OIL ECONOMY: How Can Uganda Benefit From Its Forth Coming Oil Boom?

By Magara Siragi Luyima 

After the initial exploration of oil and gas that ended in 2014, with a confirmed commercial discovery estimated at 6.5 billion barrels of oil, of which 1.4 billion are recoverable,Ugandan government has embarked on the development phase and has finalized plans to invest $800m (about UGX2.9 trillion) in the 1,445 kilometres long East African Crude oil pipeline (EACOP) and refinery projects which will guarantee realization of first oil in 2020 at the earliest after their completion.

According to the New Vision newspaper dated Monday 27, 2017 ,page 3, the government of Uganda plans to invest $500m into the refinery project (40% share) and $300m in the EACOP (15% share). The main funders of the projects will be the international oil companies such as Total and CNOOC as well Tanzania government. All these activities are a pre-cursor to oil production likely to start in 2020-2021.

Significant amounts of revenues and taxes are generated at all stages of the petroleum value-chain and these include signature bonuses, royalties, exploration fees, development fees, rents, fees on permits, Capital Gains Tax (CGT) on transfer of interests and assets, government’s profit share on production, and revenues and taxes at the refining, gas processing and conversion, transportation and storage of petroleum and its associated products, bi-products and wastes.

Additional taxes to these revenue streams include income tax, With Holding Tax (WHT), Pay As You Earn (PAYE), Value Added Tax (VAT), Import Duty, Stamp Duty, Service Tax, among others. It is thus anticipated that Uganda will generate about US$3-3.5 billion annually at peak production (2029-2045) and research has indicated that Uganda’s GDP will have doubled by 2025. Indeed, World Bank estimates that oil production could increase total government revenue from the current 13% of GDP to about 18% on average for more than 20 years.

However, with doubling of the size of the economy (GDP growth rate average of 10% from the current 4%) which may not be backed by equally competent citizenry to support the economy through proportionate innovation and invention, engagement in reasonable productive activities, Uganda may not reap big from its oil sector. This is because failure to match production with the size of GDP may cause distortionary effects on the economy including hyperinflation which may hinder investments as well as further economic growth. 

In addition, such situation is indeed ripe to cause a boom-bust economy as it occurred to Nauru Islands which had a per capita income of $40,000 in 1980 at the start of mineral production and reduced significantly to $2000 in the year 2000 after depletion of the resource.

According to the oil and Gas policy of 2008, oil revenue will be used for infrastructure development and not recurrent expenditure. Whereas this is a good move, there is need to consider the fact that Ugandans are equally an important resource who must have the capacity to put to use the entire infrastructure put up by the government using proceeds from oil.

For instance it doesn't make better sense for so many roads connecting different villages to be tarmacked if the residents cannot afford cars to drive on such roads. Relatedly, extending hydro electricity to all villages is a wise move however connecting such power in grass houses is not only risky but defeats the analogy of modernization as orchestrated by NRM government from time to time.

It therefore important to put human resource development at the forefront such that Ugandan citizens are better positioned to fit in the oil economy boom when production commences and henceforth avoid the ‘resource curse’ that has eluded many African countries such as DRC, Equatorial Guinea,and Angola among others..

The fact that oil and gas are non-renewable and finite resources Uganda needs to ensure that oil and gas resources are managed efficiently and managing them in a manner that will create lasting benefits to society.Thus there is a need for deliberate plan for the emergency of new industries, such as chemicals, fertilizers, cement etc.  These industries are new to Ugandans therefore government needs to render a hand in building the capacity of Ugandans to take up such subsidiary industries which will support the economy.

There is also need to address key bottlenecks to sector growth in agriculture, manufacturing, mining and tourism through investing oil proceeds in infrastructure, better healthcare and quality education to develop the human capital with adequate and employable skills suitable for the oil economy.

There is strong need to build strong transparent accountability systems and a conducive environment for private sector development so that natural resource rents are invested to create other forms of capital.

In conclusion, failure to address the human resource challenges, oil revenue management transparency and accountability gaps, it will be impossible for Uganda to eliminate the ‘resource curse’ and there will be a high likelihood that oil revenues will not be used properly and/or will not impact positively on the lives of ordinary Ugandans.

The writer is the Chairperson, Oil Revenue Tracking and Management Thematic Group, Civil Society Coalition on Oil and Gas in Uganda (CSCO). He is an Economist and Lecturer of Economics at IUIU.

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