Equatorial Guinea Seeks to Adjust to Lower Oil Prices

  • Oil price shock comes on top of declining hydrocarbon production
  • Effective fiscal adjustment should avoid across-the-board spending cuts
  • Policies that leverage infrastructure could support sustainable growth
  • In their regular review of the Central African nation’s economy, IMF staff said Equatorial Guinea’s decade-long hydrocarbon boom is ending and economic activity has stagnated since 2009, with oil and gas extraction having plateaued.

    The report said Equatorial Guinea’s outlook for 2015 is dominated by the confluence of lower international oil prices, a high dependence on oil revenues, and a rapidly diminishing government savings buffer. Upfront and substantial fiscal consolidation is unavoidable, particularly on high investment spending.

    As a result, the country’s economy is expected to contract by about 9½ percent in 2015, and further by about 2 percent per year during 2016–20 due to lower capital expenditures and falling hydrocarbon production.

    Equatorial Guinea embarked upon a long hydrocarbon boom around the turn of the millennium that turned it into sub-Saharan Africa’s third largest oil exporter and its wealthiest country in terms of per capita income (see chart). It has also enabled a large scaling up of investment spending on infrastructure.

    While extensive investment has helped to put in place substantial infrastructure, Equatorial Guinea’s social indicators are similar to those of low-income countries. Furthermore, hydrocarbon revenues are on the decline as oil and gas fields mature. These adverse trends have been aggravated by the price slump that is buffeting oil exporters around the world.

    The report notes that Equatorial Guinea’s era of buoyant economic growth is now receding, and the overriding theme of the IMF’s recommendations is for policies to help navigate an environment of much lower anticipated revenue, and to allow Equatorial Guinea to better leverage its existing infrastructure to foster diversification and structural transformation.

    Fiscal policy and the oil shock

    The authorities have set out a tough 2015 budget that aims to more than halve capital spending and implement strong reductions in spending. For an effective adjustment, the country report stresses the importance of avoiding across-the-board cuts. Instead, it proposes allowing near-complete projects to be finished, while putting in place a rigorous process to evaluate the relative viability of new projects in terms of expected economic and social...

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