Kigali Institute of Management Journal of East Africa [KIMJEA], Vol. 1, Issue 1 2014

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Economic Partnership Agreements [EPAs] and Growth in Uganda: THE WAY FORWARD1

By

David Lameck KIBIKYO

Centre for Basic Research

P O Box 9863

Kampala, Uganda

dkibikyo@yahoo.com, dkibikyo2009@gmail.com

+256751979223, +250787552619

Abstract :

The paper seeks to lay a guideline on how economic partnership agreements [EPAs], particularly

EAC-EU can be used as an engine for growth for Uganda. The method used is a review of

existing literature on the subject in Uganda in n particular and African Caribbean Pacific [ACP]

in general. The results show that EAC-EU promise limited scope for causing growth in Uganda

in the current framework due several obstacles such as lack of a state mobilization to produce for

export, structural challenges such as infrastructure, lack of agricultural financing, and

misalignment of inadequate policies on export and taxation. It is therefore recommended that: 1)

Government should revive both the UDC and cooperatives in order to solve the problem of

investing in sectors such as agro-processing, mining and textiles that investors

had ignored after liberalization policy was established. 2) Both ACP countries and the EU

needed to work together to address the long-standing structural challenges ACP states face,

especially trade facilitating infrastructure, to enable build competitiveness, industrialization and

poverty eradication.3) Governments needed to provide adequate agricultural financing and

procedures for agricultural activities. Also, the farmer needed subsidized inputs, storage

facilities, and transport to be given to both the ordinary and the commercial farmers.4) Lastly,

there was a need to either promote the establishment of industries locally that can make decent

packaging for processed foodstuffs or relax taxes on packaging imports for Agricultural

products.

Keywords: EPAs, Industrialization, Growth, EAC, EU, Uganda

1 This paper was presented at the a southern, eastern Africa trade initiative [SEATINI]

symposium on trade liberalization, the economic partnership agreements (EPAs) and their impact

on sustainable development in Uganda at lake Victoria hotel, Entebbe between 7th

-8th

Sept. 2012

Kigali Institute of Management Journal of East Africa [KIMJEA], Vol. 1, Issue 1 2014

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Background On November 27, 2007, the five member

East African Community [EAC] member

states, signed a two-year framework

agreement with the European Union in

Kampala. The signed will provide a

mechanism for preservation and

continuation of negotiations of EPAs, trade

deals being negotiated between Africa

Caribbean Pacific-European Union [ACP-

EU]. The EAC-EU offer consisted of 82 per

cent liberalization of EAC imports from the

EU over a transitional period of 25 years to

be applied provisionally from January 1,

2008 till a comprehensive EPA is negotiated

and signed. The EPA allows products from

any member country access to any market

within the partnership at competitive tax

rates. Some of the contentious issues being

discussed between the EU and developing

countries include market access,

Development Corporation, and fisheries.

The EU will guarantee duty free quota free

[DFQF] market access for EAC goods

exported to the EU markets with transitional

arrangements for rice and sugar [The

Monitor, Dec.11, 2007].

Trade policies are important instruments that

determinant EAC industrialization and

diversification strategies. EAC countries

needed to remember the history. With the

onset of SAP in the 1980s and 1990s,

African countries, under pressure from the

International Financial Institutions [IFIs],

reduced tariffs drastically. Some industries

collapsed since they could not compete with

cheaper imports [The Monitor, June 26,

2011].

The market share of the products from the

ACP region to the EU had been declining

over the years. The ACP bloc had lost

market share to non-ACP countries due to

high production costs in SSA which is

relatively higher than Asia and Latin

America and also due to trade bans such as

sanitary and phyto-sanitary standards [SPS].

So ACP goods do not produce goods that

meet the EU market standards [AWEPON,

2009].

Past EPAs such as ACP-EU, have not

brought the expected results. They neither

prevented the increasing marginalization of

the ACP in world trade, nor the share of the

ACP in total EU imports from decreasing

constantly from 6.7 in 1976 to 2.6 per cent

in 2006.”[i] Exports from -27 to ACP states

increased by an average 5.4 per cent and

Imports by 4.8 per cent annually from 2000

to 2006. The European Union trade balance

with the ACP countries has remained

constantly negative, the deficit hitting Euro

3.4 billion in 2006 [The Monitor, Dec.27,

2007].

