1990-2017 employed for the study. The composition of these countries was based on the over dependency of their economy on oil production both as a major source of revenue and economic growth.

1.7 Policy Relevance of the Study By shedding more light on the resource curse and the existing impact of oil production on economic growth and development. The result of the study will be of assistance to policy makers in adjusting the macroeconomic impact of oil production on economic growth of the oil-producing African countries.  More also, it will serve as a reference point for further or future studies as Dutch disease will be re-investigated.

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