Brace for price jumps as new EAC tariff kicks in

Fuel tanker at a station in Kakamega town. [Mumo Munuve, Standard]

Kenyan importers will now pay more to bring in cereals and textiles from outside the East African Community (EAC) following the implementation of the 35 per cent duty on some products.

The maximum 35 per cent duty as Common External Tariff, which took effect on July 1 this year, covers 499 tariff lines (or products), including meat, dairy produce, live trees, furniture, edible vegetables, edible fruits, tea, coffee and mate and animal and vegetable fats (oils).

Others are cocoa and cocoa preparations, preparations of cereals, meat and fish, cement, paints, cosmetics, plastic water tanks, wigs and ceramic products, textiles, iron and steel, pen, beverages, spirits and vinegar.

While it is expected to boost the economies of EAC member countries, it is also poised to negatively affect the purchasing power of citizens. But the East African Business Council (EABC), a lobby for private business players drawn from the bloc, sees this as a new lifeline for regional trade.

An analysis of the tariff by the council notes that setting the maximum duty at 35 per cent uniformly across all EAC countries will increase revenue, and boost intra-regional trade, and investment. EABC also notes that this will build supply capacities, sustain food security and rural development, improve competitiveness, create employment opportunities and safeguard revenues.

"The only negative impact is welfare loss, which is transitory and can ably be alleviated by increased industrial production, trade creation, employment creation and revenue generation," says the lobby in its analysis. In terms of social welfare erosion, says EABC, the items proposed for the fourth tariff band are those sufficiently produced in the region.

As such, the private sector body believes that while the purchasing power of consumers could be negatively impacted, the economy will not suffer due to the creation of more jobs and increased industrialisation within the region.

A comprehensive review of the 35 per cent duty published by Deloitte, an international tax and audit firm also gave a similar verdict.

"The 35 per cent rate is expected to negatively impact the purchasing power of citizens in the region," reads the review published in May. "However, the welfare loss is expected to be compensated by the additional incomes earned by the citizens through employment opportunities created by the expected growth of local industries." Apart from the creation of employment, the private sector also foresees opportunities in the informal trade, food security, rural development and reduced Stays of Applications (SoA), which have hampered the growth of trade in the region.

Some 496 tariff lines of the now 499 are products that previously attracted a maximum duty of 25 per cent.

"The other three items are those which were previously classified as sensitive items e.g worn articles, batteries, wheat grain," says the council. There are a total of 5,955 tariff lines listed in the EAC Common External Tariff. Among them are products that attract zero duty, 10 per cent, 35 per cent, and those levied 50 per cent and above. The private sector lobby believes the introduction of the 35 per cent duty affects a small number of products (499) traded within EAC, which is unlikely to affect consumers' purchasing power.

"The tariff lines to be classified under the fourth band represents just 8.37 per cent of the total EAC tariff lines and hence have little impact on consumer price since they can be accessed duty-free (zero per cent import duty) in the region," the council says.

EABC also notes that EAC citizens are served by other markets like Common Market for East and Southern Africa (Comesa) and Southern Africa Development Community (SADC), which have free trade arrangements.

The logic behind the maximum 35 per cent tariff, the council explains, was to give room for competitiveness among EAC nations within the 10 per cent margin, which is expected to, in turn, attract investments.

Previously, private sectors within the region oscillated around the figures of 30 per cent and 33 per cent. "The tariff differential of just five between 25 and 30 per cent is not sufficient to attract investment in the region as opposed to 35 per cent," says EABC.

"Thirty-five per cent tariff rate provides an adequate tariff deferential of 10 per cent, which is required to incentivise industrial investments in EAC."

Of the five EAC States, Uganda stands to benefit the most in trade diversion and creation. Kenya stands to earn Sh1 billion from the new tax measure.