In 1999, through the EBA initiative, the EU

unilaterally and totally opened the markets

to import from the poorest countries

(LDCs). For Uganda, the EBA build upon

the Lome convention of 1975. Under the

Lome initiative, nearly all exports from

Uganda were already entering Europe

markets duty free but with a ceiling.

However, the EBA was better than the Lome

because it removed the ceiling and allowed

the Uganda and some African countries to

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export any amount. Unfortunately, Uganda

did never reach the limit of her quota set for

the 25 years of the Lome [AWEPON, 2009].

The EAC-EU has made to the EAC to grant

100 per cent DFQF access to the EU market,

the EU made a similar offer in 2000 to all

LDCs at the 3rd United Nations Conference

on LDCs held in Brussels. Since 2000,

Uganda has not taken full advantage of that

offer made by the EU, - EBA ie DFQF

access, from LDC countries. For example,

the embassy of Uganda in Brussels

negotiated DFQF access of Ugandan honey

to the EU market in 2005. Unfortunately,

Uganda has not exported any honey to the

EU market. This implied that besides market

access, there were supply rigidities. Most

African countries lack the capacity to

produce sufficient quantities of commodities

and goods for sale on the world market [The

Monitor, July 30, 2011].

AGOA was enacted under USA President

Bush‟s Administration to conditionally

allow 40 Afr9ican countries export a total of

6, 900 products including textiles, crafts and

other produce to the USA. The USA

President determined which countries would

be eligible for AGOA annually. The

selection criterion was the level of

improvement in labour rights and a

movement toward a market-based economy

[The New Vision, February 16, 2009; The

New Vision, August 18, 2009].

While AGOA was meant to promote

manufacturing on the continent particularly

textiles and clothing, it had experiences a

boom in most African countries. Apparel

still accounted for less than 5 percent of

USA imports from SSA region, despite the

stimuli. The apparel export successes of all

eligible countries included Kenya

(USA$287M), Tanzania (US$3.6m) and

Lesotho (US$448). The AGOA effect was a

surge in USA imports from SSA by sixty

percent. Lesotho benefitted because she

already a textile manufacturing base. Greater

beneficiaries, however, of AGOA was oil

and minerals which accounted for over 80

percent of US imports from eligible SSA

countries. This implied that the AGOA

programme had not helped diversify African

exports. Indeed, while AGOA granted SSA

6900 products, the continent only managed

to export only 60 due to several problems

[AGOA, 2005].

Some of the obstacles responsible for poor

performance were common to all these

countries such as infrastructure, untrained

farmers, lack of researched products to meet

AGOA market, the big cost of energy in

industrial costs in Africa, lack of backward

linkages, developed country subsidies and

the shortness of AGOA period [AGOA,

2005].

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TRADE LIBERALISATION AND GROWTH

EAC-EU, besides, benefitting the flower

farmers in Kenya, stood to cause loss to the

rest of the EAC region in several field such

as government revenue loss, collapse of

local industries, and closure of most SMEs.

Poverty impacts of EPA EU-EAC suspect

that this could threaten the livelihoods of

poor people through lower prices for

agricultural commodities, crowding out of

vulnerable industries and revenue loss for

government. The results suggest very

limited scope for trade liberalization with

the EU and that the poor have only weak

links to formal markets. The results from

alternative EPA scenarios show minor but

positive macroeconomic impacts indicating

potentially low economic adjustment costs.

Impact on poverty is positive or not

depending on the selection of sensitive

products in the EPA. The poorest lose under

all scenarios [Ole Boysne and Alan

Mathews, 2008].

In EAC countries there are export-sector

interests that want to enter into EPAs

because they want access to the European

market. But small and medium enterprises

(SMEs) would lose out. SMEs provide

clothing firms; food domestically; small

manufacturing sectors that produce goods

and services for the local, domestic or

regional market [The Monitor, April 6,

2010].

Obstacles to Industrialization in Uganda

The unfair nature of the EAC-EU mostly

encourages export of primary commodities.

