Speech

Remark by Abebe Aemro Selassie at the IEA Africa Ministerial Roundtable on COVID-19 Impact on Africa's Energy Sector

June 30, 2020

Thank you for the opportunity to give this address. I will articulate my brief intervention around 2 main axes: The economic impact of COVID-19 on African economies with an emphasis on the extraordinary challenges facing African oil exporters; and the looming energy transition in the context of Africa and its development.

The economic impact of COVID-19 on the African region

Although the pandemic started in general later and countries took preventive measures, overall the curves have not flattened yet calling for vigilance and redoubled effort to contain it.

The economic toll, both through lockdowns and external shocks, will have a staggering effect on African economies. Our forecast of average African real GDP growth in 2020 was revised down from 3.8 percent in October 2019 to -2.8 percent currently. For African oil exporters (8 SSA oil exporters, Algeria and Libya), it was a revision from 2.5 percent to -5.2 percent. 

The human toll will be steep especially in African oil exporters as measured by per capita growth. Indeed, we expect average real GDP growth per capita to reach -4.9 percent for the continent, and a staggering -7.4 percent in oil exporters.

The crisis will also put government budgets under tremendous pressure with an estimated total loss in fiscal revenues of $92 billion, a decline of about a quarter compared to our October estimate, for the continent and of about $34 billion for African oil exporters, or a loss of more than a third. This has pushed the public debt burden to more than 65 percent of GDP in 2020 on average, with a particularly fast increase in oil exporters.

For African oil exporters the pandemic happened in an already difficult context. Since the oil price collapse of 2014, production and investment in the oil sector in most African oil exporters have been on a secular decline, for a combination of factors including structural issues, governance and security concerns in several countries (i.e., Nigeria and Libya). If this trend continues, limiting volumes, and if oil price persists in the $30-40 range, African oil exporters will have to face difficult fiscal challenges where most projected fiscal breakeven prices are greater than $50 and, in several cases, close to or greater than $100 (e.g., Algeria, Cameroon, Nigeria and Libya).     

The looming energy transition 

Investment in energy in Africa, whether it is oil extraction and refining or energy generation, may be affected in the next years by the conjunction of demographic trends, technological changes, the urgency of tackling climate change and the possible accelerating effect of the pandemic.

The demographic trends are such that the continent will have huge needs and is likely to overtake major energy consumers including India and China in the coming decades as noted by the IEA’s Africa Energy Outlook (2019). By 2050, out of the additional 1.9 billion people on the planet, 1.2 billion will come from Africa, with its population reaching 2.5 billion.

Meanwhile, the trends in climate change are such that the continent will be among the most severely affected and as such would need to choose a path of green development. Extreme weather events, the frequency of which has been increasing as a result of climate change, were responsible for pushing 26 million people spread over 20 countries into situations of hunger crisis in 2019 alone according to the Global Report on Food Crises (2020).

Technological developments in renewables and transportation have also accelerated over the last decade so it also makes economic sense to invest in those sectors. Africa hosts one of the largest endowments in renewable resources including the richest solar resources in the world. Unsubsidized solar and wind, already competitive in 30 countries, is projected to become cheaper than coal and natural gas in over 60 percent of the world in the next few years (World Economic Forum, 2016). With an average cost of vehicle lithium-ion batteries falling by 16 percent per year over the last decade, electric vehicles could disrupt the oil market and become a viable option for Africa as well.

African oil exporters will have to be proactive as the energy transition could lead to permanently depressed oil and gas prices. The pandemic shocks have shown the potential effect of a massive drop in the demand for oil on oil prices. As diversification takes a long time, efforts have start as soon as possible to change their growth models. 

Conclusion

If the pandemic persists it could transform profoundly the demand for energy and accelerate some of the trends I mentioned above. The shock is certainly crippling fiscal resources in the short run, but it should not be allowed to wipe out the achievements in terms of human development over the last two decades. The recovery on the continent depends crucially on investing in renewable energy which offers huge potential in terms of badly needed jobs and acquiring new technological capabilities. It would also help fight climate change and power the development of Africa.