The prices of hydrocarbons and minerals are subject to severe fluctuations. As a result, commodity dependent countries in sub-Saharan Africa face serious fiscal and balance-of-payment deficits. In the short run, countries respond by changing output levels, withdrawing from sovereign wealth funds, drawing-down reserves, reducing public expenditure, scaling up domestic resource mobilization, and seeking external borrowing. However, all these options have serious drawbacks. In the long run, diversification of sources for tax and foreign exchange is the only viable solution. For instance, in commodity dependent countries, the manufacturing sector contributes 7 per cent of GDP, compared to 13 per cent in other resource dependent economies in Latin America, the Caribbean, and Asia. The current price shock presents yet another opportunity to embark on economic diversification strategies.
Do Sovereign Wealth Funds Dampen the Negative Effects of Commodity Price Volatility?
