Maximizing Revenues from Natural Resource Wealth Could Yield Big Fiscal and Environmental Dividends for African Countries

Maximizing Revenues from Natural Resource Wealth Could Yield Big Fiscal and Environmental Dividends for African Countries

Maximizing Revenues from Natural Resource Wealth Could Yield Big Fiscal and Environmental Dividends for African Countries

Maximizing Revenues from Natural Resource Wealth Could Yield Big Fiscal and Environmental Dividends for African Countries

In a time of energy transition and rising demand for metals and minerals, resource-rich governments in Sub-Saharan Africa have an opportunity to better leverage their resources to finance their public programs, diversify their economy, and expand energy access.

Africa’s Resource Future, a World Bank report launched today, finds that on average countries capture only about 40% of the revenue they could potentially collect from natural resources. In other words, at a time when countries are burdened by slow growth and high debt, governments could more than double revenues from natural resources such as minerals, oil, and gas by adopting a better set of policies, implementing reforms, and investing in better fiscal administration and promoting good governance. Full taxation of natural resources is also important to charge the full cost of environmental and social impacts not always fully covered by producers, including petroleum resources. Failing to do so can act as an implicit production subsidy and raise carbon emissions.

Maximizing government revenues in the form of royalties and taxes paid by private natural resource industries, alongside attracting new investment, would offer a double dividend for people and planet by increasing fiscal space and removing implicit production subsidies,” said James Cust, Senior Economist in the World Bank Africa Region and co-editor of the report. The prospect of higher revenues is particularly welcome in countries that find themselves unable to make badly needed development investments because of high borrowing and debt service costs.

The global transition away from fossil fuels is creating unprecedented demand for a host of minerals and metals such as cobalt, lithium, copper, nickel, and rare earth elements (REEs) that are required to develop green technologies such as wind turbines, solar panels, and batteries. Many of these resources are found in abundance across Africa. However, experience shows that natural resource wealth does not automatically translate into inclusive growth and prosperity.

Minerals, oil, and gas account for a third or more of exports from most countries in Sub-Saharan Africa, but countries have struggled to convert this wealth into sustainable growth in the past. Regional dependance on global commodity prices has led to suboptimal management of public resources when prices are high, and economic busts and fiscal crises when prices crash. Overall, resource-rich countries have been less resilient to economic shocks than non-resource rich countries, a reminder of the risks of a “resource curse.” Slower growth among some resource-rich countries has also been associated with lagging progress on poverty reduction.  

Africa’s Resource Future provides policy makers with practical recommendations for turning a “resource curse” into a resource opportunity. Besides capturing the full value of resource rents while continuing to attract private sector investment, governments should prepare for the next boom and bust cycle by investing resource rents into productive capital – by investing in people’s health and education and infrastructure that can support more diverse and resilient economies.

Amid other recommendations, the report also highlights opportunities tied to the implementation of the African Continental Free Trade Area agreement that calls for phasing out 90%of tariffs over the next five to 10 years. Promoting regional integration and harmonizing mining taxes and royalties across the region would also help.

“A regional approach to the extractives sector would allow the creation of value chains that add more value and create more jobs for people living in resource-rich countries than extraction alone,” said Albert Zeufack, World Bank Country Director for Angola, Burundi, Democratic Republic of Congo (DRC) and Sao Tome and Principe, and co-editor of the report. “In this regard, the African Continental Free Trade Area (AfCFTA) and greater regional trade and economic integration offer an unprecedented opportunity for developing the mine-to-market value chain within the continent, as resource-driven development becomes more feasible with greater access to larger markets and the ability to pool resources, skills, and comparative advantages.”  

A just transition for Africa, and the world, will depend on successfully and equitably harnessing the economic benefits of natural resources in the region. Good governance and sound macro-fiscal management of resource revenues, while also preparing for a low carbon future, lies at the heart of this transition and must play a central role in economic transformation for Africa’s future. 

Distributed by APO Group on behalf of The World Bank Group.