Economic Diversification and Growth

Figure 4.11: Overall Fiscal Deficit (Percent of GDP)
Figure 4.12: Total Expenditure and Net Lending (In Percent)
Source: Uganda MACMOD and authors’ calculations.
Source: Uganda MACMOD and authors’ calculations.
oil production begins. Yet, it is less clear how the Petroleum
Revenue Management Policy would contribute to the
creation of a savings buffer that would smooth expenditure
when oil revenues fall short of what was initially budgeted.
4.31. The government will have to make sure that on
top of establishing an adequate NONG fiscal deficit rule
a fixed share of oil revenues is deposited each year in
a savings account. The recently enacted Public Finance
Management Act 2015 stipulates that all oil related revenues
will have to be deposited into a holding account overseen
by the parliament. From there, revenues will either be
used to finance the government budget or will be transferred
to a special savings fund called the Petroleum Revenue
Investment Reserve. This savings fund will act as a sovereign
wealth fund allowing the country to save for future
needs and to smooth government expenditure when oil
prices fall. Yet the law does not establish how much of the
annual oil revenue will have to be deposited in the account.
In Ghana, for example, the law established that in each year
15 percent of all oil revenue is to be saved in a stabilization
fund to absorb unexpected shortfalls in oil revenue in the
future. Using a macroeconometric model for Uganda (Mac-
Mod-UG), it was estimated that, if Uganda were to adopt a
similar rule, by the end of 2024/25 enough savings would
have been accumulated to absorb a sudden drop in oil revenue
of almost 50 percent (see Figure 4.9). Moreover, the
DSGE model estimates that savings rate of 15–30 percent
of oil revenue will optimally minimize the volatility of key
macroeconomic aggregates such as private consumption,
private investment, and total employment (Kopoin et al.
2015).
4.32. The right level of the NONG fiscal deficit rule would
depend on expected oil revenue and the government’s
targeted level of overall expenditures. One option would
be to set the NONG deficit target at a fixed rate of 5 percent
of GDP. With average oil revenue and grants (as a share
of GDP) expected to account for respectively 1.2 percent
and 0.6 percent over the first four years of oil production,
the average overall deficit would amount to 3.2 percent and
would allow Uganda to comply with the 3 percent deficit
target of the EAC monetary union by FY2020/21. However,
such a fixed target for the non-oil non-grant budget deficit
would not take into account the bell shape nature of the oil
production path and would result in high fiscal deficits in
the early years and excessively low by the mid-2020s, when
Uganda is expected to reach peak oil production. Alternatively,
a variable NONG fiscal deficit limit would allow
revising the rule every 3-5 years in line with the inflow of
oil revenue. Figures 4.10 and 4.11 illustrate the two alternatives.
In scenario 1, the NONG fiscal deficit is maintained
at 5 percent over the whole projection. In scenario 2, it is
gradually revised every three years, first at 5 percent of
GDP, then at 5.5 percent of GDP, and finally at 6.5 percent.
4.33. Set at the right level, the NONG fiscal deficit limit
compares favorably to other fiscal rules adopted elsewhere
in Sub-Saharan Africa. Resource-rich countries
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