Uganda Oil:Deal or No Deal for Farmers?

Published on 28th June 2013

Some potential oil prospective areas
Uganda is on the verge of exploiting oil and gas resources in the Lake Albert Rift Basin. Oil wells are being sunk and a refinery is slated for construction, despite some occasional brushing of shoulders between government and oil companies. A windfall of revenues from oil and gas is expected any time from the year 2015 onwards for the next twenty or thirty years. Uganda government, the private sector and other stakeholders hold that non-oil industries will sprout up and jobs will be created. The structure of the economy will change, with oil becoming the major contributor to the country’s Gross Domestic Product (GDP). Consequently, there is a possibility that agriculture may suffer from neglect just like in many African oil producing countries. The foregoing expectations have already inspired development of policy and legal documents aimed at ensuring that the oil and gas resources and revenues are openly and transparently managed.

Over the years, the share of agriculture in Uganda’s GDP has declined, while those of industry and service sectors have relatively increased. This would not be considered bad per se, if growth in service and industrial sectors create more jobs in these sectors while releasing unproductive labour from the agriculture sector. However, looking at the Uganda Bureau of statistics (UBOS) 2012 statistical abstract, 66% of the labour force is still stuck in agriculture. This means that qualitative structural transformation of Uganda’s economy is happening at a slow pace. Trends in Uganda’s budget allocation already indicate that the agricultural sector is getting less attention from planners at technocratic and policy levels, since the sector receives less than 4% of the entire national budget.

The fortunes of Ugandan farmers under the new ‘oil economy’ are not very clear. The oil industry may hurt the agricultural sector further and prove to be an anathema to farmers who are the majority of Uganda’s population. In a new paper,, we argue that, if not prudently managed, the oil revenues can lead to a ‘natural resource curse,’ as is the case with many African oil producing countries. For example, oil revenues can exert a negative impact on growth through having deleterious impact on institutional quality through rent-seeking and corruption; exposing the country to volatility, particularly in commodity prices; and making the country susceptible to the Dutch Disease (the tendency for the real exchange rate to become overly appreciated in response to positive shocks), which leads to the contraction of the tradable sector. In addition, oil resources can considerably increase the chances of civil conflict in a country by affecting institutional quality (Sala-i-Martin and Subramanian, 2003). There are also worries about oil spills or contamination, which could displace populations and wildlife and damage water sources.

Like in other African oil producing nations, if unchecked, speculative tendencies by a few corrupt elite with access to illicit oil money may lead to huge countryside land purchases and in effect drive poor and smallholder farmers out of their lands. Optimistically, if prudently managed, oil has the potential and vitality to spur Uganda’s economy and push the country to higher levels of development which countries like Norway have reached. However, this will only happen if there is strategic investment in non-oil sectors such as agriculture – which remains a dominant sector. Investment in agricultural modernisation, energy, education (skills development), transport infrastructure, tourism (agro-tourism), health, and environmental conservation is key. Through these strategic investments, farmers will be able to produce more and sell more, and consequently increase household incomes—therefore increasing aggregate demand, which is key in stimulating the economy.

To counteract currency appreciation, Uganda will have to increase domestic production (especially of foodstuffs) and demand. Uganda will also have to leverage the Eastern Africa Community to set the common external tariff (CET) regime for sensitive agricultural commodities like maize, rice, fruits and other oil seeds to protect local farmers from cheaper food imports from Pakistan, India and other countries. For example, the CET of 75% for rice needs to be maintained in Uganda and in the region. Should Kenya, which is now the largest importer and supplier of rice in the region, continue to stay application then it may be prudent for Uganda to charge rice from Kenya at 75%, which corresponds to the EAC CET rate. This is likely to benefit farmers, close the competitiveness gap of Ugandan farmers, and increase people’s welfare and wellbeing. However, this measure will have to be implemented within a given time frame agreed upon with other EAC partner states. Overall, for farmers to benefit in Uganda’s oil economy, the government through relevant institutions will have to do the following:

A: Leverage the Eastern Africa Community to set a common external tariff regime for sensitive agricultural commodities like maize, rice and other oil seeds to protect local farmers from cheaper food imports. This will be a strategic deterrent against expected currency appreciation driven by substantial amount of oil revenues.

B: Uganda joins Extractive Industries Transparency Initiative (EITI) a globally developed initiative for revenue transparency; accountability throughout the oil value chain. This will reduce the risk of corruption and speculative tendencies that have potential to drive farmers out of their lands.

C: Manage the potential effects of displacement of farmers, unfair compensations, and land evictions.

C: Manage environmental hazards such as flaring and venting; oil spills; land, air and water contamination; acid rain; health risks; and climate change.

D: Use oil revenues to capitalise the Uganda Development Bank and other local banks to push down interest rates for small holder farmers and small scale and medium enterprises to easily access agricultural credit.

E: Regulate local content to ensure that small holder farmers can benefit from oil companies and their auxiliaries through marketing of agricultural products and other value addition added agricultural products in Uganda.

F: Ensure that government fulfills the Maputo Declaration of allocating 10% of the national budget to agriculture with a broader objective of achieving and sustaining a 6% growth target.

By Morrison Rwakakamba (CEO, Agency for Transformation) and Daniel Lukwago, (CEO, Nonner Consult).

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