February 1 renewed the hope for many Ugandans regarding the prospects of the country’s oil and gas sector. The day marked the official announcement of the Final Investment Decision (FID), which paved way for oil companies to start actual spending in preparation to pump the country’s oil.
Experts predict that the approximately $20bn initial investment following the FID will create over 60,000 direct and indirect jobs and spur GDP growth by 22 per cent by 2025. Of particular interest to Uganda’s growth aspirations is the national local content provisions which ring-fence a certain number of jobs and opportunities for Ugandans, writes Dr Linda Nakato.
The oil and gas sector is one of the key strategic sectors upon which Uganda’s third National Development Plan (NDP III) growth aspirations are hinged. In line with Vision 2040, the NDP III aspires to push Uganda into lower-middle-income status during the plan period.
Uganda needs to have a per capita income between $1,046 (Shs 3.7m) and $4,095 (Shs 14.4m) to achieve middle-income status. This currently stands at $733 (Shs 2.5m), $313 shy of the threshold.
With the signing of the FID and the first oil production expected in 2025, there are renewed hopes that oil will accelerate economic growth and push Uganda into middle-income status. The FID unlocks the development phase for the oil sector where the bulk of the engineering, procurement and construction activities occur.
This stage comes with vast cash flows, which the local market can tap into. President Museveni has assured Ugandans that the middle-income aspiration, which has eluded the country several times, can be achieved by 2023, just a few months away.
The World Bank noted that most countries that graduated to middle-income status between 2001 and 2013 had discovered or exploited oil reserves. For example, Timor-Leste transitioned to middle-income status in 2007 after starting oil production in 2004. Likewise, Mauritania graduated to middle-income status in 2011 after starting oil production in 2006. For Zambia, middle-income status was achieved in 2011 after oil discovery in 2006, although it hadn’t started production.
Uganda discovered commercially viable oil in 2006 and 16 years later, middle-income status has eluded the country. This raises the question of whether the middle-income status is possible in 2023, especially with the FID. This may not be possible for Uganda.
The country, however, can set into motion a cycle that ensures sustainable and impactful investments into different growth and social-enhancing developments to achieve our aspirations.
With a lot of focus on developing the oil and gas sector plus the anticipated benefits from oil production, other critical sectors such as the agricultural sector (employing about 68 per cent of Ugandans and contributing about 24 per cent to the country’s GDP) could be neglected.
The oil project comes with vast employment opportunities, especially in the development phase, which may spur labour movement from the agricultural sector, likely lowering agricultural production and productivity. However, the created employment opportunities are temporary as the production phase anticipated in 2025 is more capital-intensive, requiring few highly skilled personnel.
The country banks on oil to propel itself to middle income status. Photo/courtesy
Therefore, it is critical to diversify oil exploration and production revenues to other productive sectors starting at the development phase. This will enable Uganda to avoid the oil curse, unlike Angola and Nigeria, where oil production shrunk agriculture and manufacturing sectors.
The anticipation surrounding the inflow of oil revenues may cause unnecessary increases in government expenditure. If this expenditure is not channelled towards productive sectors, achieving the middle-income status through oil revenues will be a far cry.
Uganda’s current debt burden stands at Shs 72 trillion, and the government has been taking on more expensive loans in anticipation that oil revenues will meet this. The World Bank estimates Uganda’s annual earnings at around $800m during peak oil production.
However, considering the heavy capital expenditures in the oil sector and that oil companies need to recover such costs, profits from oil will be limited in the first years and we have to meet our debt obligations first.
This calls for more prudent fiscal management for Uganda to sustainably earn from oil production. Hence, the government should balance apportioning some revenues to debt repayment and making sustainable growth-stimulating expenditures in key sectors.
Whereas the Oil and Gas Revenue Management Policy (2012) emphasizes that overall expenditure should be based on non-oil revenue, discretionary spending, especially out of the petroleum fund, should be avoided because it creates room for corruption and mismanagement.
The middle-income status may not be achieved in 2023 but it is possible five years from now if we have a favourable institutional environment, deliberate efforts to develop other key priority sectors of the economy alongside the oil and gas sector and adopt stringent fiscal management measures.
The author is a researcher at the Economic Policy Research Centre (EPRC)