Whoever coined the popular saying that big boys don’t cry may have had Kenya in mind in the context of regional trade.
East Africa Community’s big boy Kenya has remained mum even when blatantly backstabbed by its neighbours.
Instead, the country has feigned valiance or ignorance even when its peers invite it to a duel.
Perhaps this is out of fear that it could lose some of the key trading partners and markets for its products.
And after months of a trade spat with Tanzania in which Kenya’s products have been denied entry into the country, Kenya now has to grapple with an alarming rise in illegal imports from Uganda.
Uganda, Rwanda, Tanzania, Burundi and South Sudan make up the EAC.
Manufactured products from Kampala have flooded the Kenyan market, most of them having been imported cheaply from outside the regional market.
Instead of coming through the port of Mombasa as has been the tradition, a good chunk of these products is flown directly to the landlocked country from Guangzhou,China.
Most of these imports from China and India are also made in Kenya. Consequently, has been struggling to stem their flow into the local market to protect local industries.
Under the EAC’s Common Market Protocol, such goods would ordinarily be slapped with heavy tariffs by Kenyan tax authorities if they find their way into the country.
“When such a product is brought into the Kenyan market, it attracts duty at the EAC common external tariff rate,” said Kenya Revenue Authority (KRA) Commissioner, Customs, and Border Control Julius Musyoki.
Mr Musyoki says Kenya and Uganda are members of the EAC which uses common external tariff (CET) rates for goods entering the regional market unless there are specific cases where both countries use same tariff rates.
And yet, these goods have continued to pour into the country as though there were no restrictions, bringing into question the Government’s effort aimed at protecting its industries by slapping them with higher tariffs.
They include car parts, iron and steel products, shoes and clothes, beauty and cosmetics. It is a trend that threatens one of President Uhuru Kenyatta’s pillars of the Big Four agenda - job creation.
The President plans to jump-start the manufacturing sector by first shielding the production of iron and steel, plastics and rubber, paper goods, textile, and footwear as well as vegetable oils from competition and then offering them tax incentive such as reduced power charges.
Such protectionist measures were agreed by all the finance ministers from the five EAC member states during the pre-budget consultations meetings, according to National Treasury Cabinet Secretary Henry Rotich.
CS Rotich told Parliament while reading the Budget Statement for 2018-2019 that they agreed on customs duties aimed at promoting industrialisation, encouraging local investments and creating incentives in the agricultural and manufacturing sectors.
“The measures are also intended to make our products more competitive while at the same time protecting local industries from unfair competition,” he told lawmakers.
This saw Rotich shield the iron and steel industry from stiff competition from cheap and subsidised iron and steel emanating from outside EAC.
This was by hitting the said products with a punitive import duty of 35 per cent, up from 25 per cent. It is a move that has affected a wide range of products, including cooking stoves, liquefied petroleum gas cylinders, steel wool, construction materials and many other metal products, with the Government hoping that the public would, in the long run, reap the benefits of the policy through increased jobs.
As a result, Kenya has since 2015 suspended the use of EAC’s common external tariff for iron and steel as well as paper and paper boards which stands at 10 per cent. Instead, these products will attract a duty of 35 per cent from 25 per cent.
On textile and footwear, CS Rotich introduced a specific rate of import duty of Sh500 per tonne or 35 per cent, whichever is higher.
The timber industry was also not left behind, with the CS introducing a specific rate of duty of Sh11, 000 per tonne on particle board, Sh12, 000 per tonne on medium density fiberboard, Sh23,000 per square metre on plywood and Sh20,000 per tonne on block boards.
To encourage the manufacture of vegetable oils to meet regional demand, he introduced a specific rate of Sh50,000 per tonne or 35 per cent, whichever is higher, to protect local manufacturers from imported cheap vegetable oils.
But even as Kenya moved to protect its industries by slapping imports of products from outside of the EAC with higher tariffs, a lot of these products still found their way into the country, legally and illegally, through Uganda. And in both cases, they came in cheaper, defeating the Government’s protectionist policy.
