Oil and mining to be the backbone of East Africa’s economic growth

The development of oil, gas and mineral discoveries in East Africa will drive economic growth and transformation in the region of more than 300m people over the next two decades.

This is according to Gabriel Negatu, regional director for Eastern Africa at the African Development Bank.

“The extractives in general, including oil and energy, will provide the backbone that will help the transformation in this region in the next 20 to 30 years,” he said. “There has been all sorts of resources gushing out of the ground every [few] months. Every country in this region now has one or several types of resources.”

Addressing delegates at last month’s East Africa Property Investment Summit, Negatu said the region covering Kenya, Uganda, Tanzania, Rwanda, Burundi, Ethiopia and South Sudan, has made remarkable economic progress riding on sectors like agriculture, but in recent years the “energy boom” has become quite apparent.

Major energy player

The industry, he said, could become a game changer for local economies and make the region a primary energy source on the continent.

“Statistics [show] there have been about 500 oil wells drilled in East Africa over the past two to three years as compared to 15,000 wells that have been drilled in West Africa. This region is a latecomer but it is a latecomer that is set to move aggressively to dominate… the African market. I think all the way from Mozambique to the top of the Red Sea coast will be the next Gulf of Guinea kind of primary source of energy in Africa.”

There are eight oil states in West Africa around the Gulf of Guinea, together producing millions of barrels of oil a day and the region has for a long time been regarded as one of the world’s oil and gas hotspots.

The economist noted that extractives will have a direct impact on economic growth, citing the case of Kenya where oil is expected to increase the GDP by as much as 10%. As citizens get more disposable income, investments in other sectors like real estate and consumer goods could increase.

Not losing sleep over the resource curse

He urged countries to approach the development of the mining and oil sectors differently from the way agriculture has been handled over the past decades. Although agriculture is the foundation of many economies in the region, Negatu pointed out that farmers are disengaged from the value chain.

There have been a few initiatives in countries like Rwanda, enabling coffee producers to supply directly to Starbucks, and in Ethiopia where farmers provide cut flowers to supermarket chains in Europe. However, Africa’s producers are predominantly cut-off from consumers and trade via middlemen and agents.

“Traditionally our way of economic growth has not linked us to the global value chain nor with the consumers. This is one of the transformations that need to take place. We need to now do less of the primary scooping and growing and so on and move up the value chain with direct access and contacts to consumers,” said Negatu.

Notably, concerns over the “Dutch disease” and the “resource curse” have been raised in the past few years as more resources have been discovered in the region.

“This is a reality and this is something that all of us need to be concerned about. The only saving grace, if I could call it that, is that East African [nations are actively] beginning to think about these issues. It’s not like 50 years ago when Nigeria discovered oil. [Back then] Nigeria was largely a peasant agrarian society and everyone left agriculture and went to some aspect of oil.”

Negatu added that the resource curse is not “something to lose sleep over” in the case of East Africa because economies in the region are already adequately diversified.

“Today East Africa is a robust mature economy without oil. Therefore these resources if anything are icing on the cake and not the cake itself because the cake is already there. Look at these economies; they have got IT, they have got tourism, they have got services… half a dozen sectors, all of them robust. So oil coming on top of it will only help improve [these economies].”

Driving infrastructure development

Negatu said the extractives industry could also boost infrastructure development in the region.

“Where you have extractives, whether it is leading up to the mines and the rigs or leading away from them, there tends to be a major explosion of infrastructure development,” said Negatu.

He cited the case of the Tanzania-Zambia railway that was built to transport Zambia’s copper from the mines to the port of Dar es Salaam.

“Today we are in discussion with half a dozen private companies for [an] US$8bn railway from Dar es Salaam to… Musongati [in Burundi] which I think is [one of] the largest nickel deposits in the world. So that is triggering another railway line.”

Negatu noted that the big challenge for the region is ensuring that the resource “tide lifts all the boats” and that all citizens share in the wealth generated.