Fiscal Strategy Incorporating Oil

This paper addresses a number of macroeconomic concerns facing a devel- oping country that falls upon a large stock of a valuable natural resource. Our focus is on Uganda, on whose territory substantial amounts of oil were recently discovered. Although this rather unexpected event is likely to affect the lives of many— in fact, arguably most— Ugandans, history is full of examples illustrating that natural-resource discoveries cannot simply be considered manna from heaven.

The …nding of oil may indeed be a blessing but it can also easily turn into a curse. The purpose of this report is to analyze the key implications of an increase in revenue and to discuss some central related policy issues, such as how fast to extract the oil, how to man- age the revenues, and how and when to use the revenues. Our treatment does not aim to be de…nitive but is rather designed to build a framework with the perspective of which one can discern and analyze the key issues. We will start by brief‡y describing Uganda’s economy and some recent macroeconomic trends. We then report estimates we collected concerning the size and value of the oil discovery. In order to analyze how the oil use ought to in‡uence the macroeconomic growth process, we then construct a tractable macroeconomic and use it to look the key macroeconomic tradeoffs facing Uganda. In particular, the model is well suited for a quantitative study of the tradeo¤s between investing and consuming are a¤ected by the oil discovery. Since the model necessarily abstracts from a host of important issues we then move on and “think outside the theory box”, i.e., we discuss some concerns that our model cannot directly be used to analyze on a less formal level. Among these issues are risk and uncertainty, political transparency, the so-called “Dutch disease”, and whether oil revenues should be used for tax reductions. Finally, we try to draw some overall conclusions from our formal and less formal analyses.