1 December 2012

Uganda: Weighing Comesa Fortunes

Private sector, experts optimistic about benefits of joining Free Trade Area:

Though a founder member of the Common Market for Eastern and Southern Africa (COMESA), Uganda had not ratified the COMESA Free Trade Area (FTA) treaty because of various political, social and economic concerns. This, however, came to an end recently with the announcement that Uganda had ratified the agreement, a decision that has been met with mixed reactions.

First, government officials from the ministry of finance feared that the country would lose taxes charged on goods and services entering the Ugandan market from the A FTA, manufacturers argued that powerful members would dump large volumes of goods in the country and thus pose unfair competition to them among other factors.

The government has since 2000 been involved in endless consultations with different stakeholders on whether to join or not until on Nov. 14 when Cabinet approved a recommendation by the trade minister for the country to become the 15th member in the FTA.

However, several questions are being raised bout Uganda's decision to join the COMESA FTA. For instance; where is Uganda's competitive advantage in the bloc? Does it have a sound private sector that would compete in the COMESA FTA? Does it have proper institutions to support the private sector, which is the key driver of economic growth?

How ready are the local industries in terms of producing good quality products that meet international standards? How about the issue of having a sound infrastructure network to link Uganda to the rest of the members?

Ugandan manufacturers in the past have been opposed to the idea of joining the COMESA FTA fearing that foreign goods from powerful members like Egypt, Mauritius, and Libya would flood the Ugandan market and thus push them out of business. But in an interview with The Independent on Nov. 16, Sebaggala Kigozi, the executive director of the Uganda manufacturers Association (UMA) suggested that the fears were unfounded because local industries are not producing enough for the local market.

Sebaggala said after a series of discussions with the government, they are now comfortable because they are positive that Ugandan manufacturers would benefit more from COMESA members providing cheap raw materials for the local industries, which would mean producing at lower costs and selling at affordable prices to consumers.

He was also happy that the government had bought their suggestion to safeguard Uganda's essential manufactured goods like sugar and other agricultural products from foreign competitors so that the local manufacturers can grow and have a competitive advantage on them.

Lawrence Bategeka, a senior economist and acting principal of the Economic Policy Research Centre at Makerere University, was also positive that Uganda's joining the COMESA FTA was timely and would be beneficial in future.

"Regional trade is growing and we have to get involved," Bategeka said. He added Uganda has in the recent years benefited from the booming regional market in South Sudan, and the DRC, an indicator that there is potential in other markets across the region and in other blocs.

Bategeka said this is a chance for Ugandan goods to find ready and close market in the COMESA instead of looking at European markets, which most times, require high standards that most local manufacturers can't meet.

"COMESA gives us a big space to expand beyond East Africa," he said, adding Uganda has a comparative advantage in food production in the region and also, has a similar advantage to export its manufactured goods like cement, construction materials among others.

"We shouldn't have the perception that we will face stiff competition from the members. You and I should be in position to participate in any way so that we benefit from this market," he said.

Everest Kayondo, the chairperson of the Kampala City Traders Association (KACITA), said Uganda's goods have been finding it hard to enter the COMESA FTA because the country was not a member. He said joining the FTA would encourage the local industries to expand production and benefit from the market.

"It is a positive move and we have been waiting for it," he told The Independent on Nov. 16.

Trade impediment:

According to Trade and Industry Minister Amelia Kyambadde, the government opted for the FTA because it was established that the major impediment to Uganda's deeper penetration of the regional market was her non-membership of the COMESA Free Trade Area. By remaining outside of the bloc, the country's exports to its main export market were being subjected to taxes, which made them more expensive in those countries.

"This made our products less price competitive, which certainly impaired us from fully exploiting the benefits of regional integration," Kyambadde told journalists at a media briefing. Joining the FTA, she said, was part of the government's effort to foster the regional integration agenda and to continue finding more markets for Ugandan goods and services.

Kyambadde added that action was being taken to support the private sector by improving the trading environment, upgrading the transport infrastructure, increasing energy generation as well as maintaining political stability among others.

