Economic Benefits are REAL but FROM REAL- Uganda Oil Economics

 

Often time transparency and accountability dominate the oil discussion among the key stakeholders, with limited attention paid to the economic consequences. The two are necessary but not sufficient for sustainable management of the resource and are arguably strongly correlated negative economic consequences including the oil curse.

If you remember where you were and how you felt when Uganda discovered its oil in 2006, optimism was on the lips of many Ugandans. Today there is a sect of the population that would prefer to have the oil remain in the ground than being out. Uganda enjoyed commendable macro-economic stability from the early 1990s to mid-2000s or late 2000s but since then the economy faced some hard times including the 20 year low record economy growth of 3.2% and record high inflation of 30.7% in financial year 2011/12. It is also notable that annual exchange rate (bureau mid-rate) has depreciated from 1$ =1772 Ug. Shs in financial year 2006/07 to 1$ =2585 Ug. Shs the last financial year. The exchange rate is expected to depreciate further in the next couple of years. This calls for investing in enhancing the non-oil sector export competiveness.

In 2006, Uganda’s debt burden was reduced from $4.1bn to $1.6bn under the World Bank/IMF led Highly-Indebted Poor Countries (HIPC) Initiative. However, the debt stock has already shot back to the 2006 levels.  In this current financial year – Uganda intends to borrow 1 trillion shilling from the domestic market. In the same year, the interest bill accounts for almost the same amount in our current appropriated budget. This represents 7.5% of the national budget and is more than the share appropriated to either health sector. Despite recent assessments showing that Uganda’s debt is sustainable, it is evident that the cost of the debt is on the rise. Depending on which school of thought one subscribes to, some argue that this rising trend is due to the expectations of future oil revenues.

This period of economic challenges coincides with the period oil was discovered in 2006. Hypothetically it is arguable that there is a correlation between the discovery of oil and the economic trend over the period.

Prospectively Uganda will defacto face some economic challenges ahead of oil extraction. The first challenge is the high expectations that oil has cast on Ugandans. The recent tullow Oil report indicates that 150,000 Jobs both direct and indirectly. It is also worth noting that Uganda average churns out about 400,000 from its higher levels of education (universities, tertially). According to Uganda National household survey 2009/10, the unemployed were 480,300 – accounting for of 4.2% of the labor force. Evidently the oil jobs will not significantly bridge the unemployment gap. 

 Related is the skeweness of the economic activity towards oil, likely leading to slow progress.  Over the last 7 years, it is noted that the services and manufacturing sectors that have strong linkages with oil sector increasingly account for the economy cake relative to agriculture.  Commendably Uganda has enacted a local content policy, but this also risks skewing attention to the oil sector. It is of critical importance that the next development plan incorporates a holistic plan of the economy local content which incorporates the oil local content.

On a positive side, the Oil revenue management policy envisages the economic challenges associated with the oil revenue management and proposes measures to address them and has developed a public finance bill, once passed will operationalize the management of the bill. The bill was submitted to parliament in March 2012 and is yet to be passed. A set of 55 amendments have since been re submitted to the responsible parliament session committee for consideration. The delays in passing the bill has its own economic implications including the delay in setting up the respective institutions and structures the bill intends to create, consequently the oil production. Further delays of oil production beyond 2018 will compound the recovery costs.

Oil is a finite resource and its prices are highly volatile. Worryingly, the proposed law does envisage creation of the stabilization fund. The stabilization fund, aims to……. It is indeed important to follow up the recommendation of the ORMP and ensure that pricing stability /benchmarking mechanisms are to be put in place. A pricing committee could be established to consult the Government and Parliament on medium term oil price projections with a view to smoothing future spending based on expected oil receipts.

 There are some best practice cases for Uganda including my employers Norway who have been in the oil business for 40 years and boast of over of oil fund reserves of 760bn dollars for just 5 million people. The reserves by any standard are astronomical more so compared to Uganda forex reserves of 3-4 bn reserves. The key has been in the Norwegian model is that Legislation and institutional framework must be correct. Capacity should be built while enabling all actors to perform their roles especially the institutions responsible for the management of the resources