What Happens When a Country Does Not Adjust to Terms of Trade Shocks? The Case of Oil-Rich Gabon
Gabon is currently one of the richest countries in Sub-Saharan Africa, having a GDP per capita of close to $4,000, and is characterized by a stable political climate and rich forestry and mineral resources, as well as a small population. Oil is the...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2004/09/5166787/happens-country-not-adjust-terms-trade-shocks-case-oil-rich-gabon http://hdl.handle.net/10986/14245 |
| Summary: | Gabon is currently one of the richest
countries in Sub-Saharan Africa, having a GDP per capita of
close to $4,000, and is characterized by a stable political
climate and rich forestry and mineral resources, as well as
a small population. Oil is the key economic sector,
accounting for half of GDP and more than two-thirds of
revenue. Discovered in the 1970s, oil windfalls have
delivered spectacular wealth and financed public expenditure
over two decades. However, the oil boom has led to the Dutch
disease and the shrinkage of the industrial and agricultural
sectors of the economy due to the appreciation of the
exchange rate and the movement of capital to the oil sector.
But with output projections suggesting that oil will be
depleted within the next 10 to 15 years, there are growing
pressures on the policymakers to take actions to diversify
production. While Gabon's membership in the Central
African economic and monetary union means that it benefits
from the macroeconomic stability from a common external
trade and fixed exchange rate regime pegged to the euro, it
relinquishes independence in the policy response to shocks.
An analysis using a quantitative methodology to decompose
responses to shocks shows that Gabon's adjustment to
adverse movements in the terms and trade from 1980 to 2000
was considerably weak in terms of three performance
indicators-import intensity, economic compression, and
nonoil export promotion. While the economy's growth
rate was respectable, policymakers postponed adjustment by
resorting to considerable borrowing during this period.
While there was some decrease in import intensity from 1987
to 1990 and 1996 to 2000, as well as slight non-oil export
diversification from 1996 to 2000, the government borrowed
from commercial banks and donors, causing its external
debt/GDP ratio to increase from 30 percent of GDP in 1970-76
to 80 percent in 1999. To pay the debt service, it currently
has to maintain large primary surpluses. Only since 1996 has
there been significant fiscal retrenchment and a freezing of
government wages. |
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