These commodities have dominated trade,

with extractive activities such as fuel and

minerals accounting for up to 60 per cent of

all LDCs exports in 2009. Overall, it would

be impossible for region to compete when

its goods are still of low standards and this

would most likely spell economic doom to

the region [The New Vision, 2007].

In an international meeting in Kampala for

agriculturists and bankers, many experts

urged African governments to subsidize

agriculture. This would increase the sector‟s

investment opportunities and stimulate

productivity. It is now the World trend for

governments to subsidize farmers to

increase output. An example is the deadlock

between the European Union and African

governments, and the stalled signing of

EPAs, where the EU refused to lift subsidies

from their farmers to allow for fair

competition from African produce. EU

farmers are at an advantage over African

farmers, because most of their agricultural

production costs are borne by the EU

governments. Despite agriculture

contributing about 34 per cent of the GDP

and the greatest part of the labour force of

most African countries‟ economies it was

ignored by Uganda government in 2011

budget. The 2011 budget, for example,

provided only Shs30 billion [US$12m] for

maintaining the Africa Capacity Fund

[ACF], while the National Agricultural

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Advisory Services [NAADS], received a

colossal Shs133 billion [US$53.2m]. It is

inadequate the government to expect the

profit-motivated commercial banks to fill

the gap, as these institutions cannot invest in

risky agricultural activities. Governments

needed to provide adequate agricultural

financing for agricultural activities and

make procedures for the disbursement of

these funds. Further support was needed to

help the farmer at the grassroots with

subsidized inputs, storage facilities and

transport to both the ordinary and the

commercial farmer [The Monitor, July 30,

2011].

Table 1 Obstacles to Doing Business in Uganda

Topic Rankings DB 2013

Rank

DB 2012

Rank

DB 2011

Rank

Starting a Business 143 (2) 136

Dealing with Construction Permits 109 (7) 108

Getting Electricity 129 (4) 128

Registering Property 127 (5) 155

Getting Credit 48 (10) 45

Protecting Investors 133 (3) 131

Paying Taxes 93 (8) 68

Trading Across Borders 158 (1) 157

Enforcing Contracts 116 (6) 113

Resolving Insolvency 63 (9) 58

Source: World Bank, 2012 & 2013

Quality-Poor Packaging

Uganda‟s exports have the potential to

register a 10 percent increment if the way it

packages its products improved. SMEs are

missing out on the opportunities in larger

markets because many of their packaging

did not meet international standards.

“Uganda‟s exports are low because they are

poorly packaged. In an attempt to improve

the country‟s competitiveness, the Uganda

Export Promotion Board [UEPB] trained six

packaging trainers of trainers and 30

certified trade advisors drawn from the

coffee industry, a leading export sector in

Ghana and Thailand. “Uganda lacks the

technology. Although people think that

packaging machinery and equipment are

expensive yet they can access those that are

applicable at micro, SMEs level. The quality

of packaging materials supplied on the

market is poor. There are about seven

companies involved in producing packaging

materials including Riley Packaging in

Mukono, Afroplast Enterprises Ltd in

Luzira, General Molding in Industrial Area,

and Rwenzori Bottling Company. Most of

them are dealing in general plastics using

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the inferior blowing. Blowing is poor

compared to PVoC packaging technology

used by more developed countries [DCs].

“There was need to import customized

quality packaging materials to be

competitive. In 2007, UEPB carried out a

Gap Analysis survey of 155 enterprises to

investigate failure to export. Results pointed

to lack of a larger pool of competent trade

advisory experts. “Enterprises lacked the

capabilities to participate in the export

market. There was lack of business

development services, capabilities to

produce the right quantities and qualities of

export products. As a result, the

International Trade Centre in Geneva

selected Uganda as one of the beneficiaries

of the Business Management System (BMS)

course, intended to advise export-oriented

companies. They zeroed on coffee 2012

because of its potential to become more

competitive in the export market. European

markets demand a lot of requirements in

terms of quality including the origin,

procedures used in producing the product,

organic production, or packaging [The New

Vision, Dec 18, 2011].

SME involved in food processing, lacked

access decent packaging on the local market.

