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
[email protected], [email protected]
+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
Kigali Institute of Management Journal of East Africa [KIMJEA], Vol. 1, Issue 1 2014
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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].
Kigali Institute of Management Journal of East Africa [KIMJEA], Vol. 1, Issue 1 2014
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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.
Kigali Institute of Management Journal of East Africa [KIMJEA], Vol. 1, Issue 1 2014
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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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11
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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