News Column

Oil-Rich Developing Nations Still Need Aid - IMF Experts

May 7, 2014

Alon Mwesigwa

Uganda should keep requesting for aid even when it starts raking in the cash from its oil reserves, experts have said. In an article, Oil and Aid, published in Finance and Development magazine run by the IMF, Rabah Arezki, a senior economist with the International Monetary Fund, and Ritwik Banerjee, a PhD student at the Denmark-based Aarhus University, argue that aid could help countries, especially those with weak institutions and limited capacity, to effectively use the newly-found resources.

"To some extent, an oil discovery should diminish the rationale for continued aid aimed at a country's economic and social development," they wrote.

"[However], oil discoveries lead to corruption, conflict, pork barrel spending and the withering economy in the non-oil sectors. Donors could use the incentive of foreign assistance, for all its flaws, to help the recipients avoid these pitfalls, improve governance, and manage the economy to offset the fallout from a rising currency."

Uganda has so far discovered about 3.5bn barrels of oil. First Oil is expected in 2018. Another reason for keeping aid money coming into the country, the article said, is to ensure that the donors keep tapping the recipient's resources.

"Because major western companies stand to win contracts, aid is a way to ensure hefty profits for companies in donor countries," the article notes.

Arezki and Banerjee's arguments are based on the forthcoming IMF working paper, Aid vs. oil; can the two mix?, which they authored. The two say that oil discoveries are likely to further deepen relationships between donor and recipient countries.

While the support Uganda receives from donors for its budget has reduced significantly, now at 18 per cent, more donor money still goes to different projects such as Aids prevention initiatives, research, and rural electrification, among others.

The National Budget Framework Paper (NBFP] for 2014/15 financial year shows that donor project support will get Shs 2.6tn, up from the Shs 2.5tn the country received this financial year.

Speaking to journalists at Standard Chartered bank offices at Speak road last year, Razia Khan, the bank's regional head of Research for Africa, said Uganda needed to widen revenue mobilisation instead of looking at oil as the sole source of revenue.

"Resource mobilisation still lags far behind in Uganda... it can only be revamped if other sectors like agriculture are aided to grow," Khan said.

She said the ideal for Uganda was to save the oil revenues or reinvest them.

"Oil is a finite resource and once it's extracted, once it is sold, you won't get it back. Having oil wealth doesn't necessarily mean growth."

The IMF paper says aid should help build capacity for enhanced management of oil revenues.

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Source: AllAfrica

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