The Economic Implications of Namibia's Oil Find

On July 6th the Namibian mines and energy minister, Isak Katali, announced the discovery of vast oil reserves off the Southern Namibian coast. This discovery has created huge expectations in Namibia, and many hope that the revenue collected from oil production would relieve poverty and jump start development in the country. The question that needs to be asked is whether Namibia has the capacity to properly manage this and whether this find will have any advantages for the region?

To put the find in perspective, it is estimated to hold 11 billion barrels, which is nearly equal to that of Angola’s reserves of 13 billion barrels of oil, according to the weekly Namibian Economist. Angola recently surpassed Nigeria as Africa’s top producer of oil and is expected to surpass even Kuwait’s oil production in the near future. It would make Namibia Africa’s 5th largest producer of oil after Libya, Nigeria, Algeria, and Angola.

Historically speaking, in most cases, production of oil has brought little benefit to ordinary Africans. Economists call this the “resource curse” – economies becoming over reliant on an extractive commodity such as oil. In such an economy exchange rates tend to appreciate which in turn makes imports cheaper to the point where it undermines local production and industrial development. In Angola for example oil production accounts for nearly 85 percent of its GDP, 90 percent of its export revenue, and nearly two thirds of government revenue.

This scenario is known as the “Dutch disease”. It causes national governments to rely on rent from industries for income and not on tax from its own citizens. Governments then have no incentive to invest in human resources, encourage the expansion of national industries, or to develop a sustainable middle class capable of paying taxes. Governments then tend to answer to whoever is producing the resources rather than to its own citizens.

This is not to say that the above will happen in Namibia. The country has firm macroeconomic policies, efficient political structures, growing financial institutions, and its corruption index is also much better if put in comparison with other African countries. Namibia’s currency is also directly linked to the South African Rand and is therefore not as much affected by currency fluctuations.

The biggest winner from this oil discovery would be Namibia. If correctly managed, the country will have the opportunity to make large investments into health, education, and social welfare. Regionally, South Africa stands to benefit the most. By importing oil directly from Namibia, South Africa could limit the impact of price fluctuations on the international oil market, and could in theory become more independent from organizations such as OPEC. This would however entail South Africa and Namibia undertaking bi-lateral agreements with one another concerning the issue.

South Africa is also the regions refining powerhouse. South Africa has close to 80 percent of refining capacity within Southern Africa and has provided the majority of refined products for Namibia for years now. Recently, according to research and consultancy firm Frost & Sullivan, Namibia decreased its reliance on South Africa for a 100 percent of their refined product to 50 percent in order to ensure that it’s not dependant on only one country for its petroleum products. Namibia still doesn’t have the technical knowledge to do their refining on their own however and South African companies could still take advantage in refining Namibian oil.

The issue does have some security implications for the region as well. Namibian oil discoveries would have to be protected, and Namibia does not have any efficient naval or maritime policing capability to do so. Currently South Africa is the only credible naval power in the region and it could be expected that Namibia would ask South Africa for some assistance in this regard until Namibia builds up its own maritime capabilities.

Extra care would also have to be taken by Namibian authorities to ensure environmental protection. Any form of pollution or maritime disaster so close to the South African border would not only impact Namibia negatively but would surely have an impact on South Africa as well. Namibia does however maintain an excellent environmental record to ensure the protection of its own tourism industry.

The Namibian government would have to ensure that proper controls are in place before the start of oil production in 4 years time. If the process is not properly managed Namibia could suffer the same oil induced tragedies that other African countries have experienced in the past such as severe income inequalities, entrenched poverty, and environmental degradation.