What are the possibilities of import substitution?

Since the Coronavirus (Covid-19) pandemic started taking its toll on the economy, the phrase ‘import substitution’ has become a buzzword.
The economic strategy is all about replacing imported goods and services with domestic production. The idea basically is to reduce its foreign dependency while boosting the local economy and retaining the money.
Latest statistics show that Uganda’s imports and exports are declining to disruptions from the Covid-19 pandemic.

A monthly Bank of Uganda report shows that in March 2020 imports suffered a 10 per cent decline to $492m (Shs1.8 trillion). This was lower than $522m (Shs1.9 trillion) earned in February and $543.7m recorded in January.
In this period in review, exports declined by 11 per cent to $315.2m (Shs1.1trillion) down from $356.1m (Shs1.3 trillion) recorded in February and the $386m (Shs1.4 trillion) earned in January.

If you enter a supermarket and see something produced elsewhere, think about how you can start producing the same product for this market.
A high import bill of Shs28.5 trillion in 2019 according to the finance ministry report, has denied Uganda an opportunity to create more jobs as local firms lose out market to foreign factories and traders.
The question now is whether this long held vision will become a reality or remain elusive.
In most of his addresses to the nation lately, President Museveni, has not missed the quest to make a case for import substitution.

According to President Museveni, sectors like manufacturing will get a boost, on the grounds that blocking imports will get “the long-sleeping Ugandans” to wake up.
He argues that this is the time to turn the country’s market from a dumping ground for foreign goods to a manufacturing hub through import substitution. It has since emerged that the economic stimulus package that the government is “cooking” is anchored around import substitution.
“Everything you have been importing, except for petroleum products, now make it here. The $7 billion you have been using to import, keep it here. Turn misfortune into an opportunity,” said President Museveni in one of his address to the nation during the lockdown.

Meanwhile, Trade Minister Amelia Anne Kyambadde is of the view that the pandemic is a blessing in disguise as Buy Uganda Build Uganda policy (BUBU) will further be entrenched. Those willing to upscale their manufacturing capacities shall be helped to attain BUBU’s intentions.
Ms Kyambadde also noted that Uganda Development Bank (UDB) and Uganda Development Corporation (UDC) will be funded with a principle mission of aiding Micro, Small and Medium enterprises from the fangs of Covid-19 pandemic among other challenges.

It takes two to tangle
Over the last five years, until the pandemic showed its ugly head beginning early this year, the economy has been producing more stuff locally and exporting more, according to Uganda Export Board Promotion Board (UEPB) data.
According to UEPB, beginning financial year 2014/15 to financial 2018/2019, Uganda’s exports increased from $2.7 billion to $3.9 billion.
Despite all the efforts to produce more for local market consumption as well targeted export markets, the country still remains a net importer, importing more than she exports.

For decades, government believed the economy is private sector-led and looked on as the private sector struggled to drive import substitution due to the high cost of doing business in the country among other factors.
According to Dr Ramathan Ggoobi, an economist whose mantra is economics that works, there is no better time than now to focus on import substitution, thanks to the disruption occasioned by the Covid-19 pandemic.

The Makerere Business School Economics Lecturer in an interview last week said: “We have been reminded that our reliance on others can be a risky affair. Now we must do for self because nobody is going to be that concerned about our welfare anymore.”
He continued: “For import substitution to succeed, the government will have to be involved. Private sector on its own cannot succeed on this endeavour. Countries that have succeeded all over the world in import substitution did so with the involvement of the government.

“Countries in Latin America were the first to try out import substitution without government involvement and they failed. African countries even before independence and after independence also tried it and failed. Eastern Europe also went this route and failed. East Asia did the same and failed. So you need government involvement to have a robust import substitution.”
Without government rolling up its sleeve, Mr Ggoobi said it will be difficult to implement industrial policy whose focus, for the case of Uganda is hinged on import substitution.
One of the main reasons why import substitution failed is because of the policies and conditions of Bretton Woods Institutions namely; the World Bank and the International Monetary Fund (IMF).

