Uganda: Updated Assessment of Impact of the Coronavirus Pandemic on the Extractive Sector and Resource Governance

• Growing debt and significant delays in reaching “first oil” have left Uganda’s economy more vulnerable to external shocks.
• Oil production has moved a step closer to becoming a reality in recent months, but with coronavirus still impacting the oil price and the global energy transition gaining momentum, the country should still manage its expectations and investment in the sector.
• Uganda could benefit from a future demand for strategic minerals, but without significant reform in the mining sector, the country risks missing out.

Summary of economic impact of the coronavirus pandemic

The number of recorded cases of coronavirus in Uganda remains low, even after the government relaxed the lockdown in July 2020. However, the economic repercussions of the pandemic have been significant. In April, the International Monetary Fund (IMF) had predicted that Uganda’s economic growth would slow to 3.5 percent in 2020, down from 6.7 percent in 2019. It now expects growth to slow to minus 0.3 percent in 2020, before partially recovering to 4.9 percent in 2021. In July, the United Nations (UN) said 1.9 million Ugandans could be pushed into poverty as a result of the pandemic’s impacts.

Uganda’s 2020/2021 budget, announced in June, is 12.4 percent larger than the 2019/2020 budget. However, there are concerns that the increased spending is not directed towards mitigating the impact of the pandemic. Alongside larger spending needs, there has been a fall in government revenues. Uganda depends on imports of raw and intermediate goods and its economy relies significantly on the export of a range of key commodities. The slowdown in the global economy, particularly in China, has caused supply chain disruptions for the manufacturing sector. According to the Ministry of Finance, Planning and Economic Development, exports, tourism, remittances and foreign direct investment flows all shrank in the second quarter of 2020.

The IMF therefore projects that Uganda’s fiscal deficit will rise to 6.6 percent of GDP this year and 6.9 percent in 2021, compared to 5.0 percent in 2019. This rising fiscal deficit has led to the government pushing back its fiscal rule of reaching a deficit of 3 percent by 2020/21 to 2024/25. The IMF expects public debt to rise from 38.2 percent of GDP in 2019 to 46.0 percent in 2020 and 50.9 percent in 2021. While debt is increasing as a result of coronavirus-related borrowing, the stock mainly consists of non-concessional borrowing from China for infrastructure investment ahead of oil production.

Uganda’s fiscal deficit will be partly covered by the IMF’s Rapid Credit Facility and the World Bank’s Economic Crisis and Recovery Development Policy Financing totaling about USD 790 million. However, the growing deficit will likely constrain the government’s ability to complete ongoing investment projects and meet debt obligations. Delays in commencing oil production will also make it more challenging for the Ugandan government to pay off its debt. Continuing to borrow on the expectation of future large oil revenues would increase Uganda’s risk of experiencing the “presource curse.”

Impact on the oil and gas sector

Uganda discovered most of its estimated 1.7 billion barrels of oil over a decade ago, but the country has experienced delays in moving from discovery to production. In 2019, negotiations for the final investment decision (FID) for the Lake Albert Development Project broke down due to disagreements over tax issues related to the associated East Africa Crude Oil Pipeline, which further delayed the project. However, Total E&P’s acquisition of Tullow Uganda’s shares in April 2020 and the signing of a host government agreement between Uganda and Total E&P for the pipeline in September 2020 increase the prospects of the project going ahead. Uganda and Tanzania also signed an agreement on the pipeline in September.

While it is now more likely that the project will go ahead, the situation remains uncertain given the global economic slowdown, current low oil price and a potential acceleration of the energy transition. An FID will depend on the breakeven price for Uganda’s oil project(s) relative to the investors’ views of global crude oil prices in the long term. Recent estimates put the breakeven point for the two projects that comprise the Lake Albert Development Project at $40 and $48 per barrel. (These estimates are based on a 10 percent discount rate, which may be low for the project type, meaning potentially higher break-even prices.)

