Governments in Africa should put into place fiscal rules, sovereign wealth funds and other mechanisms to buffer their economies from the commodities roller-coaster, according to a new report titled Primary Commodities Booms and Busts: Emerging Lessons from Sub-Saharan Africa, issued by the United Nations Development Programme (UNDP).

The report was launched on Friday 13 May at the African Union’s Permanent Observer Mission to the United Nations by Mr. Abdoulaye Mar Dieye, Director of UNDP’s Regional Bureau for Africa, in the presence of H.E. Ambassador Tete Antonio, Permanent Observer for the African Union. 

“The key message from the report, is that governments should save more, spend less and spend wisely to guard against uncertainty and instability while investing in long term development. The imperative in light of our ambitious continental agenda for 2030 and 2063 is to translate natural wealth into national wealth,” said Abdoulaye Mar Dieye.

Africa’s export revenues increased six-fold between 2001 and 2011, thanks to strong demand from middle-income economies such as China, Brazil and India. Between 2011 and 2014, due to a sharp decline in commodity prices, per capita growth on the continent decreased by half as compared with the previous ten years.

“It’s like the Cricket and the Ant tale, where one insect idles all summer while the other prepares for winter. If countries don’t save and manage their revenues adequately during periods of expansion, when commodity prices go down, there’s very little left other than austerity and development grinding to a halt,” said Ayodele Odusola, Chief Economist at UNDP’s Regional Bureau for Africa.

“There has been the tendency to increase expenditures during booms and cut back during price declines, rather than ensuring smooth and sustainable levels of expenditures over the commodity price cycle,” Odusola added further.

Also, the report shows, over-reliance on primary commodities, particularly minerals and fuel, is often associated with higher levels of corruption and even conflict, income inequality, as well as social indicators such as disease prevalence, higher mortality rates and uneven access to education.

In order to avoid such downturns, with potentially catastrophic implications for development, countries can initiate a number of options which can actually boost long-term economic growth and development over time. Sovereign wealth funds, for instance, can build savings for future generations and be used to manage investments rationally over time. To achieve this, sovereign wealth funds must target stabilization and long term-saving objectives simultaneously.

Other measures include fiscal, exchange rate, and monetary policies to improve savings so that adequate resources are available to sustain expenditures once commodity prices fall.

The report provides detailed analyses of the impact of the commodity price cycle on ten commodity-dependent African economies which successfully buffered the impact of lower commodity prices on their economies.

In Botswana, for example, the Pula sovereign wealth fund has led to better macroeconomic management and rapid growth, and appears to have been associated with better governance and institutional quality.

In Nigeria, the local content policy focuses on the deliberate use and capacity development of Nigerian human and financial resources to link the oil sector with the rest of the economy.

In Ethiopia, fiscal policy has led to an acceleration in the collection of taxes, while raising spending for the poor, including in physical infrastructure.

In Ghana, steps are being taken for the Ghana Cocoa Board (Cocobod) to issue energy and cocoa bonds to fund its long term capital and infrastructure needs.

As primary commodities account for more than 60 percent of merchandise exports in 28 of the 38 African countries with recent data, the report urges the continent to diversify in order to minimize risks and lay the foundation for a genuine and lasting structural transformation.