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Nairobi, Kenya

Union kicks off to a slow start

The East African Customs Union became operational on 1 January but there are still teething problems to be addressed.
15 January 2005 - Deremo Maiko

It was a second coming for the East African Community and after a 27-year lacuna, the 90 million citizens were quite forgiving of the accompanying chaos. A customs union was officially supposed to kick off on the 1st of January, but traders, to their disappointment, are finding that to be more of a rhetorical statement than reality.

Deciphering the official statements emanating from the three states, it is clear that the earliest traders can reap benefits of the changes, and elbow away decades-long contraband trade at the borders, is February.

It would appear that the governments of Uganda, Tanzania and Kenya were quicker with the ink than with their practical activity on the ground. And there are enough reasons why the ratification by the three heads of state—Ugandan president Yoweri Museveni, Benjamin Mkapa for Tanzania and the newest in the pack, Mwai Kibaki of Kenya—was not accompanied by duty-free concessions on the ground.

A major cause for the delay is wrangling over tax arrangements pertaining to importation of raw material and intermediate goods into the EAC, which has now adopted a common external tariff together with uniform intra-bloc trade taxes. Uganda, whose president shot his way into State House in 1986, is more inclined to liberal trade and concessions to its investors. But Kenya on one hand believes the goods in question are finished and not input material.

Indeed, Trade and Industry minister Dr Mukhisa Kituyi has vowed to protect local industries “tooth and nail” against an assault by Ugandan goods. The bottom line of the long-negotiated deal is that the trio accepted to zero-rate raw materials brought from outside East Africa, levy 10 per cent on intermediate goods and slap 25 per cent on finished goods.

But even on the eve of the customs union, officials were still haggling over Uganda’s request for exemption of some 184 items for industrial use. Consequently, the country was allowed its wish up to end of February, by which time a team of nine trade experts with the EAC would have made up their mind on the long-term arrangement.

Kenyan officials ran hot foot from EAC headquarters of Arusha from negotiating the compromise that saved officials of the three major blushes on the day of commencement. Kenya whose main export market is Uganda has no bargaining power when it comes to offering concessions to the country; it exports 20 times more what Uganda does to it, with goods from Kenya dominated by lucrative manufactures while Uganda sells it food stuff.

Kenyan industrialists will still have to pay duty of 10 per cent for entering the two economies which they dominate, even as the duo swamp the domestic market with their duty-free goods. This would, however, only last up to the next five years. Some 21 per cent of Kenya’s industrial exports to the two, accounting for combined 1283 tariffs, are affected in the preferential trade bloc.

But what has been bothering the officialdom more in all three countries is the likely haemorrhage in revenues. It is estimated for example that Kenya could forfeit up to Sh30 billion ($375 million) in customs losses, according to the respected quasi-public think-tank, Kenya Institute of Public Policy Research and Analysis (Kippra), a figure that amounts to about an eighth of the total Kenya Revenue Authority collection. KRA in the medium term owing to its improved collection may not feel the pinch much, but the Kenya government still grappling with an Sh57 billion ($713 million) and failed attempts to borrow Sh22 billion ($275 million) from the domestic market might.
Luckily, IMF has just resumed funding which should open taps to other donor resources. Tanzania and Uganda, which have had warm relations with donors for over one decade now, may have a smoother sailing.

That the maximum external tariff at the border is set at 25 per cent is set to make imports of over one third of Tanzania and Kenyan goods cheaper—never mind the fact that volumes may not compensate for customs loss.

What is happening at the common borders right now maybe not of much concern to the bureaucrats. But the fact that the three countries maintain varied trading and economic allegiances is. Tanzania is the major odd man out being a member of the South African Development Community (Sadc) and EAC. But Uganda and Kenya at the same time maintain membership of Common Market for Eastern and Southern Africa (Comesa) where Kenya exports 40 per cent of its total exports.

What this means is that all the countries are exposing themselves to influx of transshipped goods from as far as Cairo and Durban. East African Legislative Council has warned of the possible consequence, as have several expert bodies.

Transshipment is already an issue with the African Growth and Opportunity Act (Agoa) of which the three are beneficiaries. The countries to be wary of in this regard are South Africa (Sadc) and Egypt, Comesa) both exposed to global trade at a more advanced level and with own domestic industrial base.

Whatever the teething problems, it will be a big triumph for the former British colonies, flaunting a $27.5 billion GDP, who kicked off the process on November 30, 1999, with the treaty establishing EAC. However, it will be recalled that under the old EAC, which collapsed in 1977 under the weight of petty ideological differences, the three countries had made bigger strides and were headed for a political union. This time round though, the emphasis is on economics. And foreign investors are now presented with a more credible market.

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