Managing oil cash

Mar 24, 2010

AS Uganda readies for future oil production, the need for the creation of a separate account for the revenues which are managed by a reputable institution has become more urgent.

By Sylvia Juuko
Oil will bring substantial revenue only for a limited period

AS Uganda readies for future oil production, the need for the creation of a separate account for the revenues which are managed by a reputable institution has become more urgent.

The International Monetary Fund (IMF) has suggested that a separate consolidated account should be set up and possibly be hosted by the Central bank.

Management of these assets should form an important part of the processes that create transparency of oil resources to avoid diversion of this revenue.

“We suggest that the assets are managed in an independent and transparent manner.

The institution should ensure that management is in line with best practice,” said Martine Guerguil, IMF mission chief for Uganda
“It can be placed in the Central Bank because it has a reputation of managing international reserves very well.”

Uganda’s petroleum resources in the Lake Albertine region are estimated at about 2 billion barrels and have been certified as sufficient for commercial production over a period of about 20 years.

The country is expected to earn about $2b in oil revenue per year.

The IMF recommendation forms part of the new three year Policy Support Instrument (PSI) for the period 2010-2013, aimed at gearing Uganda’s fiscal and monetary policy to take into account proper management of future oil revenues.

The PSI is an IMF instrument designed for countries that do not need balance of payment financial support.

Guerguil pointed out that Uganda needs to boost non-oil revenue and bolster its institutional and financial capacities to avoid the oil curse.

“Oil will bring substantial revenue only for a limited number of years,” she said.
“Channeling these resources in a careful and transparent manner is key to marinating macro-economic stability and raising living standards in a durable way.”

According to Guerguil, fiscal policy in an oil exporting economy plays an even more central role in maintaining macro-economic stability.

“We should establish a framework that is transparent with no opportunity for diversion of resources. The process should be well articulated within the budget process.”

This process, she adds, would spell out how collections from Uganda Revenue authority would be spent in line with the revenues from oil to avoid inefficiencies.

She was particularly concerned about how the new framework would spell out which amounts should be spent immediately and those to be saved.

“Our recommendation in respect to volatility is an efficient way of dealing with savings. It’s a large flow that has to be managed. Spending it in an efficient manner is important. We need to decide how much should be saved,” she added.

The government savings plan should not only have to deal with volatility but also cater for periods when oil prices are low.

“The saving rule should have in mind not only the future generation but the need to filter volatility so that regular amounts of spending is maintained even when prices are low. It’s important to preserve stable conditions to avoid a big shock of oil revenue.”

The IMF’s new PSI which is expected to be considered by the IMF board in May 2010 looks at supporting Uganda’s financial sector.

“A deeper and broader financial sector is also essential to intermediate efficiently a much larger volume of funds and increase the effectiveness of monetary policy.”

More importantly, the private sector needs to be supported to ensure that they are in a position to be competitive and deal with an appreciating foreign exchange.

“There will be pressure on the real exchange rate to appreciate. Our recommendation is to start thinking of measures to boost competitiveness of the private sector.

Even if the exchange rate appreciates, the lower cost of doing business will off-set any associate rise,” she said. What government should do prior to oil production is expedite investment in energy, rail, roads and also build a skilled workforce.

The IMF notes that Uganda’s economy is at an important juncture, having been spared the worst of the global economic downturn.

IMF forecast growth at below 6% this fiscal year, but the economy is expected to rebound to 7% over the coming years.

“Higher public spending will help boost activity and improve competitiveness. But it is important to make sure that these resources are well spent.

The authorities have committed to strengthening budget controls and enhancing capacity so as to ensure efficiency in spending.”

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