If the country reaches an FID in early 2021, production would still be unlikely to start before 2024/25. If the coronavirus pandemic and low crude oil prices further delay production, this would be costly for Uganda, given that the country has borrowed heavily against the promise of future oil earnings. Even if the Lake Albert project now goes ahead in the next few years, government revenues are likely to be lower than previously projected with global oil prices now at US$44. In 2019, the government suggested it expected revenue to peak at around 4 percent of GDP with an oil price of $60 per barrel. That was already half the revenue projected by the IMF in 2013, and even a long-term price of $60 could turn out to be optimistic. Moreover, this may be Uganda’s only oil project. Already, interest seems to have started to wane in exploring other parts of Uganda for oil. Even before the coronavirus pandemic and the price crash the government had extended its latest licensing round “to allow more time for interested parties to prepare their applications.”

In addition to government revenue, Uganda has prioritized building economic linkages to the oil and gas sector. The government is committed to building an industrial park (including a refinery with a capacity of 30,000-60,000 barrels per day), an airport, and a petrochemical industry. Uganda’s national oil company is expected to have a stake in this venture. However, these economic linkages may risk increasing Uganda’s dependence on, and investment in, the volatile and uncertain extractives sector.

Despite the challenges, there is significant political pressure to finalize negotiations and move ahead with oil production and related plans. This comes from the president, who will likely focus on Uganda’s oil future in the 2021 election campaign, as well as from private sector actors keen to finalize deals for oil-related supplies.

Impact on the mining sector

Following the easing of the lockdown in July, artisanal mining operations that had stopped due to the pandemic resumed. The reopening of the international airport at the beginning of October is expected to enable resumption of mining exploration activity. However, it remains to be seen whether the government will lift the ban on exports of tantalite, tungsten and tin—imposed to encourage domestic value addition before the pandemic—as part of concessions to the mining sector in light of the pandemic’s economic impacts.

Government focus on the pandemic appears to have slowed down finalization of the Mining and Mineral Bill, intended to amend the existing legal framework. This bill, if passed, would, among other things, establish a national mining company. Reflecting the government’s drive for value addition, it also requires large-scale mining licenses to include conditions related to this.

Uganda has deposits of minerals that are critical for energy transition technology. These include, in addition to tungsten and tantalite, copper, cobalt and nickel. Investor interest in these deposits may be accelerated as a result of the pandemic’s potential acceleration of the transition. It remains to be seen whether the government will develop a specific policy framework for them.

Impact on extractive sector revenues

Uganda has received meager revenues from its extractive sector to date. Revenues so far from the oil and gas sector amounting to $690 million come mainly from signature bonuses, stamp duty and capital gains tax. Although mining operations have been in place for over 10 years, Uganda has failed to maximize revenues from mining due to limited large-scale activity and weaknesses in oversight of the sector. The auditor general’s report for the financial year 2018/2019 revealed that the government collected only $3 million in royalties from mining. Overall, the pandemic’s impact on revenues has been minimal because the revenues from extractives were not significant pre-pandemic.

Impact on natural resource governance

In 2019, partly under pressure from donors, Uganda joined the Extractive Industries Transparency Initiative (EITI), a global good governance standard for oil, gas and minerals producers. At the high-level dialogue on EITI organized by NRGI, the Civil Society Coalition on Oil and Gas and Publish What You Pay held on 16 September 2020, Uganda’s Ministry of Energy and Mineral Development and Ministry of Finance, Planning and Economic Development committed to disclose information such as data on company payments to the government, which are required by EITI. The challenge the government now faces is reforming Uganda’s legal framework to enable that level of disclosure. Uganda’s economic difficulties resulting from the pandemic and low oil price are likely to mean the country needs the support of international lenders and donors who will press for more transparency.

Looking ahead

Uganda is likely to face significant economic challenges as early optimistic predictions about the contribution of oil to the economy are unlikely to materialize. This may be exacerbated if transparency around Uganda’s weak public institutions does not improve. The slowdown in the economy and the global move to reduce fossil fuels may reshape the narrative on the role of oil and gas in Uganda’s economic future. Civil society organizations (CSOs) have a critical role to play in shifting this narrative and promoting decisions that will benefit the people of Uganda. With significant political pressure to move ahead with the extraction of oil, it will also be important for CSOs to closely monitor any concessions that the Ugandan government may grant to investors in the wake of the oil price crash and coronavirus-related slowdown.

Moving forward, there is likely to be a stronger case for Uganda focusing on strategic minerals. However, without better management, Uganda may not realize the potential of its mining sector. The government will need to calibrate the country’s approach to participating in the sector through a national mining company and value addition well, to ensure that citizens benefit.