Petroleum drillers at the exlporation area 3A near Lake Albert in Hoima district

By Ibrahim Kasita

THE Central Bank will handle and manage revenues accruing from Uganda’s nascent oil and gas industry, a senior official has revealed.

A separate fund, the petroleum fund, will be set up where all the oil money will be deposited. A portion of the funds will be invested abroad, he added.

“The Central Bank will manage our oil revenue because it already has the capacity to manage foreign reserves,” Lawrence Kiiza, a director for economic affairs in the finance ministry, said.

“Withdrawals from the fund will be strict and controlled by clear rules. The guidelines will be supported by law to be enacted by Parliament.”

Uganda had $2,520m in foreign currency reserves in May, or about four months’ worth of future imports of goods and services.

The decision to let the Bank of Uganda manage the oil money aims at ensuring transparent governance and sustainability in the management of the petroleum fund.

Kiiza said spending from the fund would be for targeted development objectives.

Uganda’s petroleum resources in the Lake Albert basin are estimated to be over two billion barrels. This is sufficient for commercial oil production for 30-years.

This could generate the countryover $2b every year.
The revenue proceeds come from licensing fees, bonuses, royalties, wellhead severance, income/profit tax, value added tax and export tariffs.

To avoid the so-called ‘Dutch disease,’ a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in non-extractive sectors, Uganda must ensure that efficient and effective management of the oil cash.

“Integrating the oil and gas industry in the national economy is very important. Oil, like other commodities, is a finite resource associated with uncertainties and instabilities,” Kiiza explained.

“We must draw a plan and save part of the oil money, and invest the other to be able to sail through difficult times like when oil prices and volumes reduce.”

Kiiza reasoned that investing off-shore is critical because “the economy is shallow, the stock market is weak, yet the money earned from oil proceeds must earn returns.”

However, such plans present significant challenges.

On one hand, there is the need for a vehicle to invest windfall surpluses for future generations and toring-fence today’s wealth from greedy leaders.

But still, investing offshore would be political dynamite as there is an urgent need to develop infrastructure and fight poverty.

Therefore, the funds would more likely be deployed at home, according to experts.

“Oil should be integrated in the economy rather than having an oil economy. We need to understand that an oil economy will ‘over heat’ and cause trouble,” Kiiza warned.

“It could create artificial inflation, which has adverse impact on the low-income earners and the wage structure.

Oil reserves are an exhaustible resource with an uncertain and finite revenue stream.

It is important to have a sound macro-economic policy to manage the revenue stream, maintain macro-economic stability, and, through sound investments, create permanent income.

Uganda is one of the fastest-growing economies in Africa, historically driven by agricultural exports, including coffee, tobacco and fish.

For many years, the country struggled with severe poverty, corruption and civil conflict, but has seen strong economic growth in recent years because of macro-economic and structural reforms.

Indeed, the oil cash can lead to robust and sustainable economic growth.

This is only possible if coupled with economic freedom, fighting corruption and better business conditions, experts say.

This calls for effective, transparent and accountable state structures if the oil and gas resource is to translate into economic development.

“Strong safeguards should be put in place to ensure that the oil revenue is properly managed and used to reduce rampant poverty,” economists advise.

A key element that is critical for oil governance is the rule of law, enforcing the property rights law and limiting the state’s interference with the laws governing the petroleum fund.

There is also a need to ensure that oil and gas exploitation activities do not negatively affect the social, economic and environmental conditions of the regions from which the resource is extracted.

Oil is a new development in Uganda. It has the potential of transforming the country.

However, if mismanaged, it can plunge the country into abject poverty, environmental degradation, insecurity and misery amidst the plenty of petro-dollars.

The key issues to be considered in the new petroleum law should include revenue management and benefit sharing, waste management and environmental protection, and industry oversight and corporate governance, using a multi-country survey, according to sector experts.

Fiscal management must keep a strong focus on the non-oil economy because it is hard to predict with accuracy the oil revenues. These should be separated from non-oil revenues for fiscal planning purposes.

Uganda should resist from the tendency of over-estimating the value of petroleum resources or under-estimating the non-oil economy.

Effective, far-reaching legislation is essential if Uganda hopes to benefit from its oil reserves and avoid the oil curse. The oil and gas resource presents a mixture of promise and uncertainty.

With a struggling but slowly growing economy, Uganda could take advantage of the anticipated oil and gas revenue windfall to exploit other resources, invest in public and social infrastructure, giving the economy a significant boost.