African countries with newly-discovered oil reserves must make sure their economies do not suffer from “Dutch disease”, while established commodity producers must accelerate efforts to diversify their economies, senior policymakers have stressed.
Uganda is one of a number of African nations to have made significant oil discoveries in recent years, with the production due to commence next year and revenues from the sale of exploration rights already hitting Shs1 trillion (£415m) in 2010-11.
However, deputy treasury secretary Keith Muhakanizi insisted that policymakers in Kampala had learned the lessons from the experience of previous African states, which saw significant currency appreciation and a decline in the competitiveness of their manufacturing sectors as a result of strong revenues from natural resource exports – the classic symptoms of Dutch disease.
“Come rain or shine, oil revenues should not be allowed to kill other sectors of the economy – that’s one thing we have learned from being a late-comer in terms of oil exploration,” he told Emerging Markets.
“So we must design our macro architecture in such a way that the absorption of oil revenues does not translate into an appreciating exchange rate, and we must use it cleanly, otherwise everyone will run for oil revenues and get out of agriculture, get out of industries.
“Incentives have to be designed, even at the micro level, to ensure that all sectors remain competitive.”
UK-based Tullow Oil plans to start pumping crude oil from Uganda’s Lake Albert Basin next year, and estimates that Uganda has about 1 billion barrels in proven reserves and potential reserves totaling up to 2.5 billion barrels. Muhakanizi said that oil revenues could eventually exceed 8% of GDP.
However, Muhakanizi insisted the Treasury would not base fiscal policy on the expectation of future oil revenues, as this was risky given continued uncertainty over the potential size of the nation’s reserves and ongoing delays in terms of extraction.
“We are not projecting any oil revenue into future budgets until reserves are exploited and we have received the revenue from this,” he said. “So until the flows are proven, we will maintain our conservative stance.”
Politicians in neighbouring countries are also aware of the dangers posed by an over-dependency on oil, albeit from very different starting points.
The Government of South Sudan (GoSS) which will soon become Africa’s newest independent nation, is planning to reduce its near total reliance on oil.
Aggry Sabuni Tisa, permanent secretary at the GoSS’s Ministry of Finance and Economic Planning, said that while oil currently represented “98% of budget income from a single source”, the Juba government’s economic plan was based on creating conditions to diversify and avoid this burdening the economy.
“Our plan projects 20% non-oil growth annually,” he told delegates at the African Development Bank’s annual meeting. Development organizations have repeatedly warned African nations about the dangers of falling into the Dutch disease trap, and have greater efforts towards diversification.
“Dutch disease has been with us all the time, even if people don’t discuss it so much now,” AfDB president Donald Kaberuka told Emerging Markets. “We need the political will to mobilize now.”