Why oil revenues could spell doom for Uganda
Nov 10, 2008
Commercial reserves of oil have been discovered in Uganda and early production is slated to start around June 2009. Oil revenues may lead to employment, infrastructural development and improve people’s standards of living, as is the case with countries such as Norway and Indonesia.
By Frank Tumusiime
Commercial reserves of oil have been discovered in Uganda and early production is slated to start around June 2009. Oil revenues may lead to employment, infrastructural development and improve people’s standards of living, as is the case with countries such as Norway and Indonesia.
On the other hand, experiences from country to country demonstrate that poor oil revenue management is a recipe for conflict and poverty (Dutch disease).
I often get ecstatic when I hear His Excellency President Museveni assert that oil revenues will be put to capital investments for the benefit of future generations.
Being one of those Ugandans that long to see that oil becomes a blessing to today’s and tomorrow’s generation, a lot of questions always linger: Firstly any venture requires a regulatory framework but there is not yet a law to regulate how these oil revenues will be managed.
Will such law have come into place within this short period left before early production starts? Basing on the long periods involved in consultation processes, debating of Bills and eventual enactment of laws; a revenue management law will not be in place by June 2009.
Secondly, just like the Government has suspended issuing out oil exploration licences until the Government gets competent staff, why then wouldn’t the early oil production scheme be put to a halt until a law on sound fiscal management is in place?
Thirdly, there are no indicators that the Oil and Gas Policy will soon be put into practice. For example, objective number six of the policy resolves to adopt the extractive industries transparency initiative (EITI) and to regularly publicise revenues from oil and gas.
The puzzle is that there are no indications that such parametres will soon be put in place yet oil production is soon.
Uganda has always handled its revenues and oil revenue will not pose any challenge.
I should like to point out that: oil and gas wealth are different from other kinds of natural resources wealth in the following respects:
Oil and gas are non-renewable, any consumption of revenues from sales is a consumption of capital rather than consumption of income.
Oil does not have to be produced, it simply needs to be extracted and can be produced independently of other economic and political processes. A government can thus access oil wealth regardless of whether it commands the cooperation of its citizens or it effectively controls institutions of state.
Oil and gas extraction are both capital and technologically intensive that foreign multinationals will always be involved, in contrast with ordinary contracts, in oil extraction, the buyer (oil company) knows more about the value of the good being sold than the seller.
Further still, governments whose countries are endowed with natural resources often take this endowment as a ticket to borrow against the promise of future production (mortgaging the future).
For example due to over borrowing, around 50% of Gabon’s budget goes towards paying off the country’s external debts and approximately two-thirds of all food is imported, much of it from France, this justifies the high cost of living in Libreville. Moreover unless fresh oil deposits are discovered, it might run out of oil production within the next decade.
Unregulated oil revenues will necessarily lead to the oil curse. The oil curse takes the following pattern: As John Ghazvinian (the Scramble for Africa’s Oil) puts it, when a developing country suddenly finds itself selling a highly priced natural commodity on the international market, the money it receives from buyers will be in dollars and pounds.
The country finds itself flooded with foreign currency, this artificially inflates the value of the country’s own currency, imported products therefore become much cheaper and everyone rushes out to buy foreign goods which are perceived to be of better quality than domestic products.
To avoid the oil curse, Ugandans need to answer the following questions: Is Uganda ready to implement the EITI and also to publish revenues received from oil and gas? Will fiscal authority over oil revenue and borrowing be clearly specified in the new law? Are law enforcement agencies such as the Police, Judiciary and the Directorate of Public Prosecutions well equipped and independent enough to handle oil revenue mismanagement cases? Is the Uganda Revenue Authority ready to formulate tax measures necessary to regulate the collection of right oil revenues?
Is the National Planning Authority prepared to spearhead strategic national planning for effective incorporation of oil and gas activities into the national economy?
Are the central bank and Ministry of Finance and Economic Planning set to diligently advise government on the utilisation of revenues collected from oil and ensure that oil and gas activities do not impact negatively on monetary policy and macro-economic stability of Uganda?
Are civil society organisations ready to contribute and engage the authorities in the oil governance process? If such questions were answered affirmatively, Uganda would become a shining beacon to her African neighbours.