Attempts to import the packages, was

thwarted by taxes such as Excise Duty

of120% excluding VAT. There was a need

to re-align policies to ensure that there is a

good strategy in place to either promote the

establishment of industries locally that can

make decent packaging for processed

foodstuffs or relax taxes on packaging

imports for Agricultural products. The seven

mentioned companies just make boxes and

basic paper packaging but not Pouches for

food products or other similar packages [The

New Vision, Dec 18, 2011].

Production Quantity & Financing

In the early 1990s, the government withdrew

from doing business and put in place

policies that gave the private sector wider

roles. Such policies included privatization

that also included winding up Uganda

Development Corporation [UDC] during the

initial stages of the privatization process,

due to corruption that rendered its operations

unfeasible and inefficient. The impact on

UDC closure led to ignoring certain sectors

and also caused insufficient development.

In 2003, government admitted that it erred in

winding up UDC and planned to start a new

agency to champion investment in strategic

sectors. The revival of UDC would be a

major policy reversal and an indication that

the Government intended to play a major

role in the economy again [ii] explained by

the inadequacy of private-sector-led growth

and dislike by the private sector of certain

sectors. First, Daudi Migereko, former

minister for Ministry of Industry and Trade

[MOIT], argued the move was prompted by

the need to have several industries to reduce

unemployment. There were several areas

like mining and textile sectors, in which the

Government would like to intervene because

if the private sector was left on its own, it

was not sufficient to foster industrialization.

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It was, therefore, important to have a

combination of the private and public

sectors.

Second, the government plans to revive the

defunct UDC targeting investing in sectors

that local and foreign investors

had ignored after liberalization policy

was established. The policies had not

entirely been fruitful because the private

sector had not picked interest in investing in

the agro-processing sector, a crucial sector

to the country‟s economic development.

Given that agriculture was the backbone of

the country interventions to industrialize it

would yield enormous

benefits to the economy. "There are priority

sectors to the economy which private

investors did not invest in despite the good

policies.

The revival of the UDC, however, was

prompted more by the African Growth

Opportunities Act (AGOA) markets. Onegi

Obel, Senior Presidential Advisor on the

AGOA, said that the immediate task of the

planned new organization were to tackle

challenges that had emerged in Uganda's

quest to export to the huge American market

under AGOA. Other sources clarified that in

order for Uganda to reap maximum benefit

from AGOA there was urgent need for

investment in agro-processing and textile

industries. Under AGOA, Uganda exported

textiles to USA but newer markets had

emerged especially in the Middle East for

fish, beef, mutton and other animal products

that required heavy investment in processing

facilities.

SOEs normally intervene in causing

investment in priority areas of the economy

in which individuals did not invest despite

the good policies or where government

could venture directly. Almost all countries

in the world had such bodies. For instance,

Kenya had the Industrial and Commercial

Development Corporation (ICDC); Tanzania

has the National Development Corporation

(TNDC) while even the wealthier United

Kingdom- the Commonwealth Development

Corporation (CDC). UDC closure caused

more problems than solutions. Closure of

the UDC, a SOE-maker, caused economy-

wide negative impacts on performance.

Market Stage-Cross Border Trade [Market Access]

In a globalized world, easing trade between

economies is becoming increasingly

important for business. Excessive document

requirements, burdensome customs

procedures, inefficient port operations and

poor infrastructure increase costs and delays

for exporters and importers, hampering trade

potential. Evidence shows that exporters in

LDCs gain more from a 10 percent drop in

their trading costs than in the tariffs [World

Bank, 2012].

Doing Business measures the time and cost

related with foreign trade of an average

shipment of goods by sea transport and the

number of documents necessary to complete

the transaction. The indicators cover

procedural requirements, customs

procedures, other regulatory agencies and at

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the port. They also cover trade logistics,

including the time and cost of inland

transport to the capital city. It is a simple

average of the percentile rankings on its

component indicators of documents, time

and cost to export and import [World Bank,

2012].

Local and Regional Markets

Uganda is home to about 32 million people

and a small market. But the EAC is a market

of over 120 million people and a GDP of

$41 billion. Even more attractive is the

COMESA with over 400 million people. To

harness opportunities under COMESA,

Uganda should sign-up to the COMESA

FTAs. To address the overlapping

membership challenges, the EAC-

COMESA-SADC tripartite FTA should be

fast-tracked [The Monitor, Nov 23, 2010].

