Off to a good oil start, but watch the light at the end of the tunnel

The commissioning of the first oil well drilling this week was a historic moment for Uganda. The predominant feature in the decade-and-a-half since we first discovered commercially viable crude oil deposits has been how slow we have moved to get it out of the ground.

Now that we are finally moving our feet, we should avoid repeating the mistakes that other countries rushed into. Ghana is a good example. After crude oil exports started in 2010, they fuelled an economic boom; the gross domestic product grew by 14 percent in the following year and continued to gallop in subsequent years.

This gush of crude oil in one direction and petrodollars in the other, however, led to an almost immediate loss of fiscal discipline. This indiscipline, which in fact started even before the first petrodollar had been received, led to spending on vanity projects, especially during election years.

The government scrapped high school fees, threw money to local power producers and to local banks. But most of this was money borrowed in anticipation of the oil boom. In each of the nine years until 2022, Ghana borrowed heavily from the international bond markets and investors were happy to keep throwing money at it, until they figured that the country might not be able to pay them back.

They were right. By last September, Ghana’s public debt had ballooned to just under 76 percent of GDP, up from 68.3 percent only five years earlier. When international lenders stopped lending to it, the government turned to the domestic market, paying as much as 30 percent interest per year.

When the government struggled to pay the local lenders it turned to its bank, the Central Bank and borrowed there. And when the Central Bank also ran out of cash, Ghana crawled to the IMF, the lender of last resort, and begged for a $3 billion bailout.

Uganda has already tried to sidestep some of Ghana’s mistakes. The laws to manage oil revenue in Uganda have already been written, while Ghana only changed its rules a year after the oil revenues began gushing in.

But there are plenty of parallels for us to sit pretty. First, despite several promises to ring-fence the oil revenues for developmental expenditure, our very first raid on the kitty was to pay for fighter jets, not tractors. With the region remaining volatile, there is nothing to suggest that the next big purchase will be a smelter to turn swords into ploughs.

Like Ghana, we have also ramped up our borrowing in anticipation of the oil revenues, even if we don’t say it explicitly. Our total debt has more than doubled in the last five years, according to the latest report from the Office of the Auditor General.

More important that the absolute size might be the flavour of this debt. A large chunk of it is foreign debt which is vulnerable to exchange rate shocks. Since governments take tax collections in local currency and have to convert it to foreign currency to repay these loans, a strengthening of international currencies, as has recently happened with the US dollar makes interest payments higher. Already, the government is spending more money on interest payments than it spends on most development expenditure line items. We are working for our creditors.

Although we fought off the temptation to issue a Eurobond (something we should remain indebted to former Central Bank Governor Emmanuel Tumusiime-Mutebile), we have taken a shortcut by borrowing an increasing sum of money from commercial lenders. The net effect is often the same.

Unlike bilateral and multilateral lenders who can be persuaded to forgive or restructure their loans, commercial lenders have shareholder interests at heart and will seize your assets at the drop of the share price. 

The interest on domestic borrowings has crept up – again like Ghana – even as the percentage of domestic revenue spent on servicing local interest payments has shot above government’s own ceiling. With local banks able to meet their targets just by holding government paper, they lose any incentives to lend to the private sector, starving it of money when it needs it most to bounce back from the trailing effects of the pandemic.

The scariest bit about the surge in debt over the past five years, however, is that there is rather little to show for it. Oil revenues can breathe life into the economy but, as Ghana shows, sometimes the light at the end of the tunnel is an on-coming train. Choo! Choo!

Mr Kalinaki is a journalist and  poor man’s freedom fighter. 

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Twitter: @Kalinaki