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Lessons from the continent and beyond: Can oil diversify Uganda’s economy?

Christina Malmberg Calvo's picture


Uganda is striving to achieve middle income status by 2040, and a lot of optimism and hope is riding on the 6.5 billion barrels of crude oil in the Lake Albert basin. Many natural resource countries, however, have not fared well, and are struggling with inflationary pressures that affect competiveness, unsustainable subsidies and tax incentives which bleed the budget and undermine local revenue mobilization. High levels of corruption fueled by rent seeking behavior is also a challenge. 
 
Moreover, the global oil market is infamously finicky and the ‘black gold’ does not always turn out to be such a glittering prospect. But, ample experience abounds, and Uganda can avoid the mistakes of others. Indeed, now is the time to ‘prepare for oil’ and put in place a set of policy actions and institutions to maximize benefits and mitigate risks.
 
The upward and downward swings of the global natural resource market have caught many oil producing countries flat-footed. Nigeria, which depends on oil for more than 70% of its public revenues, is currently in need of financial support. Ghana and Zambia are facing similar dilemma. Angola, which expanded its public investment program massively—almost six-fold—during the golden days of booming oil prices, is now grappling with the results of its ill-planned and managed public investment projects. Under-execution of budgets and operational deficiencies have resulted in inefficiencies that are estimated at almost 5% of Angola’s annual gross domestic product (GDP). The ensuing deteriorating macroeconomic environment has created major economic distortions with strong negative impact on non-oil economic activities—the Dutch disease. Uganda should not head down the same slippery slope of the natural resource curse.
 
The experience of Botswana, Indonesia, Malaysia, and Mexico, on the contrary, show that exploitation of natural resources can provide a pathway to middle and high income status provided transparent accountability systems and a conducive environment for private sector development are put in place, and natural resource rents are invested to create other forms of capital. Another critical aspect is economic diversification. These countries have moved away from single resource dependence by diversifying their exports, and witnessed accelerated and sustained economic growth over time.
 
Economic diversification is already happening in Uganda, and the structure of the economy is gradually shifting from reliance on agriculture to manufacturing and services. The transformation of Uganda’s economy is also visible through an increased diversification of its trade base both in terms of geography—the number of Uganda’s trade partners has increased—and type of products—the country’s export basket now includes some 60 new products, e.g., cooking oils, processed fruits and vegetables, and fish. The gradual transformation in the output and export structures of Uganda, however, has not been accompanied by a similar shift in the employment structure—as the vast majority of jobs are still in the agriculture sector. 
 
In the latest World Bank Uganda Country Economic Memorandum, , we propose a strategy for how the country’s  oil could fuel economic diversification so that it  can harness the full potential of its oil and mineral resources to secure the long-term future of its people, sustainably.  Titled, Economic Diversification and Growth in the Era of Oil and Volatility,” the report sets out a strategy based on key building blocks articulated around enhanced transparency and environmental management, macroeconomic and fiscal prudence, and an improved investment climate for private sector.
 
Pursuing this strategy, could generate growth rates averaging nearly 10% for Uganda over the five years following the start of full commercialization of oil production, assuming that the oil price will recover in the medium term to its pre-crisis level of $90 per barrel.  This would be a doubling of the current estimated growth of 4.6% of 2015/16. Indeed, provided these assumptions hold, oil production could increase total government revenue from the current 13% of GDP to about 18% on average for more than 20 years.
 
Oil can help Uganda diversify by promoting the emergence of new industries, such as chemicals, fertilizers, cement; and by addressing key bottlenecks to sector growth in agriculture, manufacturing, mining and tourism through investing oil proceeds in infrastructure, better health care, as well as improving skills through quality education to develop the human capital. Moreover, the exploitation of oil can create synergies with local industries and services through purchases from and sales to other sectors—backward and forward linkages. Successful countries have harnessed those channels over time.
 
In a nutshell, how well Uganda ‘prepares for oil’ will determine how much the country will benefit from its oil. Uganda can buck the trend of some other countries affected by the resource curse by setting up the right institutions, improving the performance of existing institutions, and adopting and implementing the right set of policies. This is easier said than done, but it’s doable and absolutely essential to turn Uganda’s oil into a blessing rather than a curse for all its citizens.
 

Comments

Submitted by Mohamed O. Msekeni on

Definitely, the 6.5 Billion barrels of Uganda's Crude oil needs well structured policy frameworks, diversification. This will enable to maximize benefits and mitigate global recent oil glut uncertaun risks.
As the country has already started transformations from Agriculture led economy to processing, manufacturing and services industrial sectors. This is a good milestone but to make this Economic transformation more soundible potential and inclusive, Uganda needs the following:
(*1.)To link Agriculture and Crude oil fortune.
(*2.)To link Crude Oil fortune to environment, Climate change Wealth of citizens.
(*3.)To link environment, Climate change and Wealth of citizens to best global practices in Political, Economic and social Governance.
Finally linking (*1) to (*3) above into one line.

Submitted by Stephen on

Very well written piece Christina, and very informative. Congratulations to you and the CEM team for your work on this key topic. SM

Submitted by Norman Helmas Siales on

I just need some clarifications that all my revenue assets are in their save places. And another thing this extreme deprivations from our International organs and sub-organs along with their conspirators are killing me slowly. I just become homeless here in New York Manhattan, and been making requisitions to those international institutions and governments. Seeking my monetary reliefs in a form of compensation but those opposing parties would just neglect me, deprived me, and had everything under perverting. And I thank you for your respectable time and humble peace in bringing back social justice to our abrupted system. Hope we will strive to uphold its uprighteousness as we see fits and where we could. Now I really need your help with this communication. I am really sick and tired of staying in New York, I mean not NY but these corruptors and conspirators are killing me.

Sincerely yours

Norman Helmas Siales
808-489-6523
rocnormans@outlook.com

Submitted by GAKWAYA Titus on

Yes, Oil Can Establish Uganda's Dreams. I liked HE Joel Kagita MUSEVENI's Message on Swearing His Cabinet, how he did not mix the word. Yes, Uganda's Vision can be achieved with determinations, and driven vision. She is able with her people and resources with committed leadership.

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