EAC region is also now faces problems due

to high global food prices especially basic

foods that rose by 37 percent. In the EAC

region, the increase in food costs is already

affecting people and might remain for a long

time in future. It is important that the EAC

region increases its own food production as

the strategy for coping with high food

prices. Farmers need support by having the

security of a local market to sell their

produce to. With EAC-EU EPA, Uganda‟s

small farmers would increasingly have less

access to the markets. This was because; the

EU annually subsidizes its farmers to the

tune of about €85 billion. Europe has

refused to reduce these subsidies in both the

EPA and in the WTO negotiations. Under

these circumstances, the agricultural trade

with EU would always be unfair. Hence, the

importance of EAC tariffs, so that local

EAC farmers are protected from this unfair

trade. In the face of high food prices, and in

times when food supplies are low, EAC

countries can unilaterally lower their applied

tariffs to import food at a lower cost.

However, if EAC should not agree in an

EPA binding EAC at 0% tariff rates if EAC

are serious about increasing EAC own

domestic food production into the long term,

and assuring EAC producers of an internal

market. The regional integration is for the

good of all of EAC citizens. Primarily, it is

supposed to support the development of

each member country, for the transformation

of these economies. The expanded regional

market can be used to jumpstart regional

industrialization processes. Unfortunately,

this process would cease if the EU is given

preferential access to the EAC regional

market.

With the economic potential in the

COMESA, the leading destination for

Uganda goods, Ugandan products continue

to be less competitive due to failure to join

the COMESA-FTA. Uganda is a member of

COMESA but does not have an FTA and is

not importing at zero rate. Unfortunately, the

2011/2012 Uganda budget was silent on

FTA. Consequently, Kenya, Rwanda and

Sudan, being members of FTA and Tanzania

being a member of SADC, import cheap

sugar from Mauritius at 8 per cent tax and

Uganda‟s traders foot 100 per cent import

duty. The implication is imported inflation

and higher prices. In effect, FTA

concessions outweigh the budgetary tax

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reductions on sugar, hoes, kerosene, solar

energy and other supplies [The Monitor,

June 13; 2011].

Trade between the COMESA countries has

grown as economies take advantage of the

COMESA-FTA. The FTA now accounts for

80 percent of all intra COMESA trade and is

to continue expanding at an average rate of

20 percent. The FTA has led to dramatic

growth in trade of tea, coffee, tobacco,

building materials, transport equipment and

sugar. Since 1994 intra COMESA trade,

excluding informal cross border trade in

services, had expanded five times. "The

ultimate beneficiaries are the millions of

citizens through increased consumer welfare

due to lower prices and wider product

choice. After realizing greater volumes of

internal trade, COMESA would accelerate

its move towards a Customs Union and a

single currency, to allow the movement of

all labour and other factors of production

[The Monitor, August 9, 2007].

The EAC Customs Union expected to

commence on January 1, 2005, is to be used

as a model, particularly in settling more

complex areas before all countries strike a

consensus on issues like CETs and equity

[The Monitor, August 9, 2007].

Uganda should consider a quicker entry in

the COMESA's Free Trade Area (COMESA-

FTA) to enable its exports to enter the

current eleven COMESA-FTA member

countries at a cheaper cost. High power

costs are still their biggest challenge [The

Monitor, Oct 5, 2007].

Table 2 Obstacles to Market Access

Indicator Uganda Sub-Saharan Africa OECD high income

Documents to export

(number)

7 8 4

Time to export (days) 37 31 10

Cost to export (US$

per container)

2880 1,960 1,032

Documents to import

(number)

9 8 5

Time to import (days) 34 37 11

Cost to import (US$

per container)

3015 2,502 1,085

SSA = Sub-Saharan Africa, OECD=Organization of

Source: World Bank, 2012.

In Table 2, Uganda did badly in all aspects of market access compared to both SSA and OECD.

