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Borrowing against future oil revenue pushing Uganda towards oil curse - BOU

Bank of Uganda governor Tumusiime-Mutebile

Bank of Uganda governor Tumusiime-Mutebile

Bank of Uganda (BoU) governor Emmanuel Tumusiime-Mutebile has said the expectation of oil revenues has pushed Uganda to go for more expensive loans to finance infrastructure projects, a precursor for the much dreaded 'oil curse'.

President Museveni has often said that Uganda will not suffer the 'oil curse' faced by many undeveloped countries - where many of those countries sometimes even become poorer than before oil extractions due to bad contracts and policing.

According to Museveni, Uganda has been able to study the good and bad practices of many countries to formulate her own policies. 

But Mutebile told a meeting in Kampala on Friday that the opportunity to borrow non-concessional – expensive money – to meet infrastructure needs has become very tempting, especially in anticipation of oil revenues, which serve as collateral for borrowing from international markets.

“In my view, public investments financed by public borrowing against future oil revenue is a precursor for a resource curse. Moreover, Uganda has a low public investment efficiency of about 0.3,” he said while addressing a workshop discussing the theme; Infrastructure and Human Capital Investment for Growth and Development in Uganda.

Public investments like roads, electricity, and railway are expected to spur long term growth. China is one of Uganda's biggest country-lenders, with about $3 billion in development projects through state-owned banks with future oil revenues usually used as collateral. China's Exim Bank has funded about 85 per cent of two major Ugandan power projects — Karuma and Isimba dams.

It also financed and built Kampala's $476 million Entebbe Expressway to the airport, which cuts driving time by more than half. China's National Offshore Oil Corporation, France's Total, and Britain's Tullow Oil co-own Uganda's western oil fields, set to be tapped by 2023.

Uganda has also borrowed funds from China to finance the construction of Kabaale international airport, expansion of Entebbe airport among other projects. Mutebile says Uganda faces challenges regarding public investment management and financing these investments because concessional financing, which is the money of low interest, has substantially declined.

He called on Uganda to prioritize important infrastructure and warned that if the investment is scaled up quickly, absorption capacity constraints could drive public investment costs further. Uganda’s debt, currently at $11 billion (42 per cent), is projected to increase further to around 45.7 per cent of GDP in the 2019/20 financial year.

“There are risks to the rapidly rising public debt, especially the external debt, which has risen on an annual basis at an average of about 18 per cent in the four financial years to 2018/19,” Mutebile said. 

“Therefore, it is important for Uganda to strike a balance between the need for public investments and managing public finances.” 

Mutebile also sounded a warning that Bank of Uganda faces a challenge to accumulate foreign exchange reserves to service external debt.

“The forex reserves have to be purchased from the domestic market, without causing sharp exchange rate depreciation pressures that would ultimately pass through to domestic inflation, thereby warranting tightening of monetary policy, and subsequently impacting on economic growth,” Mutebile said.

He revealed that in the 2019/20 financial year, BoU has to purchase about $1 billion to cater for servicing of external debt, debt repayment, and other government imports of goods and services. 

These hard currency purchases will ensure that the international reserve level has to be maintained at the current level of 4.1 months of imports of goods and services. The required foreign currency purchases are estimated to rise in the next 5 years before oil proceeds start flowing in, Mutebile said.

“Buying these amounts without causing sharp exchange rate depreciation pressures in a shallow foreign currency market is a real challenge,” he said.

Uganda will not produce oil until after 2023.

Comments

+2 #1 Lysol 2019-10-05 21:47
The corrupt/greedy Uganda regime has fooled and fleeched the world with its oil.

That oil was discovered by Obote, even Amin . They looked at it and decided it was not worth anything for consumption.(because of poor grade/quality).

Not marketable so they left it alone. That is why the corrupt regime up to now cannot produce a single burrel of it for export. Kenya/Turkana has already tried to export its oil,but failed miserably.