Entry of cheap imports from Uganda combined with a depreciated currency has seen the value of imports from the country race past Kenya’s exports for the first time.
As of June 2018, the value of imports from Uganda stood at Sh30.2 billion compared with exports to Uganda, which were valued at Sh26 billion, with the landlocked country enjoying a trade surplus against Kenya for the first time in a long while.
One Kenyan shilling trades at 37 Ugandan shillings, with the latter having ceded ground against the local currency, making her exports to Kenya cheaper. However, Kenyan exports to Uganda have become costlier.
President Kenyatta’s Government has been trying to get the manufacturing sector back on its feet, jealously shielding paper and paper products, iron and steel and wood products and vegetable oils from the competition.
Kenya has identified these manufacturing sub-sectors as some of the low-hanging fruits in its quest for industrial recovery. The State plans to increase the contribution of the manufacturing sector to the gross domestic product to 15 per cent by 2022 by adding between Sh200 billion to Sh300 billion to the country’s GDP.
Treasury estimates that more than 800,000 jobs will be created this way.
However, Uganda, which is at a relatively lower industrial rung, has allowed importation of these products either at EAC’s common external tariff or even at a lower duty as it tries to build its nascent industrial base.
For example, while Kenya has increased duty on iron and steel to 35 per cent in the next 12 months from July 1, Uganda will apply the EAC CET rate of 25 per cent, a move that will see more metals come in from Uganda.
KRA insists that such metals will be charged the 35 per cent tariff that applies to all metals coming from outside of the EAC. Yet this has not stopped an avalanche of imports from Uganda.
This has seen imports of cars and car parts, an assortment of metals, chemical products, clothes and shoes as well as wood products from Uganda dramatically increase in the last decade.
From 2006 to 2016, for example, imports of wood products into Kenya from Uganda increased more than 126 times from Sh17.3 million to Sh2.2 billion, according to official figures.
Imports of vegetable oils, which Rotich said Kenya had the potential to manufacture as he restricted its entry with a higher tariff, went up more than 20 times from Sh696 million 12 years ago to Sh1.4 billion in 2016.
In the same period, the value of imports of all kinds of metals increased six-fold from Sh105 million in 2006 to Sh663 million a decade later.
Paper products increased more than 29 times from a value of Sh7.5 million in 2006 to Sh222 million in 2016, making a mockery of Government efforts to protect the industry. Import of plastics and rubber, another product that is manufactured in the country and which the Government has been keen to protect, has also increased more than eight-fold to Sh248 million in 2016 from Sh29.6 million ten years ago.
For sometimes, Kenya had been the main producer of these products in the region. However, with the neighbouring countries also revamping their manufacturing industries even as they suddenly found ways of accessing the international markets such as China and India, Kenya’s share of export into the region declined considerably.
In 2017, exports to Uganda, Tanzania, and Rwanda declined by six per cent to Sh107.4 billion from Sh114.4 billion in 2016.
However, imports, and particularly from Uganda have been on the upward trajectory. This has had the effect of thwarting President Uhuru Kenyatta’s efforts at revamping its fledgeling manufacturing sector.
Imports from China to the landlocked country in 2016 were valued at Sh88 billion, a six-fold increase from Sh14.7 billion in 2006.
Some of the products that Uganda imported from China included machines valued Sh28 billion compared to Sh3.6 billion ten years earlier; metals worth Sh10.8 billion compared to Sh1.1 billion in 2006.
Car and car parts imported from the world’s second-largest economy into Uganda were valued at Sh7 billion, an increase from Sh855 million imported in 2006. Plastics and rubbers worth Sh6.8 billion got into Kampala from Beijing in 2016 compared Sh569 million in 2006.
Paper goods worth Sh1.6 billion were also brought into Uganda from China two years ago, up from Sh291 million in 2006. Wood products from the Asian giant into Uganda in 2016 were valued at Sh224 million from Sh26 million 10 years earlier.
