Uganda will begin pumping its first commercial oil in 2018, which could be a major source of socio-economic transformation if revenues are well invested to diversify the country’s economy.

The new Country Economic Memorandum (CEM), jointly prepared by the World Bank Group and Government of Uganda, shows that proceeds from oil could accelerate growth and reduce poverty if it is ploughed in to agriculture, infrastructure, and human capital development to drive growth and create jobs.

Titled Economic Diversification and Growth in an Era of Oil and Volatility, the CEM discusses the prospects of oil and mineral production in Uganda, and draws on global experiences of oil producing countries in Africa and elsewhere to guide the country in making the right policy and fiscal choices so as to benefit fully from the oil and mineral windfall.

“Although the level of international oil prices are extremely low today, we have reasons to believe that these will rise again, and that Uganda’s future oil production will boost the country’s economic and fiscal performance in the years to come,” said Jean-Pascal Nguessa Nganou, World Bank senior country economist for Uganda and task team leader for the CEM.

“Uganda has an opportunity to get the economics right. If oil resources are well managed, it could take the country a lot less time to achieve its national vision of attaining upper middle income by 2040,” said Christina Malmberg-Calvo, World Bank Country Manager for Uganda. “This requires pumping back the oil profits in to sectors that will have huge economic spill-overs to the most vulnerable and poorest”.

The Memorandum presents a vision of how the country can leverage its oil and mineral resources to accelerate economic growth, reduce poverty and attain the goals of the country’s National Development Plan (NDPII).

“Oil is not a pipe dream; it is an opportunity for us to fuel our economic growth, create employment, foster technology transfer and generate revenues for investments in development of other sectors,” said Keith Muhakanizi, Permanent Secretary and Secretary to the Treasury, Ministry of Finance, Planning and Economic Development in Uganda. “We are also mindful of the risks of letting the oil economy dominate as successful countries are those that have used non-renewable resources to diversify their economies, and we are committed to learning from their success and failure, to ensure we don’t go down a slippery slope.”

In 2006, Uganda discovered over 6.5 billion of oil reserves in the Lake Albert basin, in the South West along its border with Democratic Republic of Congo. About 1.3 billion barrels are recoverable, but only 40 percent of the country’s potential has been explored so far, raising hopes of further oil finds. A consortium led by UK-based Tullow Oil, Total and China National Offshore Oil Corporation (CNOOC) hopes to produce up to 60,000 barrels per day, which could eventually increase to 120,000 barrels.

Once production commences, the country whose economy is largely dependent on agriculture, would earn up to $2billion annually in revenues, helping to provide a springboard to transform the economy which was previously growing at 7% annually for a decade, but slowed down to 3.3% in 2013/14 and 4.6% in 2015/16. Despite reduction in poverty to 19%, more than one third of the Ugandan population remains poor and vulnerable to shocks. The Government of Uganda views economic diversification as a key component of its development strategy. The economy is expected to receive new lease of life with growth rates of 7-10% once oil production starts, the CEM notes.

The report highlights a number of opportunities at the various stages of the oil industry. These include drilling services, production maintenance service, geological services, engineering, fabrication and construction – all of which could generate an estimated 15,000 new jobs for the country’s large unemployed youth population. Opportunities also exist in sectors such as insurance, food and beverages, transportation, health and safety, as well as banking and financial services.

The Memorandum also highlights experience of other countries in Africa and other parts of the world, which shows that while large scale production of oil, gas and other mineral resources offers great economic opportunities, it also presents major challenges. In Angola for instance, high oil production and high international prices boosted gross domestic product (GDP) growth during most of the 2000s. However, a massively expanded, poorly managed, public investment program created congestion, inefficiencies and inflation in the country, instead of developing the long-term physical and human capital necessary to replace non-renewable resources, the report says.

Experience from oil emerging economies also shows oil and minerals tend to fuel conflict, corruption and widen income and poverty disparity, instead of boosting shared prosperity.

The Memorandum offers a series of recommendations including policy and institutional strengthening, to regulate the sector, and ensure greater transparency as well as accountability. Stimulating manufacturing and industry, as well as private sector businesses, along with investing in health and education, would create a more skilled labour force capable of driving growth for the long term. The report also advocates a “sustainable investing approach” that combines sub­stantial savings with investment and links the size and speed of the public investment program to progress in absorptive capacity.

The report outlines several recommendations, including:

Setting up of the right institutions

• Channel the revenue generated by resource rents into human capital (through education and training), social capital, institution building, good governance and transparency and keep rent seekers at bay.

• Design an efficient oil revenue management strategy emphasizing transparency and accountability through better information of the public on the role of the State in the management of oil resources and through regular, joint briefings on oil sector revenue, involving both the government and the oil companies

• Cooperation of the government, the civil society and the private sector in the design of a national resource charter aimed at assessing progress achieved in addressing institutional gaps in the management of the oil sector

• Clarify the respective roles and responsibilities of institutions involved in the management of the oil sector (including Petroleum Authority, Ministry of Energy, National Oil Company and other institutions involved in oil management)

• Develop a strategic framework to promote the co-existence of oil and tourism during the lifecycle of oil exploration

• Develop and implement an effective national communication strategy for issues related to the prospects, possible impacts of oil, gas, and other mining activities

Improving performance of existing institutions

• Address weaknesses in the chain of accountability, including staffing, resources, specialized technical skills, legal and case management issues, and political interference

• Guide stakeholders, including CSOs and the private sector, including through regulations

• Improve public investment management and strengthen PFM systems

• Address constraints to growth, exploit forward and backward linkages, and stimulate business development

• Improve product complexity, which is key to export diversification, through training, skill development, FDI and/or joint venture with foreign firm

Adopting and Implementing the right set of policies

• Maintain macroeconomic stability through inflation targeting monetary policy and prudent fiscal policy involving spending constraints/limits

• Adopt a fiscal rule based on non-oil fiscal deficit for the use of resource proceeds in order to mitigate the effects of oscillating oil prices and oil revenue

• Strengthen domestic revenue mobilization to ensure that increased oil revenue is not offset by declining tax collection in other sectors (large or small, local or foreign businesses)

• Design and implement a set of business friendly policies in the areas in which Uganda may have a comparative advantage (food processing, construction materials and other labor intensive industries)

• Invest in infrastructure, with special attention to horizontal and vertical inequality, and invest in human capital to promote a larger long-term growth impact

• Streamline domestic regulatory regimes to improve the efficiency of regional infrastructure and create effective regional markets for services

• Design an effective oil revenue sharing formula with local governments