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A Calibrated Macroeconomic Model for Uganda

About the Project

KAPSARC is engaged in a long-term research project examining the dynamics of natural resource-driven growth in Eastern Africa. The principle research question we are seeking to answer is, how can natural resources be developed in a way that promotes inclusive economic development? We are answering this question through a comprehensive framework that examines macroeconomic issues of natural resource development, the impact of local content policies, and understanding the expectations of the stakeholders in East Africa’s oil and gas sectors.

Summary for Eastern Africa Policymakers

Recent natural resource discoveries in Eastern Africa provide an opportunity to boost economic development. However, this opportunity brings with it potential challenges in the form of ‘Dutch disease’ and, potentially, the ‘resource curse’. A companion paper to this report: Managing Macroeconomic Risks Arising from Natural Resource Revenues in Developing Countries: A review of the Challenges for East Africa sets out the current state of thinking on the issues of Dutch disease, resource curse, the applicability of the permanent income hypothesis (PIH) in populous, developing economies and the impact of absorptive capacity constraints.

Our focus is oil discoveries in Uganda and their expected impact on government revenues. We analyze alternative policies for spending natural resource revenues using a calibrated dynamic, stochastic, general equilibrium model (DSGE) of the Ugandan economy. These policy scenarios encompass the range of outcomes that are likely to be considered by the Ugandan government and provide a framing for subsequent policy discussions on how best to deploy the windfall.

Using detailed publicly-available information on the upstream oil sector and the fiscal regime, we have derived realistic cost and government revenue profiles across a range of oil price scenarios. These profiles assume that proposed local content regulations neither delay project development nor increase the costs compared to international norms. This enables us to project annual production, fixed and variable costs, and government revenues for three global oil price paths.

The three scenarios illustrate the potential effects of:
  • Direct income transfers.
  • Front loaded public investment spending.
  • Gradual public investment spending

Within these scenarios, we also assess the impacts of alternative assumptions on the efficiency of public investment arising from constraints on absorptive capacity within the economy.

The results of the three different policy choices can be contrasted to show the tradeoffs between short term welfare benefits at the expense of long term economic performance. No single economic choice can be considered optimal in the absence of considering the political and social consequences of each individual policy choice. For this reason, we make no specific recommendation as to which approach to choose but provide a framework for policy discussions.

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