Is the Budget responding to import substitution?

Tuesday June 23 2020

A woman makes clothes in a factory. Finance

A woman makes clothes in a factory. Finance Minister Matia Kasaija said there will be an acceleration of import substitution and export promotion. PHOTO | KELVIN ATUHAIRE 

By ISMAIL MUSA LADU

"Our scientists, Dr Florence Muranga, many years ago, discovered that flour from bananas can make better and safer bread than wheat flour that contains a substance known as gluten that is not good for human nutrition,” the President of Uganda, Mr Yoweri Kaguta Museveni, said.
He continued: “With a lot of resistance from the agents of colonialism, I have been funding the banana project, including the patenting of the formula. This year, Shs9.5 billion has been released and next financial year, Shs12 billion will be released to conclude this project.”

In his State of the Nation Address, Mr Museveni noted that the global demand for wheat is worth $43.6 billion (Shs162 trillion). This, he believes, is the market that is potentially waiting for the banana flour.

According to President Museveni, the wheat flour imported into the country every year is worth $300 million.

And out of cassava, he says: “You can get pharmaceutical grade starch to use in making tablets. But this is now being imported from China and India.

This cost adds 7 per cent to the cost of medicine per unit, moreover, in foreign currency.
Uganda imports medicines for humans and livestock including vaccines to the tune of $383.035 million (Shs1.4 trillion) per year.
However, with the availability of local inputs (raw materials), this may not go on for long especially if the President ‘walks the talk’ to have most of ‘this medicine made here.

Uganda produces 4.1 million tonnes per annum of cassava and 5 million tonnes of maize annually, according to government records. With that, Mr Museveni believes the country can get cooking gas from the alcohol emanating from cassava starch and animal feeds made out of the cassava flour.

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Uganda has been importing a range of products totaling about $7 billion per year (about Shs26 trillion). Many of these imports can be made here, explaining the President’s recent fascination with import substitution.

Since the Coronavirus disease (COVID-19), pandemic struck, President Museveni has been preaching the need to reduce on foreign dependency through the local production of industrialised products with gusto.

Import substitution is essentially a policy undertaken by governments to advocate replacing of foreign imports with domestic production.

Although there is a segment of technocrats who disagree with this policy, many analysts interviewed for this article agree that lack of it is equivalent to donating jobs and the much needed foreign exchange to the importing country.

Funding issue
This is the biggest problem. While reading the Budget Speech on June 11, Finance Minister Matia Kassaija said there will be an acceleration of import substitution and export promotion strategies for a range of goods including medicines and other health products.

This will be in addition to agro-industrialisation and light manufacturing products where the country has comparative advantage.

As a result of the Covid-19 crisis, Mr Kasaija stressed in the Budget Speech on behalf of the President that: “Economic activity has drastically declined, with reduced demand for agricultural produce, the disruption of input supplies to manufacturers, as well as a disruption of Micro, Small and Medium Enterprises (MSMEs) activities.”

He continued: “Inflows of Foreign Direct Investment and remittances of Ugandans in the diaspora have also declined sharply.”

A week before that, President Mr Museveni while addressing the funding situation, cognizant of the current unfolding occasioned by the Covid-19 pandemic, noted that some of the funding will be through Foreign Direct Investment (FDI), mainly from what he describes as “our Chinese and Indian friends”.

“Many new factories are coming up funded in this way. The recent examples of these are: Simi factory mobile phones and radios; Saachi factory TVs, flat irons, radios; Goodwill factory ceramics among others,” he says.

He continues: “…the government has put Shs1 trillion in the Uganda Development Bank (UDB) to give low interest loans to anybody that wants to go into manufacturing and, may be, commercial agriculture.”

In the Budget Speech, Mr Kasaija added that access to credit at UDB will also be extended to agribusiness and other private sector firms over the medium term. Mr Kasaija also announced Shs138 billion funding to Uganda Development Corporation (UDC) for public-private partnership investments to facilitate import substitution and export promotion.

The reality that should be confronted is that there is limited revenue being generated for the import substitution and export promotion strategies.

Uganda Revenue Authority is going to close its revenue collection account with a shortfall that is in excess of a trillion shillings.

That, according to analysts, will have an impact on the import substitution agenda which government is emphasising.

According to the Mr John Kakungulu Walugembe, the executive director of Federation of Small and Medium-sized Enterprises - Uganda (FSME), the money put in UDB and UDC normally ends up being accessed by the “the big boys” as majority of SMEs look on helplessly. This means that attention in terms of financing should be given to Savings and Credit Cooperative Organisations (SACCOs) where most SMEs can easily be accessed.

The low financing should not only look at one or two sectors of the economy but should be open to all that have suffered as a result of Covid-19 crisis.

The chairperson of the Budget Committee Amos Lugoloobi, notes that import substitution is not a new concept. “We have not been walking the talk. This is the time to implement.”

Just like Mr Walugembe, Mr Lugoloobi is skeptical about whether the majority of SMEs will be comfortable walking to UDB and subjecting themselves to the rigorous procedures and requirements before qualifying for the loan.
As for Mr Stephen Kaboyo, managing director Alpha Capital Partners, access to capital has been one of the biggest problems inhibiting import substitution. For it to have the desired impact, proper guidelines will be required or else it may not trickle down to those who need it most—the SMEs.

For a long time, the country appeared to have been focusing on an export- led strategy until Covid-19 pandemic reared its ugly head, changing the dynamics to import substitution. With this policy, the country will be more inward looking, and if it works out, employment opportunities will increase, the import bill will be constrained and there will be more forex saved, let alone scaled production.
What is required?
Without infrastructure such as good roads, rail, water, irrigation and air transport the dream for import substitution will remain an elusive dream, according to private sector players.

In response, Mr Kasaija said the government is undertaking emergency maintenance across the country of roads and bridges infrastructure following the destruction caused by floods.
Developing of warehousing capacity at community, district and regional hubs across the country to restore supply chains and promote exports.

This is in addition to rehabilitating the Meter Gauge Railway, improving water transport safety by installing navigation aids and development of air cargo infrastructure, including the completion of the new cargo facility at the Entebbe International Airport; and expanding feeder and national road network, power, and Information and Communication Technology infrastructure.

Import substitution versus export promotion
As import substitution becomes the government’s buzzword, some technocrats are not convinced that that is the way to go.

One such technocrat is Dr Adam Mugume, the executive director in charge of research at the Bank of Uganda. He says the country should produce more and export more.

Among other benefits to the economy, he said is regional markets such as the Democratic
Republic of Congo and South Sudan are ready to take up all exports produced and that should be the focus.

He was also of the view that the cost of lending by government through some of its lending institutions, is still very expensive. Further, government is still unable to borrow cheaply, implying that until the cost of borrowing drops to single digit, it is an expensive investment.

Although the bias of the Ministry of Finance is on import substitution, there is a feeling that the two can co-exist.

“Import substitution is our focus, but it can go hand in hand with export promotion. We are importing things that we should be producing here. This is why we need import substitution,” Mr Patrick Ocailap, the Deputy Secretary to the Treasury, said.

Exports
(a) Coffee:
March - US$45.87million
April - US$36.928million
May - ……………

(b)Tea:
March - US$5.15million
April - US$6.145million
May - ……………

(c) Fish:
March - US$14.98million
April - US$6.831million
May - ……………..

(d)Maize:
March - US$10.23million
April - US$6.256million
May - …………….

iladu@ug.nationmedia.com

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