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International Markets

The replacement of the Lome regime with

FTAs is a massive risk for the ACP but that

the EU has nothing to lose. ACP countries

would not gain more than what they already

have of the European market but would lose

local market from subsidized cheap

European imports. Worse still and

interestingly, the EU is also keen to push the

new issues that LDCs rejected at the WTO

trade negotiations. ACP countries face

further constraints on policy-making while

European corporations gain new powers

[The Monitor, 2007].

There was misperception that the EU is the

EAC‟s main trading partner. On the

contrary, the long-term trend has been that

EAC exports to the EU as a percentage of

overall trade is declining. On the contrary,

EAC export to Africa is on the rise. By

2008, EAC exports to Africa ($4 billion)

surpassed EAC exports to the EU ($2.9

billion). However, the quantity of export is a

bad indicator of development. For the EAC

countries to develop, EAC should not be

exporting raw materials, but transforming

these and exporting a more diversified range

of products, particularly manufactured

products. The markets that Uganda has for

value-added manufactured products are

more important to EAC in the future i.e. EU.

EAC exports its manufactured products to

Africa while its exports to the EU are

primary goods. Hence, COMESA was

important in the short run but EU was

significant in the long run.

The share of ACP exports to the EU fell

from 8 in 1975 to 2.8 per cent in 2000.

Hence, trade preferences have also failed to

promote diversification. The bulk, 95 per

cent, of the ACP products exported to the

EU comprised mainly of primary products

while manufactured goods accounted for a

mere 3-4 per cent. Further, most of these

primary products were restricted to a

maximum of two products from some

countries due to market entry factors [The

Monitor, May 11, 2011].

On the EU side, there have been increasing

government NTBs regulations and a surge in

individual private standards which are

normally set up by large distribution chains

including supermarkets. The use of these

systems under a legitimate cover may be

used to gain competitive lead. Although it is

early to assess Trade impact is not difficult

to assess due to the need to comply with

different foreign technical entry regulations

and standards, the EAC-EU agreement

involves additional costs for producers and

exporters [The Monitor, 2011].

The expectation of the ACP states is that

there would be additional funding that will

be provided by the EU to address supply

capacity constraints and other trade related

infrastructure. The ACP states face

infrastructure problems including inadequate

road and rail network, erratic power supply

and lack of appropriate standard and

conformity related infrastructure. The ACP

states are demanding enough resources to

have the means to undertake the required

adjustment to face the challenges of a new

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trade relationship based on ACP-EU

reciprocity with the EU. It is important that

the EU and the ACP states work together to

address some of the long-standing structural

challenges ACP states face, especially trade

facilitating infrastructure, to enable build

competitiveness, industrialization and

poverty eradication [The Monitor, 2011].

Production Costs

Energy and Transport Costs

Cement manufacturing companies in East

Africa want the Common External Tariff

[CET] be reviewed to 35 per cent when

regional governments review the tariff. In

2008, the governments reduced CET to 25

per cent as a temporary measure to curb the

cement shortage in the region. The regional

governments commissioned a panel of

experts to research the regional cement

industry. The study results show that there is

enough capacity to meet local demand and

growing regional markets of Southern

Sudan, Rwanda, Burundi and eastern DR

Congo. The EAC cement industry was

threatened from cheap imports from Middle

East and Asia. Uganda cannot be as

competitive as producers in China and

Pakistan or Middle East. Governments in

these regions give heavy subsidies to their

producers mainly in power and transport

which are the biggest components of cement

cost. The manufacturers want the CET to be

reviewed back to 35 per cent US$50 per

tonne to level the playing field now that

there is enough investment in production

capacity. Hima Cement commissioned a

new factory in Kasese which has more than

doubled the company‟s production capacity

from 350,000 to 850,000 metric tonne. The

production capacity in the EAC region as a

whole stands at 11 million tonnes compared

to a demand of eight million tonnes after the

industry players invested over $0.5 billion in

3 years. The CET reduction was a

temporary measure that was taken because

of shortage and high prices of cement. In

East Africa, energy costs account for up to

50 per cent of production costs while in

countries like Egypt, India and China, where

production costs are lower, the costs of key

inputs in the industries like power and fuel

are also subsidized by government.