Uganda, desperate to raise exports and improve its balance of payment position, has seen exports to the top the 10 COMESA member states increase over the years. According to the COMESA website, the volume of exports jumped to $955.65 million in 2011 from just $259 million in 2006 compared to the volume of imports, which recorded a marginal increase from $450million to $659.5 million.

With a population of about 468 million as of July 2011 and a combined GDP of $799 billion as of 2010, COMESA is Uganda's main export market - even bigger than the European Union (EU). The share of exports to COMESA as a ratio of total exports currently stands at 46%, surpassing exports to the EU, which stood at 31% between 2007 and 2009. That means the countries that are members of the COMESA FTA, turn out to be the main export destinations for Uganda's exports.

Uganda's main export products are agricultural products such as fish, tobacco, maize and beans, and manufactured goods such as cooking oil, cement, cosmetics, exercise books, plastic products, plywood, cotton yarn and steel products.

Over the last five years, COMESA has on average provided a market for 57% of the value of Uganda's exports annually, earning the country an average of $1.3 billion in export revenues per annum.

Joining the COMESA FTA consolidates and improves Uganda's access to this lucrative market with the result that Uganda's exports are expected to increase by 50%. Also, producer competitiveness is expected to increase since intermediate inputs imported from the COMESA FTA members, which have been attracting a 4% import duty, will now not be duty free. Consumers too will benefit since imports from the bloc will not be subjected to import duties hence lower consumer prices.

Also, the Trade ministry is optimistic that joining the COMESA FTA will positively impact on Uganda's industrialisation efforts especially given that the main export commodities to these regional markets are manufactured products. This means more jobs and more productivity particularly in the agricultural sector. However, the government still plans to enforce measures to protect its sensitive goods such as milk, husked rice, sugar, decaffeinated coffee etc under the COMESA FTA.

Revenue concerns:

In response to concerns that the government would lose import revenue, the government says the loss would not be substantial because the evaluation of the potential revenue loss would not include other taxes such as VAT, Excise duty and withholding taxes - which are imposed on all imports irrespective of country of origin or trading arrangements between countries.

The potential revenue loss from the 100% tariff reduction on COMESA FTA imports is estimated at 2% for Uganda, because import duty on sensitive products already constitutes over 90% of the revenue and most of the imports are from the EAC partner states, with which Uganda is already trading at zero tariff rates under the EAC integration arrangement.

The computations show that Uganda could lose between Shs 19.3 billion and Shs 24.3 billion in duty revenues annually after joining the COMESA FTA, which according to the ministry, "is not a big problem" since the entrance to the COMESA FTA would attract a bigger volume of imports from the 14 COMESA FTA members which will then be charged the other taxes such as VAT, Excise duty and withholding taxes. These according to the ministry, will compensate for the loss in import duty.

But most importantly, the elimination of tariffs on imports would encourage the inflow of raw materials, intermediate products and capital goods into the country which would increase the volume of low cost inputs for manufacturing, and in turn help to increase the international competitiveness of Uganda's manufactured goods. This, according to the ministry, would translate into an increase in export earnings from an average of $511.6 million in 2007-2009 to $1.28 billion in 2011-2015.

But experts warn that without supporting the SMEs in line with the theme of the COMESA Summit; 'Promoting intra COMESA Trade through Micro, Small and Medium Enterprises Development,' joining in the COMESA FTA could be of no consequence.

Charles Ocici, the executive director of Enterprise Uganda, said Uganda may not benefit from the market unless it puts in place strong policy frameworks that support SMEs.

Ocici said most developed economies like Malaysia, South Korea and others have made it because they have supported SMEs by extending "very" cheap loan facilities or at times at zero interest to SMEs. He suggested that it was time for Uganda to walk the talk as far as supporting SMEs is concerned.

"If we just do a lot of talking and fail to come up with good policy frameworks to support this group [SMEs] then we will lose at the expense of other members," he said, adding that this is a golden opportunity and we should be ready to compete.

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