These institutions insisted that government get out of business and only play facilitating role which according to Mr Ggoobi, proved ineffective, explaining the low level of import substitution in many countries, including Uganda who religiously applied the policies and conditions subjected to them by the Brent Woods institutions.
He said: “Developmental states do not just facilitates but get involved so as to develop their countries. So for import Substitution to work, the government of Uganda must get involved and not just leave it to the private sector.
Dr Ggoobi notes that it is time to fund UDC - government’s investment arm, then hold it accountable in supporting import substitution.

How easy is this shift?
Due to inadequate fiscal resources and importantly the ability to transfer resources from public to private sector in addition to the country’s low saving culture, let alone the high interest rates the private sector are grappling with, Dr Ggoobi and Dr Fred Muhumuza, lecturer at Makerere School of Economics are afraid that the opportunity for import substitution may not be seized easily as anticipated.
In addition to susceptibility of the economy to runaway inflation, unrestricted (open) capital accounts (free movement of capital), high foreign exchange rates and narrow tax base, the two renowned economists are skeptical, saying this dream will take a while to be achieved, and that is dependent on deliberate planning and execution.

When contacted, the chairman of Kampala City Traders Association (KACITA), Mr Everest Kayondo whose members comprises of importers noted that changing from trading to import substitution is not as easy as some quarters think.
He said: “It is not like switching a light on or off. You need machinery, capital, raw materials, and the right employees among others. You need to do so much before thinking of import substitutions.”

Possibilities
For import substitution to take shape, Dr Ggoobi said there is need for radical change of structures. He said: “Our states are in most cases a mirror of European states structures. So we end up spending a lot of money in the recurrent budget, with little revenue sources. This has to change. And we need to activate regional integration and stop the nationalistic approach to economic development.”
As for Dr Muhumuza, this is not the time to build more industrial parks, but to support businesses to get back their footing. He believes the Shs45.5trillion national budget for the next financial year, should have been recalibrated to factor in the realities of import substitution and the challenges as a result of the Covid-19 pandemic.

Despite notable challenges, Ms Kyambadde is optimistic about the future of the BUBU initiative which she has been driving, saying it will prioritise campaigns for local production and consumption of domestically manufactured products.
Uganda had a surplus or favourauble balance of trade with Kenya in the Financial Year 2017/18 of $ 122.7 million (Exports of $ 628.4 million against Imports of $ 505.7 million) and registered a record highest trade balance in the EAC region of $ 413.8 million (Exports of $1,220.63 million against imports of $806.77 million), in the same period.

The good news is that the Common Market for Eastern and Southern Africa (COMESA) trading bloc, just like the EAC remained the main destination for Uganda’s formal exports with the share in total export earnings of 51 per cent over the last two to three years.

The EU market ranked the second main destination for Uganda’s goods and services, with the Middle East bloc taking third position of the total market share, of which United Arab Emirates contributed 92 per cent of the Uganda-Middle East exports in 2017/2018.
As the saying goes: “Necessity is the mother of invention’. We have no choice but to adapt.”

Some good news
Mr Simon Kaheru, Coca-Cola Beverages Africa's Corporate affairs manager and also the board member of Uganda Manufacturer's Assocition says two months ago you would not have imagined that Coca-Cola equipment at Rwenzori Water would be used to manufacture hand sanitiser.
“But now we have requests from other organisations who want to buy it commercially to serve the purpose,” he says.
According to Mr Kaheru, manufacturers need to get into the mentality that adapts quickly when opportunity presents itself.

He said: “People are making cloth masks in cottage industries - what about the next step that makes luxury masks since this is now a fashion accessory as well as protective wear,” ponders?
He adds: “For Nice House of Plastics to team up with CrestFoam was amazing - how many others are now speaking with each other?”

Foregone revenue
Many previously imported items in various sectors are currently being manufactured in the country like; tiles, steel products, cement, tile adhesives, cables, motor cycle tyres, household appliances e.g. flat irons, speakers, soap and detergents, cooking oil, biscuits, sugar, juices, cosmetics, among others. This has caused a shift in consumer behaviour with preference for locally manufactured goods at the expense of imported ones. We have for instance seen foregone revenue from imported tiles of Shs0.156 billion according to URA records.