Macroeconomic Impacts of Oil & Gas Discoveries in New Producing Countries

About the Project : Natural Resource-led Development in New Producing Countries

This project seeks to understand how natural resource extraction can drive inclusive economic growth in new producing countries. We are engaged in a multi-year multidisciplinary study with four objectives: 

1.     Understand the human geography of new producing countries. 
2.     Assess the magnitude of new discoveries and estimate direct fiscal impact. 
3. Understand how industry can be localized to create economic growth. 

Estimate spillovers and welfare impacts to society.

Recognizing that policymaking in new producing countries is a complex process, this project also seeks to understand the interactions of actors’ interests that drive energy sector policies.

Our initial focus is on four countries – Kenya, Mozambique, Tanzania and Uganda – that expect to develop significant oil and gas reserves in the next 5-7 years. Through natural resource development, these countries hope to achieve middle-income economic status by 2030-2040. This project is conducted through close collaboration with leading think tanks and NGOs in Africa.

Key Points

• Macroeconomic impacts from developing a country’s natural resources can occur much earlier than initially expected. There is evidence that just the announcement of a large oil or gas discovery can affect the economy. 
• A study by the International Monetary Fund (IMF) found that the surprise news of a natural resource discovery can lead to substantial short-run economic responses including a drop in employment, rise in savings and corresponding fall in investments, and a delay in increases to economic output until production starts. 
• It is possible to mitigate these risks if expectations of stakeholders are managed early in the discovery process and carried out by organizations with responsibility for dealing with the macroeconomic impacts of natural resource revenues. In Eastern Africa, these are the ministries of finance, central banks and the national planning bodies. 
• Advancing natural resource revenues through borrowings against expected future revenues is a risky strategy given the lag from discovery to production in Eastern Africa, which will exceed at least 10 years in every case.