Working Paper 93 - The Impact of High Oil Prices on African Economies

On the one hand the high price of oil is a unique opportunity for African oil producers to use the windfall gains to speed up their development. On the other hand, it is having adverse effects on net-oil importing countries, in particular those which cannot access international capital markets to smooth out the shock. We construct a dynamic stochastic general equilibrium model, which is tailored to reflect the characteristics of African economies, to quantify the effect of the increase in the price of oil on the main macro economic aggregates. The model is general enough that it imbeds both oil producing and oil importing countries. Our results indicate that a doubling of the price of oil on world markets with complete pass through to oil consumers would lead to a 6 per cent contraction of the median net-oil importing African country in the first year. If that country were to adopt a no-pass through strategy, output would not be significantly affected but its budget deficit would increase by 6 per cent. As for the median net oil exporting country, a doubling in the price of oil would mean that its gross domestic product would increase by 4 percent under managed-float and by 9 percent under a fixed exchange rate regime. However, inflation would increase by a much greater magnitude under managed than a fixed exchange rate regime in a median net oil exporting country.