The writer is a Research fellow Africa Institute for Energy Governancefrankruta4@yahoo.com
Commercial reserves of oil have been discovered in Uganda and early production is slated to start around June 2009. Oil revenues may lead to employment, infrastructural development and improve people’s standards of living, as is the case with countries such as Norway and Indonesia.
On the other hand, experiences from country to country demonstrate that poor oil revenue management is a recipe for conflict and poverty (Dutch disease).
I often get ecstatic when I hear His Excellency President Museveni assert that oil revenues will be put to capital investments for the benefit of future generations.
Being one of those Ugandans that long to see that oil becomes a blessing to today’s and tomorrow’s generation, a lot of questions always linger: Firstly any venture requires a regulatory framework but there is not yet a law to regulate how these oil revenues will be managed.
Will such law have come into place within this short period left before early production starts? Basing on the long periods involved in consultation processes, debating of Bills and eventual enactment of laws; a revenue management law will not be in place by June 2009.
Secondly, just like the Government has suspended issuing out oil exploration licences until the Government gets competent staff, why then wouldn’t the early oil production scheme be put to a halt until a law on sound fiscal management is in place?
Thirdly, there are no indicators that the Oil and Gas Policy will soon be put into practice. For example, objective number six of the policy resolves to adopt the extractive industries transparency initiative (EITI) and to regularly publicise revenues from oil and gas.
The puzzle is that there are no indications that such parametres will soon be put in place yet oil production is soon.
Uganda has always handled its revenues and oil revenue will not pose any challenge.
I should like to point out that: oil and gas wealth are different from other kinds of natural resources wealth in the following respects:
Oil and gas are non-renewable, any consumption of revenues from sales is a consumption of capital rather than consumption of income.
Oil does not have to be produced, it simply needs to be extracted and can be produced independently of other economic and political processes. A government can thus access oil wealth regardless of whether it commands the cooperation of its citizens or it effectively controls institutions of state.
Oil and gas extraction are both capital and technologically intensive that foreign multinationals will always be involved, in contrast with ordinary contracts, in oil extraction, the buyer (oil company) knows more about the value of the good being sold than the seller.
Further still, governments whose countries are endowed with natural resources often take this endowment as a ticket to borrow against the promise of future production (mortgaging the future).
For example due to over borrowing, around 50% of Gabon’s budget goes towards paying off the country’s external debts and approximately two-thirds of all food is imported, much of it from France, this justifies the high cost of living in Libreville. Moreover unless fresh oil deposits are discovered, it might run out of oil production within the next decade.
Unregulated oil revenues will necessarily lead to the oil curse. The oil curse takes the following pattern: As John Ghazvinian (the Scramble for Africa’s Oil) puts it, when a developing country suddenly finds itself selling a highly priced natural commodity on the international market, the money it receives from buyers will be in dollars and pounds.
The country finds itself flooded with foreign currency, this artificially inflates the value of the country’s own currency, imported products therefore become much cheaper and everyone rushes out to buy foreign goods which are perceived to be of better quality than domestic products.
To avoid the oil curse, Ugandans need to answer the following questions: Is Uganda ready to implement the EITI and also to publish revenues received from oil and gas? Will fiscal authority over oil revenue and borrowing be clearly specified in the new law? Are law enforcement agencies such as the Police, Judiciary and the Directorate of Public Prosecutions well equipped and independent enough to handle oil revenue mismanagement cases? Is the Uganda Revenue Authority ready to formulate tax measures necessary to regulate the collection of right oil revenues?
Is the National Planning Authority prepared to spearhead strategic national planning for effective incorporation of oil and gas activities into the national economy?
Are the central bank and Ministry of Finance and Economic Planning set to diligently advise government on the utilisation of revenues collected from oil and ensure that oil and gas activities do not impact negatively on monetary policy and macro-economic stability of Uganda?
Are civil society organisations ready to contribute and engage the authorities in the oil governance process? If such questions were answered affirmatively, Uganda would become a shining beacon to her African neighbours.
The writer is a Research fellow Africa Institute for Energy Governancefrankruta4@yahoo.com