Kiel Working Papers, Kiel Institute for World Economics
No 1696:
Managing Future Oil Revenues in Uganda for Agricultural Development and Poverty Reduction: A CGE Analysis of Challenges and Options
Manfred Wiebelt, Karl Pauw, John Mary Matovu, Evarist Twimukye and Todd Benson
Abstract: With the recent discovery of crude oil reserves along the
Albertine Rift, Uganda is set to establish itself as an oil producer in the
coming decade. Total oil reserves are believed to be 2 billion barrels,
with recoverable reserves estimated at 0.8-1.2 billion barrels. At peak
production, likely to be reached by 2017, oil output will range from
120,000-210,000 barrels per day, with a production period spanning up to 30
years. Depending on the exact production levels, the extraction period, the
future oil price, and revenue sharing agreements with oil producers, the
Ugandan government is set to earn revenue equal to 10-15 percent of GDP at
peak production. The discovery of crude oil therefore has the potential to
provide significant stimulus to the Ugandan economy and address its
development objectives. However, this is subject to careful management of
oil revenues to avoid the potential pitfall of a sudden influx of foreign
exchange. Dominating the concerns is the potential appreciation in the real
exchange rate and subsequent loss of competitiveness in the non-resource
tradable goods sectors such as agriculture or manufacturing (‘Dutch
Disease’). These sectors are often major employers in developing countries
and the engines of growth. Several mitigation measures can be employed by
government to counter Dutch Disease, including measures that directly
counter the real exchange rate appreciation or measures that offer direct
support to traditional export sectors in the form of subsidies. With the
aid of a recursive-dynamic computable general equilibrium model this study
evaluates the economic implications of the future oil boom in Uganda. We
also consider various options open to the Ugandan government for saving,
spending, or investing forecasted oil revenues with aim of promoting
economic development and reducing poverty, but also countering possible
Dutch Disease effects. We find that generally urban sectors and households
will be better able to capture rents generated by the oil revenues leading
to growing rural-urban and regional inequality. Yet, despite these
potential risks, Uganda’s oil economy presents an unparalleled opportunity
for the agricultural sector and for poverty reduction in particular. On the
one hand, domestic demand for food, such as cereals, root crops, pulses and
matooke (cooking banana), but especially higher valued products, such as
horticulture and livestock products, will increase as incomes rise.
Moreover, higher urban income and urban consumer preferences will lead to
increasing demand for processed foods and foods with greater domestic
value-added, such as meat, fish, etc. Provided Uganda’s tradable food
sectors can remain competitive, this provides an opportunity for both
farming and the food processing manufacturing sector. On the other hand,
there is the immediate danger to lose market shares in agricultural export
markets, which might be extremely hard to regain after the oil boom. As
shown in this paper, the outcomes for agriculture, rural-urban income
differentials and poverty reduction depend very much on whether government
revenues for public investment in the agricultural sector will increase and
help alleviate chronic under-investment in public goods that is
constraining agricultural growth in Uganda
Keywords: Uganda, crude oil, Dutch Disease, agricultural competitiveness, general equilibrium modeling; (follow links to similar papers)
63 pages, May 2011
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