Roundup: Uganda's central bank cautions on falling global oil prices

Uganda's central bank on Wednesday warned that the falling global oil prices are likely to affect the country's revenue collection.

Emmanuel Tumusiime-Mutebile, Governor Bank of Uganda in a statement issued here said oil price uncertainty has a crucial implication on macroeconomic stability. He said most of the national income earned from oil comes in form of taxes.

"We have to be honest and recognize that it has become more likely that public revenues from oil over the long term will be lower than we had previously expected," he said.

"If the country were to face a fiscal crisis, interest rates would spike, inflationary expectations would rise, the exchange rate would fall sharply and capital would flow out of the country. In these circumstances, it would be almost impossible for the central bank to maintain macroeconomic stability through monetary and exchange rate policy," he noted.

Mutebile said the country must have a far sighted long term fiscal policy which recognizes the inherent risks to the magnitude of future oil revenues and ensures that fiscal sustainability will not be put at risk.

Given the uncertainty, Mutebile said government should be cautious about incurring expenditure commitments, the financing of which is contingent on substantial inflows of oil revenues in the future.

He said such commitments could include both a large expansion of the public wage bill and large public investment projects.

"If government were to undertake such commitments and future oil revenues are too low to fully finance them, the fiscal position would be unsustainable; the government would face a fiscal crisis. This is what happened in many oil producers in the early 1980s, when the oil price fell sharply," Mutebile said.

Uganda plans to start commercial production of oil. According to government, the oil revenues would be used for infrastructure development.

Mutebile also warned that the uncertainty has implications for investment in both the oil industry and the rest of the economy.

Most of the capital investments in the oil industry are irreversible, especially those involving large scale infrastructure such as pipelines, so according to Mutebile, the option of waiting will be a factor influencing investment decisions in the industry.

He said if the oil prices continue to be uncertain, companies would be reluctant to invest until they are sure the investment would be viable. "Investors in the oil industry face a tangible risk that global oil prices over the long term will render their investments unviable. That risk is higher today than it was prior to the fall in global oil prices in mid-2014," he said.

"As a consequence, investors in the oil industry face incentives to delay or slow down their investments as they wait to see how global oil prices might evolve. That does not mean that oil companies will not invest in Uganda's oil industry, but it does mean that they will be more cautious about committing resources to irreversible capital projects than would have been the case before the fall in global oil prices," he added.

This means the pace of capital investment in oil production and the associated infrastructure will be slower than had been anticipated before the global oil price fall.

The uncertainty about the future path of oil prices will also have implications for private investment decisions in the non-oil sectors of the economy, according to the Governor.

Mutebile said although volatility and uncertainty makes macroeconomic management more difficult, it does not spell doom for the country's economy.

"Even if oil prices are very low in the future and very little public revenue is earned from oil, our economy can continue to thrive and grow if it is well managed, as it has been for the last 25 years," he said.

"What would be disastrous for our economy is if we fail to recognize the significant risks entailed in the uncertain future path of oil prices and incur expenditure commitments which subsequently prove to be unaffordable," he added. Endit