The recent commitment of oil companies to develop Uganda’s oil and gas projects through the announcement of the final investment decision brings Uganda a step closer to achieving its target of first oil production by 2025.
The developments in the oil sector will partly contribute to the realization of the third National Development Plan targets, some of which include an increase in both employment and revenue collected from the oil and gas sector.
Entry into the production phase in the oil sector requires adequate preparation and learning from experiences of other countries to avoid the likely economic imbalances that could arise. Uganda can borrow lessons from countries such as Nigeria and the Netherlands. Notably, these countries experiences show that the dominance of the oil sector is likely to come at the expense of other sectors.
This is brought about by the shift in employment towards the oil sector hence causing employment deficits and a reduction in output in other sectors. In addition, it is also likely that unemployment could worsen should the sector fail to absorb the attracted labour force. Furthermore, the domestic currency is likely to compete more favourable against the dollar, which makes imports very cheap and exports expensive. This can easily lead to higher domestic debt levels and discourage local production for exports.
From these countries’ experiences, one of the key emerging issues is the importance of having strong institutional and legal frameworks to properly manage the revenues from oil exports. These countries needed to have a sovereign wealth fund to collect revenues from oil exports to decelerate currency appreciation and create a strong link between the oil and other sectors to achieve economy-wide diversification. These existing weaknesses in the institutional and legal frameworks, led oil to be considered a curse rather than a blessing.
Considerably, Uganda has a framework to control revenues from the oil sector. For example, through the Public Finance Management and Accountability Act of 2015, the Uganda Petroleum Fund was created. The petroleum fund is a depository for all revenues accruing to government from petroleum related activities. In addition, the Act is a buffer for smoothening government expenditures in periods for which government revenue collected from oil is low, saving oil rent for future generations given the non-renewable nature and benefiting other sectors. The disbursements from the petroleum fund are through appropriation to either the Petroleum Revenue Investment Reserve Account or the Consolidated Fund.
The upstream value chain of the oil sector has institutional, policy and legal frameworks put in place to provide capacity building principles for skills development and increase the participation of Ugandans in oil and gas activities. Particularly, the National Content Policy for the Petroleum Sub-sector that was approved in 2018, that in part involves the development of a National Local Content Fund to support national enterprises and improve the competitiveness of Ugandan labour in the oil and gas industry and associated sectors in the short, medium and long run. It looks at inclusiveness by tracking the share of labour, services and goods for the petroleum sector provided from within Uganda and constitutes added value from these activities.
Notably, the existence of these frameworks is to greater extent, a necessary condition rather than sufficient. Sufficiency would be met if the utilization of these revenues are followed as per the set guidelines. This would not only help to increase benefits from the revenues, but also minimize the effects of the political economy in using the funds.
In addition, there are some key policy areas that still need strengthening to maximise the benefits. In light of the fact that government budgeting is now program based rather than sector based, a well aligned framework that is clear on the approach and distribution of oil revenue across programs is needed to realise the national development agenda.