Experts cautious of impact of oil on trade deficit
The importation of oil production equipment might influence an increase in the trade deficit.
What you need to know:
Rising oil equipment imports are likely to influence a shift in balance of trade.
Trade shift.
The importation of capital equipment and goods for oil infrastructure as the country moves towards oil exploration could worsen Uganda’s trade deficit, an expert has warmed.
Ms Razia Khan, the Standard Chartered regional head of research for Africa, said with oil production, an infrastructure investment programme will be required to expand the country’s export capability as it moves towards becoming an oil economy.
This, she said, could result into more trade deterioration in the short term. Uganda’s trade imbalance is estimated at $2.5 billion, according to data from the World Bank.
Data from Bank of Uganda, however, indicate that Uganda exported $4.7 billion goods and services last year as opposed to $7.9 billion worth of imports.
Ms Khan noted that although much of the oil infrastructure will be financed by companies involved in oil production through Foreign Direct Investments (FDIs), Uganda needs to take extra precautions to deter the potential trade balance deterioration. “Trade balance in Uganda has been widening especially in the wake of donor aid cuts. Imports are now twice exports and the country could go through a more challenging time in the short term,” Ms Khan told journalists during a global research press briefing in Kampala on Wednesday.
Much as Mr Kelvin Kizito Kiyingi, Bank of Uganda acting director communications agrees that investment in oil production, refinery and pipeline will worsen Uganda’s trade deficit because of large amount of capital goods imports, the larger trade deficit will be financed with higher capital inflows, such as foreign direct investment.
Ms Khan further warned that Uganda should watch out for the appreciation of the local currency when it starts oil production, saying the appreciation makes it difficult for the country to export goods from other sectors competitively.
