PUBLISHED ON March 9th, 2015

Falling oil prices not entirely bad for UGanda

Although the tumbling global oil prices will slow down investment in Uganda’s petroleum sector and delay further the expected flow of petrodollars, experts say the price crash presents Kampala with a rare opportunity to put its house in order if the country is to avoid the oil curse.

“To sustain growth and poverty reduction, Uganda’s economy requires a stronger reallocation to more productive and high return sectors, and a sustained transformation of subsistence agriculture,” Stefan Dercon, chief economist at the UK’s Department for International Development (DfID) told a Bank of Uganda forum on February 25, which discussed the implications of the current oil price volatility on the country’s economy.

Speaking at the event, BoU Governor Emmanuel Tumusiime-Mutebile said that even if oil prices dropped too low in future and little revenue was earned from the commodity, Uganda’s economy could continue to thrive if it was well managed.

“What would be disastrous is if we failed to recognise the significant risks entailed in the uncertain future path of oil prices and incur expenditure commitments that subsequently prove to be unaffordable,” said Mr Tumusiime-Mutebile.

The government has repeatedly come under criticism over the financing of its grand infrastructure projects like the Karuma and Isimba hydropower dams, the standard gauge railway and the express highway to Entebbe International Airport, through loans from China that it expects to pay back using future oil revenues.

This has fuelled fears that Uganda may be unable to service the debt in the unlikely event that it does not make as many petrodollars as it anticipates.

The likely consequence of this would be a situation such as the one Greece finds itself in: Teetering on the edge of economic disaster, according to Dr Fred Muhumuza, a senior economist at audit firm KPMG.

But according to Lawrence Kiiza, director of economic affairs at the Ministry of Finance, nowhere has the country premised macroeconomic planning on receipts from oil.

He admitted, however, that part of the proceeds from capital gains tax collected off oil-related transactions was channelled to meet the 15 per cent government commitment in the construction of the Karuma dam.

“People look at numbers and say, ‘Oh we are borrowing so much’ but that is not how we measure debt. We are borrowing based on what we call debt sustainability framework, which is based on three variables: The GDP, exports, and capacity to repay,” said Mr Kiiza. “Based on those parameters, Uganda is not in debt stress.”

The collapse in oil prices, experts say, brought the realities of the unpredictable oil industry home, which will only benefit if it demonstrates willingness to realign its focus to other growth areas, strengthen its capabilities in governance and accountability and in the design of social sector and human capital policies that facilitate inclusion.

“The fall in oil prices may well delay Uganda’s impending resource rents, and limit its impact,” said Mr Dercon. “This is not bad news — a smaller shock, in slower time, will offer a better chance for the rest of the economy and the state to be more resilient to it, and prepare to take full advantage.”

Source: The East African

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