Towards sustainable economies in oil dependent countries

As oil prices plunge and the Covid-19 pandemic continues to impact the world, civil society must embrace new opportunities for influencing long-term policymaking in oil-dependent countries 

As the COVID-19 pandemic continues, countries face the dual crises of public health emergencies and economic devastation. This twofold burden is especially challenging in oil-dependent countries, where governments are over-reliant on oil production. The global oil-price crash means countries such as Iraq – where oil revenues make up 95 per cent of the government budget – face extreme budget deficits and are struggling to meet citizens’ most basic needs.

Watch the PWYP webinar on Covid-19 and oil dependency held on 17 June 2020

Caught in a boom-bust cycle

Unfortunately, Iraq has not used prudent tools and public financial management techniques to diversify its economy or attempt to spread oil-based expenditure over time. This would help insulate the economy from volatile oil market shocks. Now, as always, citizens are paying the price for poor policy decisions.

According to Dr. Adnan Bahiya, Founder, Iraqi Coalition for Transparency in Extractive Industries, PWYP Iraq member, Iraqi civil society tries to pressure the government to do better in times of low oil prices, but government officials tend simply to wait until prices climb again, locking the economy into a boom-bust cycle. 

“In every wave of decline in oil prices, the government finds itself in huge crisis, struggling to provide financing for public budget expenditures,” says Dr Bahiya. “Calls are always made, including by the PWYP Iraq coalition, the Iraqi Alliance for Transparency in Extractive Industries,, to grow revenues and diversify the economy, but these calls quickly end when oil prices recover.”

A sustainable approach

In contrast, Kazakhstan has created a sovereign wealth fund to avoid such crises. The country established a National Fund to save a portion of oil revenue for future generations and prepare for scenarios such as the need to maintain consistent government spending during an oil price crash.

The fund can be used to help plug budget shortfalls related to the current economic crisis, explains Tatiana Sedova, independent consultant. “Kazakhstan now has some fiscal space to maintain public spending, despite a decrease in government revenue, by increasing transfers from the National Fund to the state budget. The government ensures that this is a one-time action, adhering to the concept of the need for savings via the fund. But we also have to face the negative economic effects of COVID-19, and the National Fund could be used for this too. Citizens should have full information and a clear understanding of how much was received, spent – and on what – and left for future generations.”  

Gambling on the future

In addition to the economic hardship in countries with oil-dependent economies, some newer or expectant producers are also facing a budget crisis – even though oil has not left the ground. In Uganda, the government has taken on significant debt to finance the nascent oil industry, securing these loans with the promise of future oil revenues. This means the government has essentially “spent” a portion of the country’s oil revenues even before drilling has begun. 

But the context in which the government made those deals is drastically different from the oil market of today, making the economics of Uganda’s oil sector look increasingly unviable. If oil never leaves the ground and the government defaults on these loans, Uganda’s citizens will face the consequences of policy decisions they had no say in making.

New ways to drive change

PWYP has made real inroads in following revenues from oil, gas and mining, ensuring they reach citizens and exposing wrongdoing when they don’t. But current circumstances offer civil society important new opportunities:

• Identify risky economic planning to prevent future crises

Instead of tracking money and following up on government decisions, civil society should look ahead to influence policy decisions being made about the future. Can we use our expertise to prevent negligence not only regarding today’s oil revenues, but also when it comes to future revenues, in the hope of avoiding the current situation facing citizens in Iraq?

Open Oil says civil society can use the various disclosures we have fought for over the past decade to undertake public revenue forecasting. This would enable civil society to assess the assumptions governments make about oil prices and expected revenues, and expose risky decision making. Civil society can then push for budget adjustments or the establishment of revenue management tools such as sovereign wealth funds.

“It’s time to build on the hard-earned achievements of civil society and use the years of disclosures to track – or model – the future as well as the past,” says Open Oil’s founder, Johnny West. “There are data and contracts in the public domain to inform a wide range of financial analysis of natural resources. What will the government get this year? How long will fossil fuel production go on? What pressures will governments and societies face from companies whose business model is squeezed by the energy transition? These and others are all questions civil society can now address, putting into the public space investment-grade analysis, which is often ahead of the government. Why play catch-up when you can take the lead?”

• Advocate against risky oil-backed debt in newly producing countries

Civil society excels in tracking oil revenue expenditure, but can we track policy decisions being made based on future oil revenues? For instance, could we assess and critique Uganda’s oil-backed debt management plan, to identify risky policy choices? Could we call out the government’s incurrence of debt, in contravention of the Public Finance Management Act, which prohibits the use of oil revenue as collateral? PWYP believes citizens should have meaningful input into how oil revenues are spent. This means Ugandan citizens should be able to veto decisions made behind closed ministry doors to “spend” future oil revenues through current loan agreements.

In some cases, we could use modelling to compare a project’s projected lifetime with climate mitigation goals, to see whether a project is at risk of being “stranded”, or left incomplete. This would show whether a government is incurring debt based on revenues expected for the next 30 years, when realistically, a project might be put on hold after 15 years, leaving the state strapped for cash. 

• Promote economic diversification and a departure from fossil fuel dependency

The current context gives us leverage to push back against oil dependency, as the negative consequences of extractive-based economics are highly visible. Citizens are suffering due to weak economic planning and over-reliance on oil, so now is the time to push governments to do better. Governments must diversify national economies by diverting investments beyond boom-bust commodities into productive sectors, such as education and agriculture. This will bring sustainable, long-term economic productivity. Now is also time to push for energy diversification and investment in more sustainable energy sources that will deliver long into the future. 

As oil prices creep back up, dependent governments will be eager to use oil dollars to plug budget gaps. Civil society must take this opportunity to demand that instead, they commit to a more sustainable economic and energy future for us all.