Agency For Transformation

Oil in Uganda: What does it mean for Agriculture sector?

The recent discoveries of oil and gas deposits in Uganda present new opportunities through access to energy and increased oil revenues that can be used to chart a sustainable growth path that does not only create economic growth but also results in economic development whereby growth is fairly well distributed to facilitate poverty reduction. However, these discoveries come in the midst of serious concerns and controversies that have characterized the empirical relationship between oil rents and development, particularly in the oil exporting African countries. The disappointing development performance of many resource rich economies has been a topical issue among policy makers, NGOs, civil society and academicians. Many countries have failed to leverage their natural resource wealth into strong states. For some of these countries, oil, gas, and mineral wealth have become associated with high poverty rates, weak state institutions, corruption, and conflict

One concern that has triggered a substantial amount of theoretical and empirical debate is the Dutch disease effect of natural resource abundance. This phenomenon describes the situation whereby the additional revenues from the natural resources put pressure on demand for domestic goods and services in a way that consequently raises the value of the local currency (real exchange rate appreciation) and makes tradable goods uncompetitive. This might stifle other sectors of the economy like agriculture and education.

The extractive industry has considerable impacts in our countries, not least on our economies. Its impacts are felt and seen at many levels including employment, government revenues, expropriation of populations, population displacement, health, the environment, education, culture, and life in general.

The case for “Dutch Disease” and Agriculture in Uganda is even more pronounced given that Uganda primarily depends on agriculture for survival. With over 80% of the population employed in agricultural and coffee, until recently the major export commodity, a negative influence on agriculture due to oil would have dire consequences. The theory of Dutch disease is that an increase in revenues from oil will adversely affect the tradables (manufacturing and agriculture) of a nation’s economy by appreciating the local currency, which in turn makes manufacturing and agriculture less competitive.

High oil revenues raise exchange rates, promote an adverse balance of payments on the cost of imported goods when prices fall, boost wages for skilled labor – ultimately pricing them out of the international market – and reduce the incentive to risk investment in non-oil sectors. In short, it kills the competitiveness of all non-oil sectors, squeezing out vital sectors like agriculture and manufacturing, leaving oil as the only functioning revenue source. Just one example includes Gabon, which since initiating the export of oil has seen its agriculture sector collapse; it is now entirely dependent on imported food.

The environmental pollution caused by oil drilling also results in a destruction of livelihoods in local communities making it difficult for the present and future generations to make a living off of their land. Farming and fishing activities, the mainstay of these economies, literally grind to a halt with the exploration of oil.

Oil exploration and production entails acquiring land which ultimately requires eviction of people that were formerly in those areas. It becomes worse where the process entails construction of refineries and pipelines. The women of Ogoniland, Nigeria who earn their living as farmers can testify to the ways in which the execution of oil projects compromises their livelihoods. In late April 1993, for example, farmlands close to the Ogoni pipeline were bulldozed with no regard for the crop growing on the land. The situation is no different in Cameroon where the construction of the Chad-Cameroon oil pipeline by ExxonMobil, Petronas and Chevron have had serious survival implications for the Bagyeli (UNCTAD 2007). This is because the pipeline project left a 30 meter wide gap through the forest, where the Bagyeli hunted, gathered and cultivated crops. The effect of this is the loss of land and access to resources upon which Bagyeli livelihoods have traditionally been based (Nelson 2002).

The effects of the “Dutch Disease” are not a foregone conclusion. With foresight and careful management of how the oil revenues get injected in the economy, this phenomenon can be avoided.

Since majority of Ugandans are employed in the agricultural sector, one would want to know what would happen if most of the oil resources were used to unleash the binding constraints to agricultural productivity. In this case, oil resources would be used to provide, for example, fertilizers, extension services or better technologies that would result into higher yields in the sector. A projection study done by researchers at the Makerere University based Economic Policy Research Center shows that appropriate use of oil resources to increase productivity in the agricultural sector would mitigate the adverse Dutch disease effects associated with the oil resources. The overall growth rate would be higher than what it is today. In relation to the exports, the researchers noted that they would be a lot higher than in the case where by the oil resources were not spent productively. Given that a large part of the manufacturing sector is agroprocessing, researchers further noted that the manufacturing sector would hardly be affected given its intermediary link with the more productive agricultural sector. The agro‐processing sector would also grow in line with other agricultural activities.

Interestingly, the same researchers found out that the argument that resources would be shifted to the non‐tradables like services if most oil revenues are invested in agriculture, would not hold in this case. Indeed, the growth rate of the services would be much more subdued. Given that the majority of the population which is poor is involved in agricultural activities, targeting the oil resources at the sector would also result into considerable reduction in poverty. The welfare of citizens increased through higher levels of consumption – and this is determined not only by what they produce themselves, but also by the additional consumption and investment that the oil revenue finances.

In a nutshell, the fears for an oil industry to subdue and suffocate the agricultural sector are founded. A deliberate effort must be made to ensure that a balanced macroeconomic fiscal regime is put in place to ensure that key sectors like manufacturing and Agricultural; are not outcompeted and made less competitive. At the community level, caution must be exercised to ensure livelihoods of communities displaced by oil extraction activities are compensated and at the national level, right and appropriate policy decisions must be taken to ensure the co-existence of agriculture and the oil industry.

Morrison Rwakakamba
Chief Executive Officer
Agency for Transformation
Re-imagining agricultural and environmental policy