Post-Covid-19 recovery: Import substitution will boost economy

Tuesday June 23 2020

Ms Sarah Mubiru packages aroma honey toffees in

Ms Sarah Mubiru packages aroma honey toffees in Wakiso District. There is a very strong synergy between jobs and savings, as can be seen in the National Social Security Fund story. PHOTO | ERONIE KAMUKAMA 

By Alvin Mbugua

As we emerge from nearly three months of lockdown, we have all seen how Uganda has been BOLD through the Covid-19 pandemic.

We have seen Ugandan manufacturers encamp their workers; how Uganda Revenue Authority (URA), immigration and securities risked it all to keep the goods flowing across the borders and how Bank of Uganda (BoU) working with the financial services sector swiftly came in to manage the likely fallout in the lending market.

We have seen how utilities like NWSC and Umeme worked longer hours to keep the country running and how our health care workers, gave their all, day and night to save lives.

By March, 2020, we had only two factories- Saraya East Africa Limited and the Luwero Industries making sanitisers. But we now have 107 factories.
By March, 2020, there was not a single factory making masks in Uganda- all masks were imported. But as we speak, there are more than 10 large scale manufacturers of medical-grade masks and several other Small and Medium Enterprise (SMEs) making non-medical masks.

Some innovative SMEs have taken it a notch higher by making facial shields from recycled plastic waste! Now that is resilience- the deliberate choice to see and pursue the silver lining in the dark cloud-regardless of the circumstances.
Even though BoU lowered their 2020 growth projections to between 2.5 to 3.5 per cent, it is still much better that the Sub-Saharan average averages of between -2.1 to -5.1 per cent and -1.6 per cent by World Bank and International Monetary Fund (IMF), respectively in their April 2020 outlooks.
The central bank predicts that economic growth will begin to recover to between 4 and 5 per cent in 2021, rising further to between 6 and 6.5 per cent in 2022. 

The Central Bank, however, hastened to add that these projections will depend in part on how Uganda will be able to open up for economic activity safely, and how effectively the public will comply with social distancing rules.

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Our Purchasing Managers Index (PMI) has rebounded strongly in May. There is an urgent need to fix domestic demand and the disruptions to supply chains.

Import substitution
Talking of stepping up domestic demand, I support the Uganda Government’s and largely inward-looking direction of all of EAC government’s agenda on import substitution.

Import substitution create jobs; jobs that not only improve household incomes, improve savings and standards of living but also results into valuable skills transfer. Import substitution is important for positive balance of payments.

It preserves precious foreign exchange, keeps the Ugandan shilling valuable and stable and above all, builds a resilient and sustainable economy. In short, import substitution is our highway to Vision 2040.

At Ugandan Breweries, more than 85 per cent of the raw materials used - the sorghum, corn starch (maize), cassava, barley and denatured spirit from sugarcane, are all sourced from Ugandan farmers under our Local Raw Materials (LRM) programme.

Uganda Breweries LRM currently invests Shs16 billion in agricultural inputs, trains farmers and annually spends Shs74 billion on purchases from local suppliers, who consist of 17,000 farmers. This has can reach Shs 130 billion and touch more than 50,000 farming households in the next five years.

Let’s apply import substitution to the agriculture sector which accounts for 45 per cent of exports, employs 64 per cent of all Ugandans and 72 per cent of all youth. It should be a national shame if next year and the years after, Uganda is still importing food products - animal & animal products; vegetable products, animal, beverages, fats & oil; prepared foodstuff, beverages & tobacco worth $713 million (Shs2.7 trillion) like we did in 2019.

As pointed out in the President’s state of the nation address, fixing food reliance value addition for local consumption and export should be the first action point on the import substitution agenda.

Think about Switzerland which imports unprocessed coffee beans at average of $4.2 per kilo and exports roasted and or processed coffee at an average $31.5 per kilo. The country in 2019 exported a total of 83,819 tonnes of coffee, fetching $2.56 billion.

Compare that with Uganda which exported three times more unprocessed coffee beans- 271,800 tonnes, but earned five times less -$438.5 million. Imagine if Uganda was to add extra value by washing and roasting its coffee before export; with the right government supported marketing effort in the different coffee capitals of the world, Uganda could easily double her export earnings to a cool $877 million!
Imagine the same government support for some of Uganda’s leading exports by 2019 revenue such as: cotton ($58.2 million), tea ($78 million), hides & skins ($21.3 million), maize ($78.1 million), beans ($35.7 million), cocoa ($77.6 million) and fruits & vegetables ($36.1 million), Uganda could easily be looking at $1.6 billion in increased export revenue, without doing much on the production levels. revenue, think about the jobs and skills transfer that will be created and several other small industries that would spur as well.

2020/21 Budget
Import substitution is about the optimal allocation of scarce resources, managing the balance between supply and demand, and extracting maximum value for stakeholders, in this case, local producers.

This year’s budget theme- Stimulating the Economy to safeguard Livelihoods, Jobs, Businesses and Industrial Recovery, speaks to the import substitution agenda.

The tax reliefs to businesses, namely, the deferred payment of Corporate Income Tax or Presumptive tax for Corporations and Small, Medium Enterprises (SMEs) until September 2020, defer of PAYE payments to selected sectors to , waiver of interest on accumulated tax arrears and expedited payment of outstanding VAT refunds are all welcome.

Government also plans to invest in various community irrigation projects/schemes as well as provide Shs300 billion for agricultural inputs using NAADS e-Voucher Scheme to farmers. To reduce post-harvest losses, government is also investing in construction of storage facilities of 42,000 metric tonnes capacity in Iganga, Isingiro, Amuru, Kalungu, and Nebbi districts.

Other key measures in the budget, such as increasing import duties on goods that are produced or can be produced locally, especially agricultural products (60 per cent) and other products to 35 per cent will go a long way in propping up local enterprises.

Other measures like the Shs1 trillion recapitalisation of Uganda Development Bank, the provision of Shs94 billion for FY2020/21 in credit through SACCOs and Micro Finance Institutions and the Shs138 billion injection into Uganda Development Corporation for public-private partnership investments is the right thing to do.

The author is the managing director of UBL.

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