“Thermal energy costs in Egypt are $7.2 per

tonne compared to $37.5 per tonne for

Uganda. Electricity costs in Egypt and

China are US$ 0.03 per Kilowatt per hour

compared to 10 US$0.10 for Uganda, 19 US

cents for Kenya and 7 US cents for Tanzania

[The Monitor, May 10, 2011].

Low cost imported cement is choking the

regional industry. The reduction in import

tariff on cement has led to an influx of cheap

cement from low cost producers such as

India, China, and Pakistan sold at 50 - 60

per cent less than the domestic market price

due to subsidies. Cement producers in

Egypt enjoy subsidy on natural gas used in

cement production while producers in India

and China enjoy diesel price subsidy. On

the contrary, Uganda cement industry is

faced with high production costs due to high

energy costs, labour costs, poor distribution

network especially railway transport and

inadequate ancillary industries for spare

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parts and consumable. Uganda spends Shs2

trillion in the importation of cement to meet

the increasing demand from the booming

construction industry because the current

production failure to satisfy the growing

demands [The Monitor, Nov 10, 2009].

Exchange and Interest Rates

Uganda cement production is rated at about

1 million tonnes capacity from the both

Hima (350,000) and Tororo (700,000). At

the onset of the EAC in 2004, cement

producers negotiated the cement CET and

agreed that cement was to be considered a

sensitive product due to its capital intensive

investment requirement. Although EAC

CET is classified in three tariff bands of 0

per cent for raw materials, 10 per cent for

intermediate goods and 25 per cent for

finished products, goods considered

sensitive attract a higher tariff. “Cement was

considered a sensitive product with tariff set

at 55 per cent in 2005 which was to reduce

at a rate of 5 per cent annually capping it at

35 per cent in 2009. However, in June 2008,

the sensitive status was removed; with

import duty being reduced from 40 per cent

to 25 per cent under the EAC CET. “This

was a unilateral decision and did not only

show lack of commitment by EAC Partner

States to maintain the CET but also seemed

a deliberate creation of an unpredictable

policy environment in the region.

The surge in the importation of subsidized

cement products into the region from Asia

and the Far East hurt the market leading to

loss of revenue. Uganda loses about Shs131

billion [US$52.4 m], which is 2 per cent of

the country‟s total export revenue. Existing

investments of about Shs900 billion

[US$360 m] and new ones of over Shs400

billion [US$160 m] are threatened as the

country sought capacity creation and self

sufficiency. The CET on imported cement

was reduced in 2008 from 40 to 25 per cent

by the EAC member states due to

mechanical breakdowns in two cement

factories in Kenya. “The EAC cement

industries faced stiff challenge from

subsidized and dumped imports mainly from

Pakistan, Turkey and China. Over 2,200

people and another 17,000, who are

employed in cement in Uganda would lose

their jobs and threaten an annual social

investment of over Shs3 billion [US$1.2 m].

The global financial crisis in 2009 reduced

demand in Asia and the Far East, forcing

manufacturers to search for alternative

markets to damp their excess capacity.

China‟s total capacity is 1,600 MT,

exceeded EAC‟s regional market demand.

Secondly, is the high cost of production for

the local industries were a disadvantage

position compared to the low cost producers

in Asia and the Middle East? “In EAC,

energy costs account for up to 50 per cent

while in countries like Egypt, India and

China, production costs are lower, due to

subsidization of key inputs in their industries

like power and fuel by government [The

Monitor, March 19, 2010].

Kigali Institute of Management Journal of East Africa [KIMJEA], Vol. 1, Issue 1 2014

13

Table 3 Production Obstacles

Industry Tariff Exchange rate Interest rate Energy Transport

Fish Process 0.053 0.047 0.014 0.013 0.001

Dairy -0.004 0.111 # 0.043 0.104 # 0.006

Grain Milling -0.001 0.081 0.028 0.024 0.015

Bakery Products -0.168 # 0.088 0.040 0.021 0.010

Animal Feeds -0.031 0.053 0.009 0.014 0.017

Textiles & Cloth -0.267 # 0.398 # 0.319 # 0.128 # 0.023

Footwear -0.131 # 0.091 0.015 0.018 0.007

Paper Products -0.007 0.102 # 0.029 0.006 0.013

Chemical Paint -0.041 0.071 0.040 0.013 0.030

Cement -0.102 # 0.153 # 0.167 # 0.058 0.037

Metal Products -0.052 0.125 # 0.052 0.049 0.051

Auto Parts -0.074 0.083 0.035 0.028 0.010

Average -0.040 0.095 ~ ~ 0.056~ ~ 0.034 0.022

Source: Siggel and Ssemwogerere, 2002, p.28, Table 6.

