A new report published by the United Nations Development Programme (UNDP) has called on governments in Africa to adopt fiscal policies and create sovereign wealth funds in order to compensate for fluctuations in commodity markets.
“There has been the tendency to increase expenditure during booms and cut back during price declines, rather than ensuring smooth and sustainable levels of expenditures over the [full duration of the] commodity price cycle,” explained Ayodele Odusola, Chief Economist at UNDP’s Regional Bureau for Africa.
The report, entitled Primary Commodity Booms and Busts: Emerging Lessons from Sub-Saharan Africa, was a unveiled at the 10th African Economic Conference in Kinshasa and offers a detailed analysis of ten commodity-dependent African economies that have introduced new economic policies and mechanisms that have reduced the economic impact of a downturn in both demand and price.
One example cited in the report is Botswana, where the Pula Sovereign Wealth Fund has led to better economic management and rapid growth. In Ethiopia, the report reveals that fiscal policies have aided tax collection and freed up funding for infrastructure projects in poor areas, while the Ghana Cocoa Board is in the process of issuing cocoa bonds to fund future capital and infrastructure needs.
In addition to creating sovereign wealth funds, other recommended measures include fiscal, exchange rate, and monetary policies to improve savings so that adequate resources are available to sustain spending if commodity prices fall.
“One third of Africa’s impressive growth rate is due to huge demand [from] emerging economies [and] governments must [therefore] seize the opportunity of these commodity booms to structurally transform their economies,” explained Abdoulaye Mar Dieye, Head of the UNDP Regional Bureau for Africa.
The launch of the report follows six-fold growth in export revenues across the continent between 2001 and 2011, thanks to strong demand from China, Brazil, and India. However, in the three years that followed, growth figures fell by half when compared with the previous decade, as commodity prices tumbled.