Viable and imperative economic

policies for the avoidance of Dutch

disease in Uganda’s oil context.
Mubiru Faruku, Nkumba university.
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Table of Contents
1. Introduction
2. Theory and definition
3. Transmission mechanisms
4. Possible effects to the economy and development of
Uganda.
5. Measures of successful countries.
6. Implication policies for Uganda.

• Viable and Imperative economic policies for avoidance of Dutch disease in Uganda • Mubiru Faruku
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Introduction
 In 1925 Oil potential of Uganda was documented by a government
geologist E.J Wayland, in the publication “Petroleum in Uganda”.
 On 6th June 2006,confirmed its commercial discovery of 300 mbbl
 In 2014, estimated to 6.5Bbl of oil in over 21 discoveries.
 The expected revenue would potentially strengthens Uganda’s
development initiative to eradicate poverty and meet the vision of
2040 but instead could result into other unfavourable effects known
as Dutch disease.

• Viable and Imperative economic policies for avoidance of Dutch disease in Uganda • Mubiru Faruku
 Theory and Definitions Slide 4

Dutch disease is an economic term that refers to a situation in which

an extra wealth from the booming sector leads to a contraction of the
other non booming sector by giving rise to a real exchange rate
appreciation.
 It is attributed to the crisis in the Netherlands in 1960s.
 The Dutch guilder appreciated, non-oil products became less
profitable
The economy can be divided into three sectors (Corden and Neary
(1982).
 natural resource booming sector.

 non-tradable sector.

 non- resource tradable sector.

• Viable and Imperative economic policies for avoidance of Dutch disease in Uganda • Mubiru Faruku
 Slide 5
Effects of oil and gas boom on the traditional and
non-traditional exports sectors of an economy.
Transfer of
income.

Desired
consumption
Kwaku et
al, 2011

New
Initial equilibrium before equilibrium
discovery of oil

• Viable and Imperative economic policies for avoidance of Dutch disease in Uganda • Mubiru Faruku
 TRANSMISSION MECHANISM. Slide 6

MECHANISM TRANSMISSION IMPACT

Spending effect  Increased domestic income
 Stimulated demand and spending
 Causes indirect de-industrialisation
Resource movement  Boom attracts capital and labour
effect  Permanent movement of labour force
 Leads to direct de-industrialisation.
Residual effect  Degree of vulnerability correlates with the
degree of domestic flaws.
 Includes; corruption, rent-seeking, poverty,
policyeconomic
• Viable and Imperative choices
policies for avoidance of Dutch disease in Uganda • Mubiru Faruku
 Slide 7
POSSIBLE EFFECTS AND DEVELOPMENT
IMPLICATIONS.
 Over borrowing, corruption
 Governance and policies, rent-seeking, protectionism, local
community agitation and rife
 Mixed growth outcomes and a decrease in the prices of imports
 Growth per capital.
 Volatility as a transmission channel.
 A decline in the traded goods sector, structural unemployment.
 Increase in foreign exchange inflows which lead to the
appreciation of real exchange rate

• Viable and Imperative economic policies for avoidance of Dutch disease in Uganda • Mubiru Faruku
 Slide 8

MEASURES OF SUCCESSFUL COUNTRIES

Indonesia
Norway
 oil is an “enclave” and avoided boom based borrowing
 centralized wage formation system.
 agriculture development, sterilized the oil revenues, balanced
 intelligent,sustainable enterprise and
principle. investment policy.

 tight fiscal discipline and foreign direct

investment,establishment of the pension
Botswana. fund.

 Booming sector is an “enclave”

 Fiscal discipline, budget surplus

 Foreign exchange reserves

• Viable and Imperative economic policies for avoidance of Dutch disease in Uganda • Mubiru Faruku
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Implication policies for Uganda.

 There is a need to slowdown the spending effect through
sterilization of the boom revenues.
 Government should give consideration of using oil revenues to

reduce taxes.
 Uganda should invest in human capital development (education)

and infrastructure.
 The government should consider directly subsidizing the traditional

export sector. Furthermore, Uganda should reduce reliance on rain-

fed agriculture and invest capital in irrigation schemes in areas of
high agricultural dependence to boost agriculture.

• Viable and Imperative economic policies for avoidance of Dutch disease in Uganda • Mubiru Faruku
 Slide 10

 Uganda should absolutely be involved in the operation and

management.
 There should be a well established legal framework to guide
activities of the oil and gas industry which should be strictly
enforced through transparency. Furthermore, an independent
committee should be set up to oversee corruption in oil and gas
sector alone.
 Deceleration of domestic currency appreciation.
 Diversification of Uganda’s economy.

• Viable and Imperative economic policies for avoidance of Dutch disease in Uganda • Mubiru Faruku
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Acknowledgements
I am grateful for Mr. Musisi Norbert (PhD candidate) for his
professional assistance in encouraging and reviewing my work. I
thank Ms. Namugwe Victoria, Mr. Magezi Johnmarvin and Mr.
Kalinda Denis for their contributions and advices.

THANK YOU.