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Uganda Economic Memorandum: Black Gold: Oil and Mineral Extraction Can Diversify Uganda’s Economy

World Bank Group

  • The most recent Uganda Economic Memorandum says commercial oil production can propel the country to middle income status by 2040
  • Uganda’s oil has potential to diversify its economy for the long-term if revenues are invested well in developing key productive infrastructure, commercialization of agriculture, providing skills training and adding value to ensure high-quality exports to regional and international markets
  • Drawing on lessons of international experience, the memorandum proposes an agenda of policy and institutional reforms aimed at maximizing the positive impact of oil production, and minimizing challenges

KAMPALA, June 23, 2016 – Despite the slump in global oil prices, the start of commercial oil production in Uganda in 2018 offers long-term prospects to diversity the country’s economy and catapult it to upper middle income status by 2040, according to the country’s new economic memorandum.

This optimism is informed by past trends in oil price volatility and underlines the analysis of the Uganda Country Economic Memorandum: Economic Diversification and Growth in an Era of Oil and Volatility (CEM) and evaluates the prospects of oil and mineral production in the country.

“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.

Prepared by the World Bank and the Government of Uganda, 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 technogy 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 confirmed discovery of crude oil reserves of up to 6.5 billion barrels of oil in the Lake Albert basin in the South West along its border with the Democratic Republic of Congo. Earlier this year, the government auctioned out several exploration licenses which could lead to more discovery of other reserves. With commercial production in full swing, the country could earn up to $3 billion in revenue from exports of up to 60,000 barrels of oil per day. Some of the crude will be used to produce power locally, while the rest will be processed at a new $2.5 billion refinery, and routed by pipeline through the Tanzanian Port of Tanga for export.

According to the CEM, oil production is expected to boost Uganda’s 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. The economy is expected to receive new lease of life with growth rates of 7-10% once oil production starts, the CEM notes.

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.

Similarly, if proceeds from the oil and mineral resources are channeled through consumption/recurrent expenditure, or find their way into the pockets of a handful, the full benefits may not materialize, according to the report. More than one-third of the Ugandan population remains poor and vulnerable to shocks, despite the reduction of poverty from 68.1% in 1992/93 to about 19 % currently. To boost incomes and quality of life, the report proposes undertaking direct transfers to the poor linked with behavioral improvements, such as sending boys and girls to primary school, reducing dropout rates, providing vaccination and other basic health services.

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