EAC Customs Union: Why it has so far not been such a good idea for Uganda

By Angella Abushedde

New report says country needs to attract more investment in technology to compensate for lost tariff revenue

Uganda and other East African Customs Union states need to produce more of the goods they import from other trade blocks if they are to benefit more from integration and recover lost tariff revenue.

The recommendation by two leading researchers at the Economic Policy Research Centre (EPRC), an autonomous research organisation based at Makerere University in Kampala, is the first to attempt to analyse the impact of integration on regional economies.

In a paper entitled, “Comparing the Performance of Uganda’s Intra-east African Community Trade and Other Trading Blocs”, the researchers; Isaac Shinyekwa and Lawrence note that although intra-regional trade is increasing, Uganda’s imports are more integrated in the Asian and EU blocs than the EAC.

“The reduction of internal tariffs, reduction of non-tariff barriers and adoption of a common external tariff is paying off,” they say but questions remain about the “extent to which Uganda’s trade is getting integrated in order to reap the benefits especially after forfeiting customs revenue.”

They do not give empirical evidence but statics by the Uganda Revenue Authority and the other tax bodies in the region have pointed in the same direction.

When the URA announced its financial year 2012/13 revenue figures, it noted a marginal net shortfall largely attributed to poor performance of international trade taxes. While domestic revenue increased by 23.1%, international trade taxes only went up by 4.5%. The result was that net overall revenue collected was Shs7.1 trillion against a target of Shs7.28 trillion.

Since 2005 when the EA Customs Union came into effect, international trade taxes which previous contributed as much as 20% of total collection have declined to hover around 6%. The gap of over 14 percentage points is what the EPRC researchers say could be recovered if EAC member states increased their intra-regional trade.

Until 1986, Uganda had faced the burden of devastating economic policies and political instability, making its export and import trade performance with neighboring states poor.

However with the removal of Internal Tariffs (IT) on intra-regional trade, the reduction of Non-Tariff Barriers (NTBs) and with the improvement in trade facilitation, both Uganda’s exports and imports have noticeably adjusted to the gravitational forces of the East African Community’s (EAC) during the progress of the integration.

The EPRC research shows that while the EAC Customs Protocol has enabled Uganda to boost the value of its exports to its EAC partner states, its imports from EAC state have not increased.

“Imports have not because Uganda looks at markets beyond,” explains Isaac Shinyekwa.

Exports to EAC and Common Market for Eastern and Southern Africa (COMESA) combined have grown from 26 % in 2000 to 58 % in 2009 while imports from the EAC region have declined significantly from 29% in 2000 to 13% in 2009. In value terms, Uganda’s imports from the EAC partner states increased from US$288million in 2001 to US$547million in 2009.

Low investment in technologies means Uganda exports unprocessed agriculture products and imports manufactured goods. It exports coffee, cotton, black tea and imports petroleum products, iron and steel, mineral fuels, electrical machinery and pharmaceutical.

Since most of the other EAC and COMESA regional states with which Uganda is integrated are equally technologically challenged, Uganda looks at markets beyond such as Asia and Europe for its imports.

“Given the composition of Uganda’s exports and imports, Uganda, and other EAC partner states should attract and channel investment in production of high technology products,” Shinyekwa advises.

Within the EAC and COMESA where Uganda is both a partner and a member, Kenya is the only largest single exporter to Uganda. Other members such as Tanzania and Egypt that emerge among the leading thirty (30) exporters to Uganda only account for 1.2 % and 1% respectively in the share of Uganda’s imports.

Asia presents 50% of total imports to Uganda while the European Union (EU) has maintained a constant proportion of about 21 % of the total imports of. India is said to be the leading exporter to Uganda with 14.7 % market share, China 8.9 %, United Arab Emirates 8.4 %, Japan 6.6 %, and South Arabia 5.1 %.

Shinyekwa says regional trade agreements can be adequately implemented to promote intra-EAC trade through deliberate government involvement and attraction of strategic foreign direct investment.

Additionally, Uganda should actualize the education, skills, and technology development strategies in the National Development Plan to increase the stock of skills. Uganda and its partners within the EAC except Rwanda maintain work permit requirements even for citizens of other EAC and COMESA countries which undermine the free movement of people within the region.

“The fact that implementation of the EAC treaty has reached the stage of a common market, there is need to ease and adjust the respective partner migration policies towards skilled labor to address the persistent skill shortages in specific fields,” he says.

Shinyekwa advises that it is imperative for Uganda to push for the implementation of regional trade agreements in order to boost its export and import markets.  He advises EAC member states to allow free mobility of skill labor.

The poor physical infrastructure network in the EAC has also greatly added to the costs of transporting goods. The railway and road networks linking Uganda to its partner states remain in poor conditions depressing trade opportunities within the region.

How Uganda can gain more from integration

The experts make five recommendations to reverse the negative impact of integration for Uganda:

Uganda should target regional destinations for the country’s exports in addition to other blocs. Since 2007, the value of Uganda’s exports to regional trade partners has been declining.

Regional trade agreements should adequately be implemented to promote intra-EAC trade.

To increase intra-EAC regional trade, Uganda, and other EAC partner states should attract and channel investment in production of high technology products through deliberate government involvement and attraction of strategic foreign direct investment.

Uganda should actualise the education, skills, and technology development strategies in the National Development Plan to increase the stock of skills;

Uganda and the EAC region should improve infrastructure such as roads railways to reduce transport costs and improve on trade facilitation to boost trade. Revamping the railway system from Uganda to Mombasa targeting reduced unit transport costs is extremely crucial.