Are the Bretton Woods Institutions Ready for Africa’s Oil Shock?

The goal of reaching net-zero fossil fuel emissions by 2050 appears increasingly achievable. Investments in clean energy continue to grow, and the International Energy Agency and others predict that fossil fuel consumption will be in permanent decline within the next five years. While this is good news for the planet and the millions of people dealing with the fallout from climate change, it will also bring sizeable shifts in the global economy, including to African countries that depend on fossil fuel export revenues. The International Monetary Fund and the World Bank were created to assist members facing financial crises, but are they ready to respond to Africa’s looming oil shock? The short answer is no, but as one of us (Cleo) explains in a new paper, the IMF and World Bank can act now to avert a future crisis.

A predictable shock?

In 10 African countries, fossil fuel exports account for 50 percent or more of the export basket. Together, these countries make up a quarter of Africa’s total population, and a third of its GDP (Table 1).  

Table 1. African countries where crude oil and petroleum gas accounts for more than half of exports 

For the three largest among them—Algeria, Angola, and Nigeria—fossil fuels account for 80 percent or more of their export basket. Unless these countries have identified a new growth path in good time and are producing alternative export goods, they will be without foreign exchange sufficient to cover imports or fiscal revenue sufficient to support even modest domestic budgets.  

Algeria, Angola, and Nigeria are also especially important to economic and political stability in their regions as North, West, and Central Africa are under enormous political stress. Angola has a special interest in the stability of its fragile neighbor, the Democratic Republic of Congo (DRC), while the highly unstable Sahel region, where six countries fell to military coups between 2020 and 2023, lies between Algeria and Nigeria, putting pressure on their southern and northern borders respectively.

The IMF and World Bank have framed their “climate response” in a way that obscures this problem

The IMF and the World Bank Group (WBG) were created to assist members in exactly such circumstances. They can provide liquidity during a balance-of-payments crisis that risks disconnection from global trade, and additional long-term finance during a fiscal crisis that makes investment to support growth and development impossible.

The IMF recognizes that for fossil fuel exporters, managing the global transition away from fossil fuels requires 

“analysis (that) would usefully start with an assessment of a country’s vulnerability to a permanent price decline from a fiscal, [balance-of-payments], and financial angle. Vulnerability will thereby depend not only on the share of fossil fuel receipts in exports or fiscal revenues, but also on extraction cost and margins. In many fossil fuel exporting countries, an analysis of exposure of the financial system to potentially stranded assets is warranted. Staff reports would then discuss the authorities’ plans to manage the transition… and to diversity economic exposure ... and to protect the financial system”  (Guidance note for Surveillance under Article IV Consultations, Paragraph 116, bullet 3).   

Similarly, the WBG’s staff consistently stress the importance of diversification for these economies as they confront the “downside risk” of the collapse in demand for hydrocarbons. 

Despite having made climate issues integral to its mandate, the IMF is not systematically undertaking this analysis. Like the WBG, the IMF is focusing its analysis, activity, resources, and policy advice on “greening”—changing the source of energy production (mitigation) and preparing for climate shocks (adaptation). Africa produces less than 4 percent of global energy and consequently the primary focus of the Bretton Woods institutions is on adaptation. The focus on greening risks obscuring the impact of the global response to climate change on external conditions. Investment in adaptation is not a perfect substitute for their primary need—the discovery of future sources of growth.

The way forward

If the outlook for fossil fuel exports from Africa continues to deteriorate, by 2050 one in four people on earth will be living on an overheated continent with little to no adaptive capacity, struggling to make ends meet on incomes many multiples below the global average.

The global financial community must anticipate the timing, extent, and severity of this financing crisis that will have global implications by the mid-century. The full paper details the nature and scale of this problem and makes seven specific recommendations for IMF and World Bank Group leadership. These steps will help ensure their institutions step up now to play a vital role in confronting the greatest long-term financing challenge in Africa since the two institutions were created in 1944: 

1. The IMF must assess the vulnerability of oil exporters to a permanent price decline in oil from a fiscal, balance of payments, and financial angle. Such an assessment should be mandatory for African oil exporters. 
2. Informed by this detailed risk assessment, the IMF must sensitize the authorities to the likely timing, extent, and severity of the crisis, to inform domestic expectations and build support for reform.
3. With more accurate problem specification and sensitization of domestic policy makers, the IMF must work closely with the WBG and within the larger system of multilateral development banks, harmonizing adjustment with programming to support the discovery of a new growth path.
4. IMF members must review how best to employ IMF resources given the end of trade in oil, and the growth, debt service and development implications for systemically significant countries in Africa.
5. The IMF, WBG, and G20 members need to make every effort to ensure rapid progress in creating agreement on the design and rules of a sovereign debt restructuring mechanism to ensure that adequate capital investment in made to support a new growth path. 
6. The WBG must pay at least as much attention to new institutional forms and policies to support the discovery of new growth opportunities (diversification) as is given to the impact of climate change (adaptation) in Africa. 
7. The WBG should not overestimate the potential of public-private partnerships to deliver infrastructure in Africa and should carefully review experience ensuring that previous lessons are learned. A more systemic approach should also be considered with complementary investments to create employment and support sustainability. 

It cannot be simultaneously true that demand for fossil fuels declines from 2030 toward net zero in 2050 and oil exports are sustained at current levels. The Bretton Woods institutions should act now to head off what is starting to look like a foreseeable crisis.