“The EAC cement sector is unable to

effectively compete with the low cost

producers like Pakistan, China, and India

because of the high production costs; not to

mention the rail and road transport

inefficiencies. The Pakistan government

gave all cement manufacturers a 35 per cent

subsidy on inland transportation expenses to

the sea to boost exports. Pakistan viewed

East Africa as a strategic market for her

cement due to proximity and the

construction boom in the region. Pakistan

projects 10 to 11 million tonnes of cement to

be exported in 2010-1 due to inland freight

subsidy. The industry mobilized investments

amounting to about Shs2.3 trillion in

capacity expansion in the region. However

in 2008 during pre-budget meeting, the

council of ministers dropped the CET on

cement from 40 per cent to 25 per cent.

“This abrupt change of policy adversely

affected the industry because this opened

doors for cheap imported cement into the

region [The Monitor, May 14, 2010].

Kigali Institute of Management Journal of East Africa [KIMJEA], Vol. 1, Issue 1 2014

14

Taxation, Exchange and Interest Rates

The interest rate distortion is 5.6 percent on

average, and ranging from 0.9 percent in

animal feeds to 31.9 percent in textiles &

clothing. While the rate differential between

the market interest rate of 21.5 percent and

the shadow rate of 16 percent is taken to be

the same for all industries. In practice, the

variance may be even bigger since firms

may either borrow on preferential terms or

incur penalties for lack of security. This

distortion is due to the Ugandan financial

sector inefficiency, which was clear from

several bank closures in the 1990s. The

distortion is much less important in Uganda

than in Kenya, due to a more conservative

attitude of the government in fiscal policy

and the financing of deficits [Siggel and

Ssemwogerere, 2002, p.28].

Conclusion: Way Forward

The paper sought to lay a guideline on how

economic partnership agreements [EPAs],

particularly EAC-EU, can be used as an

engine for growth for Uganda. The method

used is a review of existing literature on the

subject in Uganda and African Caribbean

Pacific [ACP]. The results show that EAC-

EU promise limited scope for causing

growth in Uganda in the current framework

due several obstacles such as lack of a state

mobilization to produce for export,

structural challenges such as infrastructure,

lack of agricultural financing, and

misalignment of inadequate policies on

export and taxation.

Revive UDC and Cooperatives

Government should revive both the UDC

and cooperatives. UDC would solve the

problem of investing in sectors that local

and foreign investors

had ignored after liberalization policy

was established. There are priority sectors to

the economy which private investors did not

invest in despite the good policies. The

policies had not entirely been

fruitful because the private sector had

not picked interest in investing in the agro-

processing mining and textiles. A agro-

processing was crucial sector to

the country‟s economic development.

Given that agriculture was the backbone of

the country interventions to industrialize it

would yield enormous

benefits to the economy. "

Address ACP States Long-Standing Structural Challenges

The EU and the ACP states should work

together to address some of the long-

standing structural challenges ACP states

face, especially trade facilitating

infrastructure, to enable build

competitiveness, industrialization and

poverty eradication.

Kigali Institute of Management Journal of East Africa [KIMJEA], Vol. 1, Issue 1 2014

15

Agricultural Financing

Governments needed to provide adequate

agricultural financing for agricultural

activities and put in place procedures for

disbursement of these funds. Further support

was needed to help the farmer at the

grassroots with subsidized inputs, storage

facilities, and transport to be given to both

the ordinary and the commercial farmer.

Re-align Policies

There was a need to re-align policies to

ensure that there is a good strategy in place

to either promote the establishment of

industries locally that can make decent

packaging for processed foodstuffs or relax

taxes on packaging imports for Agricultural

products

.

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