emmanuel tumusiime - mutebile : the challenges which will face agriculture in an oil economy speech by mr emmanuel tumusiime - mutebile, governor of the bank of uganda, at the ceo summit forum, kampala, 30 october 2012. * 1. * * introduction for a country with fertile land and abundant rainfall which give it a strong comparative advantage in agriculture, uganda ’ s agriculture performance is weak. agricultural productivity per worker, at approximately $ 200 per year, is among the lowest in the world. real growth in agriculture has averaged only two percent per annum over the last 10 years, less than a third of the average growth of the rest of the ugandan economy. productivity is especially low in the food crop sub - sector, which is dominated by smallholder farmers, because farmers use rudimentary farm technology and produce mainly for subsistence rather than the market. the production of oil on a commercial scale will intensify the problems facing the agricultural sector. the spending of the revenues from oil in the domestic economy will inevitably bring about some appreciation of the real exchange rate. as a result food imports will become cheaper in real terms and agricultural exports such as coffee, tea and cotton will lose competitiveness. higher wages paid in the non - traded goods industries such as services will pull labour out of agriculture. all of these effects have been observed in many oil producing countries around the world, including those in africa such as gabon and nigeria ; they are features of the phenomenon known as dutch disease. unless there are radical changes in our approach to agriculture, our agricultural performance will weaken further, with very deleterious consequences for rural poverty, employment, inequality, geographically balanced growth and food security. the theme of my talk this afternoon is that it is imperative to implement a comprehensive strategy to support smallholder agriculture if we are to avert a long term decline in the agricultural sector ; a decline which will be accelerated by the exploitation of our oil resources. if we can help the broad mass of farmers in this country to become more productive, raise their yields and sell more of their output on the market, it will be possible to create a more dynamic agricultural sector which is strong enough to survive despite the adverse impacts of oil on the real exchange rate. furthermore, by supporting uganda ’ s farmers to increase their marketable output, we can boost agro - processing industries and thus promote industrialisation. strengthening agriculture will not be possible without devoting more public resources to support the sector, but how

we spend public resources is critical, as i will explain later in this talk. 2. what should be our strategy for agriculture? the goal of agricultural strategy should be to support the modernisation of agriculture. modernisation entails farmers adopting good agricultural practises, employing productivity enhancing farm inputs, making decisions about input use and choice of crops or livestock to maximise their profit and selling more of their output on the market. it will bring about a switch towards the production of higher value crops, as well as raising yields per acre and yields per worker. a feasible strategy for agricultural development in uganda must have at its centre support for smallholder farmers. smallholders comprise 96 percent of uganda ’ s farmers. it is unrealistic to expect that uganda ’ s agricultural performance can be turned around by ignoring smallholders and focussing instead on large farms. furthermore, small farms generate higher value added per acre than medium sized farms which in turn are more productive than bis central bankers ’ speeches large farms. although large farms market a higher share of their output than small farms, the former are not very efficient. on average, crop income per acre is four times higher on small farms than on large farms in uganda. 1 with constraints on land availability tightening in uganda, it is imperative to implement a strategy which makes more productive use of land, and this is most feasible by strengthening smallholder farming. smallholders in uganda face a raft of constraints to commercialisation, including poor access to markets and lack of commercial and technical information, but with adequate support from government policies to alleviate these constraints it should be possible to generate substantial improvements in productivity, output and incomes ; improvements which will help to insulate agriculture from the negative impact of oil. how government can best support agriculture is the question i turn to next. 3. policy measures to support agricultural modernisation research carried out by lawrence bategeka and john matovu of the eprc, using a computable general equilibrium model of the ugandan economy, examined how agriculture would be affected by the spending of oil resources. in their baseline scenario, under which oil revenues are simply used to fund an expansion of government, the real appreciation of the exchange rate leads to a significant reduction in agricultural production, especially production of the traditional agricultural exports. however, bategeka and matovu find that, if additional budgetary resources are targeted at the agricultural sector, in ways which improve agricultural productivity, the negative impact of oil on agriculture can be mitigated, enabling