India is the has also deepened trade relations with Uganda with exports from the sub-continent to Kampala increasing from Sh21 billion in 2006 to Sh82 billion in 2016.
Notable imports from India that have increased during this period include machinery, plastics and rubber, iron and steel and vegetable products. But there have been also increased cases of illegal imports of some of these products coming into the country, often from Uganda.
It should not come as a surprise that contraband goods that have been nabbed since the Multi-Agency Committee was formed are, by and large, a reflection of these goods.
The agency has seized products and items - some of them counterfeits valued at Sh7.5 billion. They include illicit liquor, electrical items, foodstuff, ICT materials, leather, motor vehicle parts, among others.
The Principal Secretary in the Ministry of East Africa Community Betty Maina said this trade pattern might be as a result of either trans-shipment or misdeclaration. “That might be a diversion of products under the guise that they are made in Uganda, which is an offence,” said Ms Maina in a telephone interview with Financial Standard.
But Mr Musyoki insists that the problem of cargo diversion and dumping into the Kenyan market has been greatly reduced following the implementation of the Regional Electronic Cargo Tracking System.
PS Maina, on the other hand, said Kenya has been importing a lot of foodstuff such as maize, and milk products from Uganda for a long time but expressed surprise that an increasing number of imports from Kampala are manufactured products. “We import a lot of food products from Uganda but not manufactured goods,” she explained.
In 2017, for example, Kenya imported food products valued at Sh24.6 billion. Much of the foodstuff included milk and milk products (Sh8.1 billion) and leguminous seeds (Sh7.1 billion).
The PS said she was also perturbed that Kenya was importing more cars and car parts from Uganda. “They (Uganda) do not assemble cars,” she said, noting that KRA needed to do more to deal with the issue of misdeclaration. Imports of car parts from Uganda has since increased four times in 10 years to 2016 from Sh144 million to Sh659 million.
Perhaps it Uganda’s cost of production that has over the time become cheaper. The cost of power, labour and transportation in President Yoweri Museveni’s country are lower compared to Kenya’s.
Uganda electricity production at Jinja is cheaper than Kenya’s. “You can see it through, for example, sugar imports from Uganda. Sugar from Uganda is much cheaper than Kenya’s,” said Dr Scholastica Odhiambo, an Economics lecturer at Maseno University.
Moreover, exporters in Uganda enjoy tax holidays. There is a number of tax incentives that investors in Uganda enjoy, including capital investment allowances and tax exemptions for exporters, thus making their exports to Kenya cheaper.
Cost of production
There are also exemptions on raw materials, plant and machinery imports, and sector-specific incentives for hospitals, hotels, pharmaceuticals, assemblers, and manufacturers of exercise and textbooks under the East African Customs Management Act.
A cheap business environment has seen a lot of investors, including most from Kenya, flock into Kampala.
The way out for Kenya is for it to significantly bring down its cost of production. “We need to re-examine our inputs,” said Gerrishon Ikiara, an Economics lecturer from the University of Nairobi. “We are not supposed to protect our market against Uganda and other EAC member states. That would be against the spirit integration.”
However, Dr Odhiambo contended that Kenya is far ahead of her EAC peers in terms of industrialisation and it will be long before manufacturers in these countries give their Kenyan counterparts a run for their money.
China’s entry into Uganda has been grand, especially after Kampala established direct cargo flights to Guangzhou, China. Dr Odhiambo said South China Airlines have shipped massive cheap goods directly to Uganda from China, bypassing Mombasa port where much of Kampala’s imports used to pass through.
Uganda Civil Aviation Authority spokesperson Vianney Luggya was quoted as saying that cargo numbers had grown to 59,000 tonnes by last year hence the need to expand the airport to handle more.
“Once completed, it will provide capacity for 100,000 tonnes but with a possibility of adjusting it to take up to 150,000 tonnes if the need arises..., which has a capacity of 69,000 tonnes,” Luggya said.