Fragile, oil-exporting developing countries will be hard hit by the consequences of the Coronavirus (COVID-19) pandemic, and the opportunity exists to assist these countries to transition towards a low-carbon, more diversified and resilient economic future
Countries that are net exporters of oil are experiencing an unprecedented double blow; a global economic contraction driven by the COVID-19 pandemic and an oil market collapse with the benchmark price for United States crude oil, the West Texas Intermediate, briefly going negative for the first time in history (in April 2020). Based on an oil price of USD 30 per barrel, the International Energy Agency projects that oil and gas revenues for a number of key producers will fall by between 50 to 85% in 2020, compared with 2019, yet the losses could be larger depending on future market developments (IEA, 2020[1]). The present crisis is happening in the wider context of a structural decline in the market for fossil fuels, driven by a commitment towards decarbonisation by a number of countries as well as the wider technological changes that are gradually making renewable energies the preferred energy option (Lahn and Bradley, 2020[2]; Elgouacemi et al., 2020[3]).
The current crisis is expected to hit oil-exporting developing countries particularly hard, for two reasons:
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First, the dependence of many of these countries on a single commodity for their exports and revenues renders them extremely vulnerable to market volatility. Although the largest share of commodity-dependent countries1 globally are in sub-Saharan Africa, oil and gas make up the majority share (over 60%) of total merchandise exports in a range of developing countries, including Algeria, Islamic Republic of Iran, Iraq, Libya, and Timor-Leste (UNCTAD, 2019[4]). In the period 2011-2013, the proceeds of crude oil sales by the top ten sub-Saharan Africa oil-exporting countries amounted to more than 50% of their combined government revenues and more than 75% of export earnings (Gillies, Guéniat and Kummer, 2014[5]). Indeed, UNCTAD reports that despite the global focus on energy transitions, and repeated calls to diversify their economies, some countries are more concentrated on commodities than ever (UNCTAD, 2020[6]). Other developing countries are still looking to expand their oil sectors as a source of future economic growth.
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Second, many of these countries were in vulnerable positions already before the current crisis, and further deterioration may exacerbate existing fragilities. Over half of low and lower middle-income countries dependent on oil and gas for their exports and revenues are classified as ‘fragile’.2 Decision makers in resource-rich countries have frequently struggled to translate resource wealth into poverty reduction and sustainable development, performing poorly across a number of development metrics, including on economic growth (Sachs and Warner, 1995[7]), democratic governance (Ross, 2012[8]), and conflict prevention (World Bank, 2011[9]). Although variation amongst countries exist, oil-exporting developing countries frequently score ‘weak’, ‘poor’, or ‘failing’ on metrics for good governance (NRGI, 2017[10]), with decision makers often having been found to overspend on consumption and wasteful infrastructure projects while neglecting priority sectors such as education and health (de la Croix and Delavallade, 2009[11]). The result is that social services in oil rich developing countries are often deficient and fail to cater to the most vulnerable populations. Although pockets of efficiency in the form of more capable and resourced state institutions often do exist in these countries, these institutions have tended to focus on the extraction of additional resources rather than on providing public goods that enhance the collective welfare (Hertog, 2010[12]; Soares de Oliveira, 2007[13]).
In the context of these mounting pressures, opportunities exist for official development assistance (ODA) and particularly blended finance to be deployed to assist oil producing developing countries to transition towards a cleaner, more diversified and resilient future.