Uganda will never be the Saudi Arabia of Africa. The Oil dream is a mere fallacy .Museveni promised and sold the Kilembe Copper(to a British company) mine to finance his guerrilla war. The corrupt regime has already sold Uganda to the so-called foreign investors. By the way the US is now the leading exporter of oil.
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+1 #2 Lubabuka 2019-10-06 10:35
Better we suffer the curse but when we have something to show for it.

It will be worse when the money is there for everyone to grab claiming to do grandiose projects. We shall end up with the Kenyan non existent dams but money disbursed
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0 #3 kabayekka 2019-10-06 18:22
It depends what this economic expert calls an economic curse.

One wonders how much money in dollars has this country put up in the start up to extract oil since 2000.

It must be lots of money indeed much more than what this country put up in the production of coffee and cotton since 1930. By 1970/90 the coffee and cotton revenue had become a real curse for the country of Uganda!
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0 #4 WADADA roger 2019-10-06 22:47
The discovery of oil has been hyped beyond the limits, lets watch the space but i think What Mutebile is saying is true, Uganda is suffering from what they call arrivalism and we are bound to regret.

I hope the President has read this very clear message.
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+1 #5 Ronald 2019-10-07 07:35
[quote name="Lubabuka"]Better we suffer the curse but when we have something to show for it.

We should borrow responsibly. In Africa odds are against us in everything we do, We can have all the infrastructure at whatever exorbitant cost, but we can't sustain it.

We couldn't sustain the manual rail left being by the colonialists, how sure are you that we can maintain the more modern electric one built by Chinese!

We borrowed and built expensive power dams, but you have no idea how expensive it is to keep them operational in the long run.

Owen falls dam has been here since 1952, but it collapsed, Hoover dam in the US has been operational since the 1930s and it is still going strong!

This Govt is a real pain in our lives. Instead of developing a skilled workforce in the country, so the demand for those assets come naturally, they just invest fwaaaaa, that's why they say we have more electricity that we demand, we have more roads that we can use, roads are empty!!
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+1 #6 rubangakene 2019-10-07 20:28
The oil was actually discovered before independence, and in 1926 the then British Colonial Government awarded the Anglo- Persia Company (read Iran) the exploration rights.

King Leopold of Belgium contested the same oil saying it belonged to the then Belgian Congo; still the curse will be with our grandchildren until kingdom come!
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0 #7 Lakwena 2019-10-08 08:03
In other words, by the time Ugandans wake up, there will only be monstrous empty holes in the ground.

A conman will always tell you what you want to hear. And as a con artist Mr. M7 gets an A. I.e., although his lingua frank has been "discipline", it is now self-evident that he is the most indiscipline president Uganda ever had.

But in a nutshell, Mr. Mutebile is the one superintending over the worst financial indiscipline in the social economic and political history of this country.

Meanwhile, dumb ass Ugandans with their eyes wide open, are sitting on their hands, as they are conned day an night by Mr. M7. Without raising a finger, including their only asset land; everything is being taken away from them and handed over to foreigners on a silver platter.
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0 #8 Lakwena 2019-10-08 08:17
Quoting rubangakene:
The oil was actually discovered before independence, and in 1926 the then British Colonial Government awarded the Anglo- Persia Company (read Iran) the exploration rights.

King Leopold of Belgium contested the same oil saying it belonged to the then Belgian Congo; still the curse will be with our grandchildren until kingdom come!


Thanks Rubangakene for that piece of History.

Because he thinks Uganda started with him in 1986, deep in his thick, sick and lying head, Mr. M7 fanatically believes he is the father of the nation.

In other words, before 1986 Uganda did not exist. Hence, he is hell bent on re-writing the entire history of Uganda.
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0 #9 Lakwena 2019-10-08 08:39
In the final analysis, since he said it himself that he is only "fighting for himself and family"; everything Mr. M7/NRM has been doing to Uganda, including the incessant borrowing; is driven by malice and sabotage.

In other words to say the least, Mr. M7 does love Uganda and Ugandans.
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