Spend Now or Save?

• Author: Paul Toungui
• Position: Gabon's Minister of State and Minister of the Economy, Finance, the Budget, and Privatization

Africa's oil producers, including Gabon, must decide how to manage windfall oil revenues

Africa's oil-producing countries are benefiting from high global market prices for oil, raising the question of how they should manage their windfall revenues. Is it better to use the resources to tackle the many challenges they face, thereby advancing their efforts to achieve the 2015 Millennium Development Goals (MDGs)-which cover a broad range of social goals, including halving poverty from its 1990 level, reducing child mortality and improving maternal health, and achieving universal primary education-or should they set aside a portion of the resources to provide for future generations?

It is very tempting to use these revenues to make up lost ground. Like other developing countries, Gabon has deficiencies in basic infrastructure, job creation, and access to basic social services (especially in health care and education). Poverty afflicts an ever-greater percentage of the population-now about one-third.

The dilemma of how oil revenues should be managed is not new for Gabon. During past oil booms, windfall revenues and favorable financing terms led it to borrow excessively to finance ambitious investment programs in basic infrastructure-resulting in public debt outstanding during the 1980s that exceeded 70 percent of GDP. Those who worry about Dutch disease note that this approach led, not surprisingly, to higher production costs and unsustainable debt.

Taking into consideration the country's weak absorptive capacity, Gabon is now opting to use its additional resources to finance social spending-focusing on sectors that can serve as a foundation for increasing the country's economic growth potential-while at the same time setting aside a portion of those revenues to cushion the impact of external shocks in the future.

Using oil to get out of debt

It is virtually impossible for African countries to achieve the eight MDGs by 2015, given their present starting point. Real growth remains weak in many countries, falling well short of the 7 percent needed to reach the MDGs, and debt service places a heavy burden on public finance, absorbing resources that could be used to alleviate poverty. As a result, social indicators stagnate or worsen.

Although African countries have, for several decades, carried out structural adjustment programs and sought debt...