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afrol New, 7 June - Three decades of oil production has left the Gabonese economy dependent on this natural resource. The need for diversification is however "pressing", a new study says, as oil production is set to drop by 50 percent in the coming five years. Ludvig Söderling of the International Monetary Fund (IMF) yesterday presented a new economic study, titled 'Escaping the Curse of Oil? The Case of Gabon'. He concludes that the "need for diversification is pressing" as oil tax revenues constitute nearly 60 percent of the Gabonese government's total fiscal revenue and make up close to 80 percent of total exports. The long-lasting steady income of oil revenues had made the Gabonese economy develop structural weaknesses, Söderling outlines. This was "evident from the overexpanded government, the weak industrial tissue and the high degree of urbanisation" - symptoms of what economists call the "Dutch disease". The Gabonese case may confirm the controversial economic theory that a rich endowment in natural resources presents a curse rather than a blessing, as it can lead to lower growth in the non-oil sector and a higher degree of inequality. Over the last years, however, there have not been made new oil discoveries in Gabon, meaning that oil production - following the current trends - "is now expected to fall by over one half in the coming five years," Söderling says. "The short- to medium-term consequences of the declining oil sector are to a large extent related to an increasingly tight domestic and external financing situation." Gabon is ill-prepared for a diminishing oil sector as the countries financing needs are set to be high in the future as well. Despite of thirty years of big oil revenues, the social and physical infrastructure was still "in need of significant improvement," Söderling notes, in agreement with the Gabonese government. In Gabon, the question has increasingly been raised, where all the oil money has left and why public investments in infrastructure have tended to be extremely costly and of poor quality. The Gabonese conclude it's corruption. "Corruption is an undeniable problem in Gabon," also Söderling concludes. "Government investment contracts with the private sector tend to be overpriced or even fictitious." Another problem connected to an economy based on one natural resource is that productivity of capital is generally low. A big capital inflow perceived as permanent often induces excessive public investment projects. This happened through "political pressure to spend rather than to save, bribery involved in obtaining lucrative government investment contracts or nationalistic pride in a particular project." This also was the case for Gabon. Even worse - and a product of this - is the high level of external debt the rich country has accumulated during the oil boom, triggered by the easy access to credits. The public external debt service in 2000-01 was claiming over 40 percent of government revenue, Söderling says, adding it "will continue to be extremely high in the absence of debt rescheduling." While the country seems predestined for an economic setback on medium term, the IMF economist sees many more possibilities on a longer term perspective. The development of the non-oil sector was "essential for economic development and poverty reduction," Söderling writes. However, "no real progress has been made in terms of diversification since the end f the 1980s," the study demonstrates. In 2001, the oil sector had accounted for an estimated 40 percent of the total national economy. Agriculture and fisheries - contrary to the rich land and sea resources - represent only a small part of the economy, even if Gabon had been a big coffee and cocoa producer before depending on oil. Industry is underdeveloped, - based on wood processing and agro-industry - and account for 10 percent of non-oil GDP. Government services make up 20 percent of non-oil GDP, which is about the same as agriculture, fisheries and industry combined. The bulk of non-oil economy consists of services; mainly commerce, transportation, tourism and telecommunications. According to the study, "this is also what has driven growth, in addition to wood processing and other industries, in the most recent years." Also when it came to poverty reduction, the oil sector had been of little importance, as one easily can observe on a visit to the nominally richest country of Africa south of the Sahara. "Poverty reducing growth would need to be derived from the non-oil sector, given the limited effect the oil industry has on employment and economic activity of the general population in Gabon." - Resource abundance is often associated with neglect of education and health and poor development of human capital, the study mentions. "Although the public spending on education and health has tended to be rather high in Gabon, the results have been disappointing." Social indicators in Gabon are not significantly different from those of other sub-Saharan countries despite the relatively high income per capita. Less dependence on oil in the future therefore gave long-term hopes for the Gabonese economy. The non-oil sector however needed to be stimulated by fiscal consolidation, private investments and external financing, Söderling recommends. Fiscal consolidation was "a key to sustaining a minimum level of public investment without crowding out the private sector." One key "policy lesson" of the study was that Gabon needed to secure external financing in the future. Söderling, between the lines, lets the reader know that Gabon will need to knock on the IMF's door to ask for credit. Therefore, "Gabon needs to continue its efforts to normalise relations with the international community," he writes diplomatically. "This would entail continued fiscal consolidation, improvements in governance and the implementation of a comprehensive poverty reduction strategy" - classic IMF-ordered structural reforms. The non-oil sector clearly is Gabon's future, but government policies need to produce investment incentives. Söderling holds that the best way to achieve this probably would be "a sound business environment. This would require a decrease in the role of the state in the economy, an improvement in the business climate, and a strong stance against corruption." These IMF prescriptions most Gabonese would agree to.
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