Uganda's glorious misconception about commercial oil production

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By Daniel Walyemera Masumba

A majority of Ugandans have been cajoled into the glorious misconception that once commercial oil production commences around 2018-20 in the country, citizens will suddenly live a better financial life.

But the facts from several countries deeply engrossed in corrupt tendencies, like Uganda is, indicate otherwise.

Enter the facts. Countries like Nigeria and more recently Ghana, have had challenges with the commencement of commercial oil production due to failure of their governments, to effectively manage oil price unpredictability. Significant oil price changes can cause serious economic challenges. Long term plans can be disrupted; governments, businesses and individuals can be forced to curtail spending.

As a consequence, this will lead to fluctuations in other spending, investments and living standards. Even with vast oil resources in the Delta region of Nigeria, it still has its citizens lining up at petrol stations for fuel. Ghana’s currency, the cedi has suffered from inflation to the extent that President John Mahama’s government has recently asked the International Monetary Fund to facilitate the fiscal management of its economy.

An abundance of natural resources like oil can cause serious challenges to the economic development of a country. The challenges to the economy can arise as result of corruption, an overvalued exchange rate, excessive foreign borrowing, unsustainable high wages and over spending by government. This sounds like an apt description of the Ugandan economy.

Good financial management can ameliorate some of the aforementioned challenges. Other economic policy solutions may entail the use of special financial institutions and instruments, which are useful in managing commodity price unpredictability in a country that is dependent on revenues from the sale of its natural resources.

In his article “Protecting developing economies from price shocks” Randall Dodd contends that oil price unpredictability makes it difficult to maintain budget discipline. This difficulty may lead to a distortion of the economy which can result into political instability, let alone its effects on the women and the poor.

Financial institutions such as stabilization funds can act as a reserve to cushion government budgets. Alternatively, hedging instruments such as futures, options and other derivatives can protect governments by shifting some of the risk to investors willing to bear it. Reducing the risk of oil price unpredictability comes at a cost of giving up some revenues when the price of oil is unexpectedly high, however, governments are not always politically ready to give up that wind fall, considering the political patronage networks the oil revenues create to sustain their survival.

In his novel “East of Eden,” the American writer John Steinbeck described the unreliability of natural resource wealth generated by farming. He concluded:    “And it never failed that during the dry years the people forgot about the rich years, and during the wet years they lost all memory of the dry years. It was always that way.”

 The lack of contract transparency, deployment of the presidential guard brigade around the oil fields, inadequate or lack of compensation of evicted communities around the oil fields, rendering them landless, a lack of clear and shared vision on how oil price unpredictability will be managed to cushion the economy from its effects, among others, in the management of our oil industry, are indicators that Ugandans may not survive the consequences of oil price instability, and thus the oil curse!

One way of reducing the incidence of both gross fiscal mismanagement and corruption is to require a high degree of transparency in the government budget(s). Considering, supplementary budgets are the order of the day in Uganda, this is a long shot!

The author is a Lawyer based in Kampala