Why Uganda must invest in manufacturing

Tuesday March 29 2016

Men at work at a gold processing site in

Men at work at a gold processing site in Namayingo. Uganda is likely to see her primary commodities losing more ground on the global market. PHOT0 BY RACHEL MABALA 

By Lydia Namono

A recently released research dubbed Economic Insight: Africa Q1 2016 carried out by the Institute of Chartered Accountants in England and Wales’ (ICAEW) has revealed that Africa, is the most commodity-dependent continent on earth.
The report further reveals that Africa’s economies increasingly need to create a hospitable environment for companies in the manufacturing and services sectors to drive growth, as the old models of growth driven by exporting raw materials is out-dated.
The research also unveils that Africa is still heavily commodity–dependent, with manufacturing accounting for a small share of output.

The report notes that GDP growth in Africa is projected to average 4.3 per cent between 2015 and 2020. Nigeria, the largest economy on the continent, is expected to contribute significantly to Africa’s economic expansion – at an average real rate of 4.8 per cent per annum between 2015 and 2020, contributing more than 25 per cent to the continent’s forecast growth in this timeframe.
Commenting on the report, Ramathan Ggoobi, renowned economist and assistant lecturer Makerere University Business School, explained that the growth of the manufacturing sector is particularly critical for Uganda’s development especially if her export base is increased.

“First, the need to improve our export performance: Uganda needs to increase manufacturing of exports as a means of diversifying her export structure and reducing its vulnerability to global market volatilities. Currently, Uganda’s “revealed comparative advantage” (a commodity in which a country has advantage over its competitors) is vegetables! We cannot have a strong Shilling when we are exporting such vulnerable commodities, such as vegetables.”
What is required, according to Ggoobi, is more industries.
“We need manufactures such as textiles, leather products, metals,” he says.

Manufacturing is one of the sectors than can solve Uganda’s unemployment problem.
“Manufacturing is the only way sustainable through which Uganda will create more decent, well-paying jobs for its young and growing population. The current buzz of encouraging young people to create small and medium enterprises (SMEs) is survival tactics, and a sign of failure by the leaders and policy makers to structure the economy in such a way that it would create decent jobs,” he says.

Lessons from other countries
Ggoobi added that evidence shows that growth in emerging developing economies such as China, South Korea, India and Brazil. has largely been driven by rapid structural economic transformation from primary production, that is agriculture and mining to manufacturing.
Since Uganda is predominantly rural in that 82 per cent of the Ugandans live and work in the rural economy, it is manufacturing that will change that.
“If Government were more serious with investment in this sector, Uganda would be doing quite better than it is doing now,” he says.

Research shows that Uganda’s manufacturing sector is more competitive relative to other countries in Eastern Africa individually and the region as a whole.
A recent study by the African Development Bank (2014) found that the Uganda’s manufacturing sector was more competitive than Kenya’s, Rwanda’s, and Tanzania’s with the only problem being low priority and low public investment to facilitate the sector.

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Ggoobi explained that there has been a marked delay in investment in Uganda’s manufacturing industry due to a number of reasons including weak institutional support following the dismantling of the UDC (Uganda Development Corporation), Uganda Electricity Board, and Uganda Development Bank, inadequate physical infrastructure particularly quality transport, energy, and communication infrastructure, lack of technical skills in the manufacturing sector among other issues.
But how can Uganda reduce commodity dependence such as exportation of raw materials?

“Let’s start by investing in agro-processing across the country. These will help to add value to raw agricultural products. Then, technological upgrading will allow farmers to transform themselves into small-scale industrialists. The proceeds will then be used to build an export-oriented manufacturing base. In short, a shift to manufacturing requires a strong, well-functioningagriculture, “he says.
According to Ggoobi, the move towards reduced commodity dependence such as exportation of raw materials is developmental but is also likely to create low and diminishing competitiveness of Uganda’s export commodities.

“We are likely to see our primary commodities lose more ground on the global market. The slowdown of China’s economy means that commodity prices, such as coffee, oil, and other minerals will continue to suffer from low demand and thus low prices. This will reduce our capacity to earn foreign exchange. Consequently, our current account deficits will deepen and this will have more serious impact on the value of the shilling, given that demand for imports is projected to continue rising as we import construction materials and other imports,” he said.

According to the ICAEW Economic Insight: Africa report Innovation in financial services technology– known as FinTech – has erupted as a primary global investment opportunity and has recorded rapid growth over the past five years as technological innovation allowed digitally active consumers to streamline and improve on traditional banking services.
FinTech has eased money transfers and remitting earnings, acquiring insurance and attaining credit.
Tom Rogers, Associate Director, Macro Consulting at Oxford Economics, said: “The online financial sector has really taken off in Africa, answering a need for quality financial services and tailor- made solutions to structural challenges including frequent power disruptions and poor rural infrastructure.

Regional director, Institute of Chartered Accountants in England and Wales’ Middle East, Africa and South Asia Michael Armstrong said.
“The East African region is embracing the use of renewable energy to leapfrog older power generation technologies, while reducing the need to extend the national energy grid to remote villages,” said Armstrong.

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