The Dutch Disease In the oil and gas sector in Uganda; mitigations under the current legal framework

Friday, 21 December 2018
Alan Baguma

"Oil and Gas"

Commercial oil production shall commence in Uganda, and soon. Amen! The reasons for the ado are justified; taxes and profit oil payments to government for utilization in development, industrialization and infrastructure improvements, job creation through local content emphasis, foreign exchange boost, downstream supply of refined petroleum products, etc.
However, there may be a few reasons for trepidation, i.e. the ‘Dutch disease’. This may in general terms and in the context of oil production, be described as a situation where owing to the increase of foreign currency injection into the economy pursuant to oil export, local currency value appreciates leading to a negative economic impact such as an increase in the prices of the country’s exports on the international market, with a resultant effect of less competitiveness owing to the exports being more expensive. This may result in a reduction of export revenues as the international market opts for cheaper options, with an increase in the importation of cheaper commodities, hence affecting local production. This may be coupled with other vices such as imprudent additional debt accumulation on the confidence of oil resources, despite the volatility of international prices and the finite nature of oil, leading to future repayment challenges, among others.
This requires us to pause for a minute and reflect on the potential effect on the agricultural sector, which accounts for a great portion of Uganda’s exports. These effects can of course spread to other sectors as well, such as the tourism and manufacturing sectors.
Examples on the continent are easy to identify. Nigeria experienced a decline in its agricultural export revenues following the appreciation of its currency on the backdrop of oil exportation. The cascading effect was a decline in agricultural production and increased dependency on imported food. Angola suffered similar negative effects as well in its agriculture and manufacturing sectors, which stagnated. Sudan is also an example.
The antidote is known and is nothing new. Lessons have been drawn from countries such as Norway that have set a benchmark on the mitigation of the disease. Since we know that the influx of oil revenue may result in currency appreciation with its attendant negative effects, one of the solutions lies in the control of the influx so as to manage economic issues. This is done by limiting the amount of revenues brought into the economy through saving the oil revenue in a special fund, and possibly investing it in various ventures such as stocks and bonds, as was done by Norway. This way, the revenue can be brought into the economy in a phased manner that minimizes negative economic effects, while also possibly utilizing the revenue in a manner that supports the growth of other sectors such as agriculture, tourism and manufacturing, which sectors shall remain vital long after the oil reserves are exhausted.
Using the Norway example, Uganda has taken positive steps by setting up a Petroleum Fund. Under the Oil and Gas Revenue Management Policy of 2012, it is provided that “The Government will continue to pursue prudent macroeconomic management policies, irrespective of the oil revenues. These policies will emphasize a sustainable path for the non-oil budget deficit, aimed at minimizing the Dutch disease effects, boom and bust cycles and excessive borrowing. A special Fund is to be set up in the Bank of Uganda, with a twin objective of financing the budget and saving for future generations.” It further
provides that “Investment of the Petroleum Fund shall be made in low risk and well diversified investment portfolios abroad. This will ensure that the risk to these resources is minimized while at the same time guarantee availability, in the event they’re needed to deal with domestic emergencies. In addition, investing a significant portion of the petroleum revenues abroad minimizes the risk to the economy arising out of domestic spending from large foreign exchange inflows. However, in order to ensure sound management, all investments of the Petroleum Fund shall be made in accordance with the investment policy approved by the Petroleum Fund Investment Advisory Committee.”
This was followed by the Public Finance Management Act 2015, which provided for the Petroleum Fund in which government revenues from petroleum activities are deposited. Under this Act, withdrawals from this fund to the Consolidated Fund for expenditure on government budget requirements for infrastructure and development projects; are subject to Parliamentary approval by way of an Appropriation Act. Similar approval is required for withdrawals from this fund to the Petroleum Revenue Investment Reserve for purposes of investment in accordance with the petroleum revenue investment policy, which must include a requirement that investments shall be undertaken in manner that does not jeopardize the macroeconomic stability of Uganda. This fund is to be managed by the Bank of Uganda pursuant to a written agreement entered into between the Minister of Finance and the Governor of the Bank of Uganda for that purpose.
As such, it can be fairly stated that the legal regime has made an effort to foster safeguards against the Dutch Disease. The Petroleum fund has been operational since 2015, with periodic audits of the same carried out by the office of the Auditor General in accordance with the law. It has also been reported by the media that UGX 125 Billion was moved from the Petroleum Fund to the Consolidated Fund early this year to finance government budgetary requirements.
It is expected that the Petroleum Fund shall be utilized in a manner that conforms to the legal provisions so as to mitigate the Dutch disease. If well managed, the socio-economic future of the country shall be positive.

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