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.