Economic Diversification and Growth

Much of Uganda’s
oil deposits are in
areas with tourism
potential
percent of GDP to 21 percent by 2024/25 (a more ambitious
scenario in which public expenditure is frontloaded ahead
of oil production is discussed in Chapter 4 ). The country’s
gross debt to GDP ratio will continue to increase, peaking
at 35 percent in FY2015/16 shortly before oil production is
expected to begin.
2.14. The emergence, and development of Uganda’s oil
industry, and the capacity of the government to increase
public investment will have a major impact on GDP
growth during the next decade. Figure 2.6 illustrates
Uganda’s growth path with, and without oil. If oil price
recovers to its pre-crisis level and assuming that oil production
comes on stream in 2017/18, and that public investment
continues to accelerate during the next decade, real GDP
growth is expected to average 8 percent annually between
2015/16 and 2024/25, i.e. 1.7 percentage points higher than
in a scenario without oil, and a more limited investment
surge. In per capita terms, the emergence of the oil sector,
and a continued emphasis on public investment would allow
Uganda to reach by 2021/22 a GDP per capita of US$1147,
14 percent higher than in a situation without oil, and less
public investment (see Figure 2.7).
2.15. The second impact is related to trade balance
effects of oil which should be sequential. In fact, as FDI
increases when firms are focusing on the construction phase
as well as other oil related imports, growth in total imports
is expected to accelerate from 4.5 percent in 2014/15 to an
average of 12.5 percent over the period 2017/18 to 2020/21.
Subsequently, annual import growth will gradually decline,
reaching 7 percent in 2030/31, as the need for imported
inputs diminishes, and construction phase in the petroleum
sector winds out. At the same time, oil exports will increase
gradually from a very insignificant level in 2017-20 to 6.6
percent of GDP in 2024-30. In line with these developments,
the country’s trade balance (as share of GDP) will first deteriorate
slightly from a deficit of 9.7 percent in 2014/15 to
17.9 percent on average over the period 2017/18 to 2020/21
but will improve significantly thereafter due to the stronger
performance of oil and non-oil exports. In contrast, the
current account will not improve over the next decade, as
Uganda’s income account deteriorates when international
oil companies repatriate profits, and aid inflows decline.
Therefore, by 2025 the current account deficit is projected
to reach 10 percent compared to the 9 percent today. The
government is expected to deposit a small share of its oil
revenue to a sovereign wealth fund abroad. Yet, compared
to the rise in imports these savings will be small. Foreign
exchange reserves are thus projected to exceed about 6
months of imports.
2.16. Without a marked change to Uganda’s current
account, the Ugandan shilling is projected to continue
its downward trend observed during the last decade.
Over the last ten years the Ugandan Shilling lost an annual
average of 3 percent of its value against the U.S. dollar.
Assuming this rate of depreciation remains constant, US$1
will trade at UGX 3,700 by 2024/25 compared to an average
value of UGX2,600 in FY 2013/14. It is worth noting
that between 2014 and 2015 the shilling depreciated by 27%
against the U.S dollar, standing at UGX3301.77 at the end of
December 2015. In contrast, the real exchange rate, which
corrects for different levels of inflation in Uganda vis-a-vis
the rest of the world, will appreciate by a modest 14 percent
between 2013/14, and 2024/25.
2.17. This divergence in real and nominal exchange rates
is commonplace in natural resource economies. Angola,
Ghana, and Nigeria, for instance, all saw their real exchange
rate appreciating during the commodity boom that started
in the mid 2000s. Their respective nominal exchange rates,
however, fell during that period. An underlying reason for
this divergence in nominal, and real exchange rates is that
commodity booms fuel domestic inflation, which in turn
causes the real exchange rate to appreciate. The appreciation
of the real exchange rate has a negative impact on the
country’s competitiveness lowering non-natural resource
exports. The literature refers to this as Dutch Disease, which
is often identified as one of the key challenges of economies
with large natural resource sectors (see section V. for
a more detailed discussion of Dutch Disease). One of the
ways countries can regain competitiveness is by allowing
their nominal exchange rate to adjust freely through a nominal
depreciation of their currency. The emerging oil, and gas
sector in Uganda will be relatively small compared to the
rest of the economy. Assuming that Uganda maintains an
open capital account with a floating exchange rate regime,
it is therefore unlikely that the onset of oil production will
exert significant upward pressure on real exchange rate.
35