Import substitution: Will it boost local production?

Tuesday June 18 2019

A customer walks through a supermarket in

A customer walks through a supermarket in Kampala as a worker arranges a shelf with toothpaste. This toothpaste which is imported into the country will now be charged an import duty of 60 per cent, up from 25 per cent. Photo by Rachel Mabala 

By Christine Kasemiire

In 2017, government imposed a 25 per cent import duty on irish potatoes. The aim was to mitigate importation of the agricultural product that would have otherwise been acquired in Kabale - the potato hub.
That year, Uganda imported 158,553 kg of ‘potatoes not prepared or preserved other than vinegar or acetic’ worth $71,438 (Shs267.7b) from United Arab Emirates (UAE), Uganda’s biggest import destination.
In 2018, government imposed an even higher import levy on potatoes from 25 per cent to 35 per cent. Uganda Revenue Authority’s annual trade report 2018 indicates only 44,534kg worth $30,448 (Shs114m) of the same product was imported.
Government has nearly doubled the import duty on potatoes from 35 per cent to 60 per cent in 2019/20 financial year.
The move, known as import substitution is aimed at discouraging importation and increasing market and growth of inland industries especially for those products that are manufactured in Uganda.
In 2017, $64,307 (Shs241m) worth of 107,373kg of honey was imported from UAE. In 2018, when import duty was set at 25 per cent, Uganda recorded a higher value of $67,232 (Shs251.9m) but fewer quantities of only 89,425kg imported.
For three years, the success rate of import substitution has increased from 71.7 per cent in 2016 to 91.6 per cent in 2018 albeit below intended target.
This means that even in the face of increased import duty, people continue fetching commodities into the country.
In 2016, revenue from import substitution tax measure was Shs7.1b against a target of Shs10b, 2017 recorded Shs47.4b against a target of Ssh58.7b while 2018 raised another Shs45.8b against Shs50b target.
Mr Ian Rumanyika, manager public and corporate affairs URA, said the government policy was informed by the realisation that Uganda has the manufacturing capacity to add value to agricultural produce.
“We have seen the policy grow and it works in tandem with other government policies, for instance, ‘Buy Uganda Build Uganda’ (BUBU) and local content,” he says adding that the policy has been successful in boosting exports as well.

Among those products whose import duty is proposed to be 60 per cent for 2019/20, is honey, toothbrushes, ball point pens, exercise books and toilet paper and toothpaste, among others.
Importers of granite marble, clay tiles and tomato paste will fork out 35 per cent import duty from 25 per cent for one year.
The move is timely especially since President Museveni recently commissioned a factory to manufacture tiles at Kapeeka.
Uganda, whose focus is currently centred on industrialisation, has allocated more than Shs428.6b to enhance industrial parks and more than 4,000 factories producing a wide range of products.

Local capacity
Asked if manufacturers have the capacity to increase supply for those products, Mr Richard Mubiru, chairman economic subcommittee Uganda Manufacturers Association (UMA), says they have the capacity to supply Ugandans especially for products such as toilet paper and pens among others.
“We have capacity to supply all this; tomato paste, mineral water, biscuits. You want to import biscuits from Dubai?” he said rhetorically.
However, concerns of quality and failure of government to pay suppliers has nipped moves meant for the positive results of import substitution.
While government – one of the customers of local content – is fronting the BUBU policy, a measure aimed at guaranteeing domestic market for industries, she is straining manufacturers’ efforts by retaining high amounts of money in arrears.
Whereas manufacturers might not be directly affected, suppliers, who are a major part of the value chain are affected by government’s delay to pay.

Budget for arrears
With over Shs1 trillion in arrears owed to suppliers, government has only allocated about Shs360b in settling these dues.
Mr Mubiru is choosing to hold government to its commitment on reducing the arrears.
“It is hurting us because we borrow expensively and have to compete with the rest of the world. But the damage has been done. We have to focus on what can be done so the Shs1 trillion arrears do not grow effective July,” he says.
“Then government uses the available resources to start down scaling the arrears,” he says.

Local suppliers
Dr Fred Muhumuza, economics lecturer at Makerere University, on the other hand, says government has to take deliberate efforts to convince Ugandans that they will pay these arrears.
“Commitment has been made but government is not disciplined. Government first needs to pay the old arrears she owes them, then build confidence. Nobody will trust them until they build that trust. Otherwise they will choose not to lend to government,” he says.

Global perspective
Hiking import duty on particular products is a global measure used to boost sales of local industries. President of United States of America Donald Trump imposed tariffs against Chinese products to reduce imports from the Asian country. He also threatened to impose tariffs on Mexican products to curtail immigration of their citizens to the United States.
Subscribing to regional markets such as East African Community, Common Market for Eastern and Southern Africa (COMESA), the Tripartite and African Continental Free Trade, some of these tax measures are non-applicable to Uganda’s neighbours.
This means that goods from member states are imported to Uganda at either 0 per cent or subsidised rates.
Dr Muhumuza says the increase in import duty will only affect Ugandans because manufacturers cannot compete with some imports which usually are cheaper than local products.
He says regardless of this measure, Ugandans will continue to import from different countries.
“Foreign countries will ignore us. It is just going to increase our cost of doing business because we do not have those products produced here, for example, toothpaste. It is also not enough and sometimes not of quality,” he says.