Import substitution push produces mixed results

A retail shop in Namuwongo, Kampala. The UN says the Ukriane-Russia war is supercharging a crisis in food, energy and finance in poorer countries.  Photo/Frank Baguma

What you need to know:

  • According to economic experts, the most practical prescription to the imported inflation ailment lies in actualising the import substitution agenda.

The spillover effects of the ongoing Russia-Ukraine conflict will continue to amplify the already high cost of consumer commodities as well as some key raw materials as the country smarts from pandemic-induced shocks.

The latest United Nations (UN) task force report warns that Russia’s war against Ukraine threatens to devastate the economies of many developing countries such as Uganda.

 It further notes that such economies are facing even higher food and energy costs and increasingly difficult financial conditions.

UN Secretary-General Antonio Guterres launched the report this past week.

He emphasised that the war is supercharging a crisis in food, energy and finance in poorer countries that continue to be buffeted by the pandemic, climate change and a lack of access to adequate funding for their economic recovery.

The Russia-Ukraine conflict has since disrupted supply of oil and grains such as wheat, corn, and sunflower oil. Still on the account of the conflict, Uganda Bureau of Statistics (Ubos) data indicates that cooking oil and laundry bar soap has seen the highest price increase. A bar of soap at some point was going at Shs10,000 up from between Shs3,500 andShs4,000.

Import substitution

Government technocrats and economic sector players say the most practical prescription to the imported inflation ailment lies in actualising the import substitution agenda.

The said agenda has been a buzzword in the last two years after the pandemic disrupted supply chains. Import substitution revolves around replacing foreign imports with domestic production.

Uganda’s Bubu (Buy Uganda, Build Uganda) policy—launched in 2014—was essentially supposed to significantly reduce foreign dependency. So, where are the returns after years of investing heavily in sunflower, vegetable and oil palm projects?

“Why are we still importing cooking oil? Why is BIDCO and other companies still importing raw materials for cooking oil? Does this mean that monies some of which are borrowed are not allocated where the real problem is?” Fred Muhumuza, an economist, policy analyst and a researcher rhetorically asked in an interview with Sunday Monitor.

He continued: “These were import substitution projects meant to solve the importation of cooking oil made from sunflower. We are now paying the price because Ukraine and Russia are the biggest exporters of sunflower and as we all know they are now in a conflict situation yet we could have grown sunflower here in northern Uganda.”

Dr Muhumuza adds that if these projects had succeeded then the raw materials problem—certainly the one around cooking oil and soap, two commodities whose prices have soared in recent times—would never have cropped up in the first place.

Mr Patrick Ocailap, the Deputy Secretary to the Treasury, however says the import substitution agenda is akin to a marathon race; not the 100-metre sprint dash. He said: “The import substitution policy is continuous and so is its implementation. We know that import substitution promotes employment domestically, creates value addition and has a multiplier effect on the economy. ”

He continued: “Slowly but steadily we will achieve our intention of import substitution. This is important because it will allow us to save the money we inject in importing and reinvest it to grow the economy.”

Meanwhile, the Ministry of Finance says there is no joint import substitution agenda at the East African Community. Individual member states consequently have to explore reducing their import bills using any means necessary—some of which can be disruptive to regional trade, particularly in the form and shape of non-tariff barriers (NTB).

Presidential view

President Museveni has severally said Uganda’s annual import bill of $7 billion (Shs25 trillion) is unacceptable. Mr Museveni reckons many of the imports can be manufactured locally, and has thus given the import substitution strategy a ringing endorsement.

Some of the items imported include medicines, textiles, leather products, industrial sugar for use by coca-cola, industrial starch for use by the Pharmaceutical Industries, paper, packaging materials, glass products, automobiles, bicycles, among others.

Already, a move to substitute wheat with banana flour is being supported by Mr Museveni. The support being rendered to Dr Florence Muranga banana project—if it succeeds—will be a perfect substitute, if not better alternative, for the global wheat demand worth $43.6  billion (about Shs154 trillion) and the $300 million (about  Shs1  trillion) domestic one, according to State House records.

The flour from bananas can make better and safer bread than wheat flour that contains gluten. This compelled President Museveni to fund the banana project, including the patenting of the formula.

Before the pandemic reared it ugly head, the Ugandan economy had been producing and exporting more as per Uganda Export Board Promotion Board (UEPB) data. For instance, in the last five years before the pandemic struck (specifically from the financial year 2014/15 to financial 2018/2019), Uganda’s exports increased from $2.7 billion to $3.9 billion.

Despite all that Uganda still remains a net importer (imports more than she exports). The individual countries with which Uganda had high trade deficits (imports more from) are China (amounting to more than $855 million or over 30 of the deficit); India (amounting to $596 million or representing 22 percent); and Saudi Arabia (amounting to $384 million or representing about 15 percent).

Others are the United Arab Emirates (accounting for $277 million or representing 10 percent) and Japan (accounting for $247.83 million or representing about 10 percent).

The five countries were responsible for approximately 80 percent of Uganda’s trade deficit, according to Ministry of Trade (MTIC) data.

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 a share in export earnings of 51 percent over the last two to three years. The European Union market placed second, with the Middle East bloc taking third position.