The discovery of oil reserves in Uganda’s Albertine rift placed the country firmly on the radar of international investors. The discovery of 1 billion barrels of oil by London-based oil company Tullow Oil in western Uganda has led investors to take interest in the country’s potential as a significant global producer of the energy source.

As a country that was long overshadowed by Kenya, its neighbour to the east, Uganda had largely been ignored by the multinational oil companies, which were deterred by its relatively smaller market and the high logistical costs associated with operating in a land-locked developing country. Yet the country’s oil reserves, which Uganda’s Ministry of Energy estimates could be as much as 2.5 billion barrels, has led to a rapid influx of major oil companies, such as France’s Total and China’s National Offshore Oil Corporation.

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Learning lessons

Although Tullow’s discovery has generated high expectations within the country with regards to how any new-found oil wealth will benefit Ugandans, finance minister Maria Kiwanuka maintains that such excitement should be tempered by the examples of other oil producers in emerging economies that have not achieved sustained economic development, something Uganda can learn from.

“We are fully aware that there is a potential for the Dutch disease [where a country becomes over-dependent on its natural resources and neglects its manufacturing sector], and the way the government will avoid this is through ensuring that it utilises its oil revenues for investment, and not consumption,” says Ms Kiwanuka. “Oil revenues will go towards providing public [services] that the private sector cannot provide, and it will offer productive facilities that will jump start and develop other sectors of the economy.”

Although Uganda’s economic growth has, in recent years, outpaced the global economy’s average growth rate, it remains a frontier market. The United Nations Conference on Trade and Development in a recent report classified it as one of the world’s “least developed countries”, and the African Development Bank (AfDB) reported that global and regional economic shocks have led to a steady economic deceleration in Uganda over the past two years.

Economy worries

According to the AfDB, Uganda’s real GDP growth decelerated from 6.1% in 2010 to 4.1% in 2011. Although this has recovered to 4.5% this year, the decline has cast doubts on the country’s ability to achieve the economic transformation necessary to become a middle-income economy by 2030.

“Uganda has had its fair share of financial storms,” says Ms Kiwanuka. “There was a drought which increased food demand and food prices, and there was a generalised impact from the outside world where demand for our exports from our traditional markets in Europe and North America declined. However, we put in place some stiff monetary policies, which brought inflation down from a high of 30% last October to 18% at the end of May this year. Inflation now stands at about 11%.”

The finance minister maintains that although the production of oil will be a boon for Uganda, the government will work to put in place measures to ensure the revenues develop its export sector, and this will form part of a long-term export strategy that will move away from a reliance on the country's traditional partners in the West, and towards trade with neighbouring markets in Africa.

“We are working to improve the costs of doing business, and we have started identifying what we can do to improve the costs of transport and electricity,” says Ms Kiwanuka. “Our most strategic advantage is that we are land-linked. There is a route to the eastern part of the Democratic Republic of Congo and South Sudan, and these are very lucrative markets for any investor based in Uganda. We want to become the food basket of the region, and we also wish to redirect our export strategy away from our traditional markets and to the countries around us.”