U.S. Department of the Treasury

(Archived Content)

HP-211

Washington, D.C.– I would like to thank the Corporate Council on Africa and in particular, Steven Hayes for the opportunity to speak on this very important matter. I am also honored to be speaking at this lunch along with Deputy Minister Noormahomed from Mozambique. I must begin, however, with a mild reproach to CCA for my position in the line of speakers. Not only do I have the daunting task of trying to add something insightful after all of the distinguished speakers who have participated in the last two days, but I also stand between our guests and lunch. Therefore, I'll try to be brief.

The Treasury Department focuses on the world's financial sectors and global economic developments. I will therefore focus on this theme, and discuss the linkages between Africa's oil and gas sector and the U.S. and global economies.

Africa has long played an important role on the world stage. It is a continent that is significant in population and diversity, and is rich in tradition and culture. Its contributions to world civilization are numerous and long-standing. However, the continent represents a small fraction – less than 2 percent - of global GDP.

But Africa is a global player in the energy markets, and it plays a particularly important role here in the United States. As others this morning have noted, the continent currently supplies 19 percent of U.S. crude oil imports – a figure that will rise as the U.S. continues to diversify its supply. Africa is also an important source of global energy supply, accounting for 12 percent of world crude oil production.

Africa has reaped the benefits of its oil resources. The IMF estimates that GDP growth could top on average 10 percent in 2007 in sub-Saharan Africa's net oil exporters. In certain countries, oil will have an even more pronounced impact. For instance, the IMF projects Angola's GDP to increase by 30 percent in 2007.

And yet despite this oil wealth, some of the countries richest in oil and other extractives are also the poorest. Average per capita income in 2005 in sub-Saharan Africa oil producers was $537. Furthermore, despite the availability of abundant oil reserves, Africa has yet to fully exploit its resources fully. Although Nigeria alone has greater proven reserves than the United States, in September there were 27 times as many offshore rigs in operation in the United States as there were in all of Africa - 1,739 rigs compared to 64. In addition, Africa has far more unexplored territory than we do in our country. There are a number of reasons for this discrepancy, but these statistics reveal the stark reality that global resources are poorly distributed in the pursuit of this valuable resource, and Africa has large untapped areas that could be explored and harnessed.

The important question is, of course, how African governments could do more to realize the benefits inherent in this untapped wealth. I would like to discuss three areas where there is much to commend, but where more remains to be done.

First, and in many ways most significantly, resource allocations cannot be made more efficient until investment environments are improved substantially in African oil, and for that matter, non-oil producing countries. Speakers have noted Africa's poor rankings on a variety of surveys, such as Transparency International's Corruption Index. Another similar ranking is the IFC's annual Doing Business Indicators report. Unfortunately, many African countries continue to score very poorly on these indices. The IFC's doing business indicators recently ranked three African oil producing countries (Cameroon, the Democratic Republic of Congo and Chad) as some of the most difficult places in the world to enforce contracts.

There is, however, clearly an impetus for change emerging in Africa, and strong models for business climate reform are emerging on the continent. Zambia, Egypt, and Burkina Faso all ranked in the IFC's top ten list of reformers this year. I personally had the opportunity to see the reforms in Burkina Faso first hand earlier this year when I visited Burkina's new business registration center (CEFORE). The streamlined processes put in place at CEFORE have dramatically reduced the time required to register a business in Burkina Faso – a fact born out not just in statistics but by the conversations that I had with many small businesspeople in Ouagadougou.

Second, it is imperative that oil resources be used to foster broader economic development if Africa's oil wealth is to translate into long-run sustainable growth. Even as world oil prices and Africa's oil production increase, ordinary Africans do not always reap the benefits. Continuing poverty and lack of equity, against the backdrop of high oil prices, can lead to civil strife and attacks on oil infrastructure. The Niger Delta is a case in point, where fully a quarter of Nigeria's existing oil production capacity is off line due to militant activity spurred by worsening socio-economic conditions.

Establishing transparent processes for collecting and using national revenues, including those derived from energy production, could help avoid such troubles. Put succinctly, oil revenues should benefit all citizens in oil producing countries. Several countries are making progress in this area. For example, Cameroon and Angola publish information on oil revenue. Nigeria has published a series of oil-sector-related audit reports and brought the quasifiscal activities of its national oil company into the national budget. Four more oil producing countries subscribed to the Extractive Industry Transparency Initiative in 2005-06. This initiative empowers citizens to know what amount of wealth their governments are receiving so that governments can be held accountable.

The IMF has also shown its commitment to helping countries improve transparency in the oil sector, particularly with its recent Guide on Resource Revenue Transparency, a guide we highly recommend to all oil-producing countries. There has been progress in improving transparency, but African governments and private oil companies need to build on this platform. They can and should do more.

Third, it is essential that the stewards of government economic policy ensure that the macroeconomic framework is robust enough to manage the impact of volatile oil revenues on the economy. It is heartening to see that there has been a real improvement in macro-economic policy management on the African continent, and there is a great deal to commend on this front.

Monetary policy, increasingly implemented by independent central banks, has effectively controlled inflation. Some central banks have also taken proactive measures, such as introducing new monetary tools to help control growth in the money supply. As a result of these efforts, the average year-end inflation rate of sub-Saharan Africa's oil exporting countries has actually fallen over the last four years. Nigeria, for example, has managed to bring inflation to historically low levels despite the influx of billions of dollars of surplus oil inflows in 2006.

Fiscal policy management has also improved. While each country has pursued its own combination of policies, a key policy measure in some countries, and again Nigeria deserves mention, has been the adoption of a fiscal rule for budgeting purposes that saves all oil revenue receipts above a certain price per barrel. In addition, efforts have been made in some countries to improve the medium-term expenditure frameworks and strengthen public expenditure management. One area that certainly could use more attention is extending fiscal prudence at the national level to sub-national and provincial governments and strengthening their ability to spend efficiently.

African policymakers also need to think about how they will manage their oil resources for the long-term. Although circumstances vary significantly from country to country, there are intriguing models to consider from other countries. In the Persian Gulf, an area that I deal with quite frequently, governments invest excess oil revenue in state-owned funds that generate investment returns and which can be tapped when oil revenues fall or other circumstances arise. Kuwait, for example, withdrew $80 billion from its oil fund at the time of the first Gulf War in order to manage the task of reconstruction. Other examples such as Alaska or Norway offer other potential models.

The world needs Africa. Global markets will increasingly depend on African energy reserves to meet rising demand. This situation presents a challenge and opportunity to African policy makers. The wealth that oil will provide to Africa, if managed efficiently, has the potential to drive sustainable and equitable economic growth, and this in turn can improve the welfare and well-being of citizens. At the Treasury Department, and in the United States Government as a whole, we look forward to being a partner in this endeavor. Thank you.