Poor nations ride high on commodity boom but aid agencies worry about the bust

High oil and metal prices have boosted economies of sub-Saharan Africa

Many of the world's poorest countries are reaping windfall gains from the boom in global commodity prices which has seen oil prices top $75 a barrel and pushed most metals to their highest point for more than 20 years.

Developing nations had seen the price of their main exports fall relentlessly on world markets for years. But the insatiable appetite of China for raw materials and a frenzy of speculative buying has resulted in sub-Saharan Africa enjoying its best growth rates in three decades.

In some countries the expansion has been spectacular. Angola and the Democratic Republic of the Congo were both hobbled by civil war in the 1980s and 1990s, with growth suffering badly as a result. In the latter, the economy shrank by an average of 5% a year from 1988 to 1997; Angola managed to grow by an average of 0.9% a year.

But between 2003 and 2005, Congo's economy expanded by more than 6% a year, and the International Monetary Fund is projecting 7%-plus expansion this year and next.

With the oil price tripling over the past three years, Angola's substantial oil reserves have become far more valuable. The IMF expects the economy to grow by 26% this year and a further 20% in 2007 after growing by 11% in 2004 and 16% in 2005.

"The economic outlook in sub-Saharan Africa remains positive, with growth of 5.8% projected this year - the highest rate in over 30 years - underpinned by high commodity prices, improved macroeconomic policies and structural reforms in some countries," the IMF said in last month's World Economic Outlook. "This acceleration in growth is largely due to the oil-producing countries, where capacity increases in Angola and the Republic of Congo and new production in Mauritania are expected to drive a substantial pickup in activity."

There is more to the story than oil. The price of metals has been rocketing, partly owing to strong demand but also as a consequence of increased buying by pension and hedge funds. The fivefold increase in copper prices, from $1,500 a tonne in 2002 to its current level of just over $7,700, has added two percentage points a year to the growth rate of Zambia, one of the world's main suppliers.

Zambia had already been showing signs of economic recovery after the lost decade of the 1990s, but has averaged 5%-plus growth from 2003 to 2005, and is expected to expand by 6% both this year and next.

Corporate profits

Governments have had to share the windfall gains from rising commodity prices with giant oil exploration and mining companies. Much of the price rise has been absorbed by higher profits, as the recent performance of BP and Shell testifies. The mining company Rio Tinto saw its underlying profits rise 118% to $5bn (£2.7bn) in 2005, with the chairman, Paul Skinner, expecting the outlook to remain good. "We believe economic growth will continue the positive trend of 2005 even if rates of growth slow somewhat," he said at the company's annual meeting last week. "This, in turn, should result in a continuation of strong markets for our products and prices above the long-term trend."

Mr Skinner tempered his optimism with a warning. "We recognise that the current strong markets will not continue indefinitely. At some point the supply position will become more balanced and we will see a downturn in the cycle."

End of the boom

Some analysts believe that a bursting of the bubble is inevitable and not that far away. Simon Hayley, international economist for Capital Economics, predicted yesterday that oil prices would drop back to $45 a barrel by the end of next year, with metals declining by 40% over the same period. That, he added, was a conservative estimate; there was the possibility of an even sharper fall in the event of a pronounced slowdown in the US economy.

Mr Hayley said that though the recent increase in commodity prices looked spectacular, it was little more than a modest upward blip when set against the steady fall in the real cost of industrial commodities over the past 160 years. He said demand was likely to fall at a time when producers were responding to market signals by supplying more and that meant prices would come under downward pressure. "Prices have also been boosted by speculative buying and investors have been encouraged to regard commodities as an alternative asset class. This could continue to support commodity prices for now, but the subsequent fall in prices risks being exacerbated by the unwinding of these positions."

It is the possibility that developing countries will be vulnerable if commodity prices come down as quickly as they have gone up that concerns some development experts. Max Calì, research fellow at the Overseas Development Institute, said that the short-term boost to growth caused by higher commodity prices tended to lead to a higher real exchange rate, which made life more difficult for non-commodity exporters.

In Zambia, he added, there was evidence that the agricultural and agro-processing sectors were being handicapped by the rise in the value of the Zambian kwacha, which was making exports dearer.

Claire Melamed, the head of policy at Christian Aid, said the benefits of the commodity boom had not been spread evenly. Africa overall had seen an improvement in its terms of trade of 30% between 2000 and 2004 so that each kilo of exports bought 30% more in 2004 than it did in 2000.


In contrast, countries reliant on soft commodities such as sugar had been faced with falling prices and deterioration in the terms of trade. For example Malawi, where the main exports are sugar and tobacco, had seen a 20% fall in the terms of trade since 2000. In Mozambique the higher world market price of aluminium had been more than offset by declines in sugar and cotton.

Ms Melamed and Mr Calì said the crucial thing was how countries spent the extra revenues from the commodity boom. "Nobody knows how long the price rises are going to continue," said Ms Melamed. "Nor do we know whether China will be enough to keep demand for these commodities high.

"Developing countries cannot afford to relax. For those that are benefiting, high commodity prices have bought them some time to do what they should have been doing all along - diversifying into new sectors."