Stop borrowing expensive loans in expectation of big oil revenue

The developments in Uganda’s oil and gas industry have since transitioned from exploration and appraisal phase in 2006 to the development phase in 2019 with production expected to start in 2023. The government and oil companies have signed production licences and are in negotiations for the final Investment decisions for different oil projects.

However, according to reports Uganda’s first oil expectation in 2023 is more likely not to happen. The government continues to borrow expensive loans to finance infrastructure projects. In a way, this is a precursor for the much dreaded oil curse.

Although the President has said Uganda will not suffer the oil curse faced by many developing countries where sometimes they have even become poorer than before oil extractions due to bad contracts and policing, 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.

With a low public investment efficiency of about 0.3, public investments financed by public borrowing against future oil revenues is a precursor for a resource curse. Public investments such as roads, electricity, and railway, among others, are expected to spur long-term growth.

China is one of Uganda’s biggest 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 of Karuma and Isimba dams. It also financed and built the $476 million Entebbe Expressway to the airport, which cuts driving time by more than half.

Uganda’s current debt stands at $11 billion (42 per cent), and is projected to increase further to about 45.7 per cent of GDP in the Financial Year 2019/20.

There are risks to the rapidly rising public debt, especially the external debt, which has risen on annual basis at an average of about 18 per cent in the four financial years to 2018/19. The country should prioritise important infrastructure and avoid quick investments, which could lead to capacity constraints that drive public investment costs further.

Therefore, it is important for Uganda to strike a balance between the need for public investments and managing public finances. This will save the country from too much debt burden and allow citizens to benefit from the oil revenues.

Patrick Edema,
[email protected]