Juba, Dar to bear brunt of steep drop in oil prices

The Kurasini oil Jetty in Tanzania. Low oil prices will hurt the economies of Tanzania and South Sudan more the others in the EAC. PHOTO | FILE 

By MICHAEL WAKABI

In Summary

• South Sudan and Tanzania will bear the brunt of the sustained fall in commodity prices while Uganda and Kenya stand to gain because the reduction in prices for agricultural exports such as coffee is more than compensated for by the drop in their oil bill.
• Oil prices have fallen 75 per cent since mid-2015 and financial experts now project that the price will settle at a long-term average of $50 per barrel towards the end of the year.
• While coffee prices too have fallen to over the past year, Uganda’s current account deficit is expected to narrow to 7.4 per cent this year, primarily because of the gains made from lower oil prices.

South Sudan and Tanzania will bear the brunt of the sustained fall in commodity prices while Uganda and Kenya stand to gain because the reduction in prices for agricultural exports such as coffee is more than compensated for by the drop in their oil bill.

Oil prices have fallen 75 per cent since mid-2015 and financial experts now project that the price will settle at a long-term average of $50 per barrel towards the end of the year.

While coffee prices too have fallen to over the past year, Uganda’s current account deficit is expected to narrow to 7.4 per cent this year, primarily because of the gains made from lower oil prices.

READ: Coffee to boost Uganda’s foreign exchange revenue in 2016

“We don’t believe oil prices will go back to $65 or $80 anytime soon, they well settle around $50 by the end of the year. We believe that $50 is perhaps a true reflection of where the market should be,” Jibran Qureish, Standard Bank’s chief economist for East Africa, told the Stanbic 2016 Investor Forum in Kampala last week.

This, he argued, should be an opportunity for new oil producing countries such as Kenya and Uganda that plan to go into oil production to diversify their economies and avoid the pitfalls that have seen Africa’s large oil producers (such as Angola and Nigeria), seek emergency loans from the World Bank as oil prices plummet to their lowest in two decades.

“Declining oil prices mean the endgame for undiversified economies,” Mr Qureish said. “But economies like Uganda and Kenya, which will become oil producers in the next five years, should be looking at diversifying their economies.”

Mr Qureish said oil prices will remain low.

“It is more than demand and supply or the price of oil, the name of the game in oil right now is market share. Iran which lost market share during the sanctions regime for now has no interest in an output cut,” he said, pointing to the failed effort to agree on an output cut during the OPEC meeting in Doha last week.

Furthermore, the demand side is unlikely to lift prices significantly because the major oil consuming economies such as China, Japan and Europe continue to face poor growth prospects.

China is projecting a growth of 6.9 per cent for this year, down from the heady double digit numbers it has enjoyed in the past decade. Even then, analysts believe actual growth in China will be closer to 3-3.5 per cent.

For most mineral-heavy African economies such as Angola, Nigeria, South Sudan and Tanzania as well as Mozambique, which recently discovered huge gas reserves, the depressed state of China’s economy is a double blow.

ALSO READ: World Bank lowers 2016 growth projections for sub-Saharan Africa

Besides being a major buyer from them, its impact on global commodity prices means they will have to live with depressed prices for longer. South Africa is a major producer of coal while Tanzania is a player in gold and diamonds.

However, by and large, East Africa stands to benefit more from the collapse of global oil prices because the net savings on import bills far outweigh the losses from the drop in international prices for primary exports such as coffee and tea for Uganda and Kenya respectively“Commodity prices have traditionally mirrored the trend of oil prices and what we are seeing now is no different, but the decline in oil prices is more positive for Uganda than the fall in coffee prices,” Mr Qureish said.