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Post-Covid-19 budget: resilience and import substitution

Vegetable farmers

Vegetable farmers

In all my life, I have always been a pragmatist and a believer. I believe in the silver linings in every dark cloud.

I believe in the fact that when lemons are thrown at you, the best option is to think around the many varieties of lemonade you can make- and if you have some Uganda Waragi, how many neat cocktails you can make with the lemonade.

The emphasis is mine but nonetheless there are very few brands in Uganda that best exemplify the resilience of Uganda and Ugandans than Uganda Waragi, which this year marks its 55th anniversary. But that’s a story for another day.

Speaking about Ugandan resilience, as we emerge from nearly three months of lockdown, we have all seen how Uganda has been able to be bold through the Covid-19 pandemic and emerge, scathed but at least alive.

We have seen stories of how Ugandan manufacturers decided to encamp their workers; how Uganda Revenue Authority (URA), immigration and securities risked it all to keep the goods flowing across the borders and how Bank of Uganda, working with the financial services sector, swiftly came in to manage the likely fallout in the lending market.

We have seen how utilities like National Water and Sewerage Corporation and Umeme worked longer hours to keep the country running and how our healthcare workers gave their all, day and night, to save lives and are still saving lives. There is a lot to be proud of as I call Uganda my home.

Ugandan manufacturers have taken the bull by the horns. By March 2020, according to President Museveni’s State of the Nation address, we had only two factories - Saraya East Africa Limited and the Luwero Industries - making sanitizers. We now have 107 factories.

By March 2020, there was not even a single factory making masks in Uganda. All masks were imported. But as we speak, there are more than 10 large-scale manufacturers of medical-grade masks and several other SMEs making non-medical masks.

Some innovative SMEs have taken it a notch higher by making facial shields from recycled plastic waste! Now that is resilience - the deliberate choice to see and pursue the silver lining in the dark cloud - regardless of the circumstances.

Even though Bank of Uganda, in their June Monetary Policy Statement lowered their 2020 growth projections to between 2.5 and 3.5 per cent, it is still much better that the Sub-Saharan average of between -2.1 and -5.1 per cent and -1.6 per cent by World Bank and IMF respectively in their April 2020 outlooks.

The central bank predicts that economic growth will begin to recover to between 4 and 5 per cent in 2021, rising further to between 6 and 6.5 per cent in 2022. The central bank, however, hastened to add that these projections will depend in part on how Uganda will be able to open up for economic activity safely, and in particular how effectively the public will comply with social distancing rules.

Our Purchasing Managers Index (PMI) has rebounded strongly in May, which is a sign of business confidence and the PMI survey notes that there is an urgent need to fix domestic demand and the disruptions to supply chains internally and in the region.

Why import substitution should be the new normal

Talking of stepping up domestic demand, I am wholly in support of the Uganda government’s and largely inward-looking direction of all of EAC government’s agenda on import substitution. Import substitution creates jobs; jobs that not only improve household incomes, improve savings and standards of living but also result into valuable skills transfer.

Import substitution is important for positive balance of payments, preserves precious foreign exchange, keeps the Uganda shilling valuable and stable and, above all, builds a resilient and sustainable economy. In short, import substitution is our highway to Vision 2040.

Let us take an example of Ugandan Breweries, where more than 85 per cent of the raw materials we use in our business; the sorghum, corn starch (maize), cassava, barley and denatured spirit are from Ugandan sugarcanes etc -, are all sourced from Ugandan farmers under our Local Raw Materials (LRM) programme.

Uganda Breweries LRM currently invests Shs 16 billion in our LRM programme in agricultural inputs, training our farmers and annually spending Shs 74 billion on purchases from local suppliers, who consist of 17,000 farmers. With enough support, this has a potential to reach Shs 130 billion and touching over 50,000 farming households in the next five years.   

Let’s apply import substitution to the agriculture sector, which accounts for 45 per cent of exports, employs 64 per cent of all Ugandans and 72 per cent of all youths. For starters, it should be a national shame if next year and the years after, Uganda is still importing food products - animals and animal products; vegetable products, animal, beverages, fats and oil; prepared foodstuff, beverages and tobacco worth $713 million (Shs 2.7 trillion) like we did in 2019.

As pointed out in the president’s State of the Nation address, fixing food reliance, value addition for local consumption and export should be action point number one on the import substitution agenda.

Think about Switzerland, which imports unprocessed coffee beans at an average of $4.2 per kilo and exports roasted and or processed coffee at an average $31.5 per kilo. The country in 2019 exported a total of 83,819 tonnes of coffee, fetching $2.56 billion.

Compare that with Uganda which exported three times more unprocessed coffee beans - 271,800 tonnes, but earned five times less - $438.5 million. Imagine if Uganda was to add extra value by washing and roasting its coffee before export. With the right government supported marketing effort in the different coffee capitals of the world, Uganda could easily double her export earnings to a cool $877 million!

Imagine the same government-support for some of Uganda’s leading exports by 2019 revenue such as: cotton ($58.2 million), tea ($ 78 million), hides & skins ($21.3 million), maize ($78.1 million), beans ($35.7 million), cocoa ($77.6 million) and fruits & vegetables ($36.1 million), Uganda could easily be looking at $1.6 billion in increased export revenue, without doing much on the production levels. In addition to the revenue, think about the jobs and skills transfer that will be created and several other small industries that would spur as well.

And there is a very strong synergy between jobs and savings, as can be seen in the National Social Security Fund (NSSF) story. In eight years alone - from 2011 to 2019 - NSSF’s 2.3 million core members of whom less than 1 million are active, have managed to grow their savings from Shs 1.2 trillion to Shs 13 trillion! That is just about 87 per cent of all commercial bank lending (Shs 15 trillion) and 47 per cent of all commercial bank deposits (Shs 23.3 trillion) at the end of 2019.

With increased home-generated savings, interest rates will eventually crumble as well. This allowing for increased private sector consumption and growth of local industries.

Import substitution in the context of the FY2020/21 budget

It is human nature to talk more than we put into actions, but you can tell the commitment of every government to the strategies and plans by largely, how much of their money they put to their words i.e. the budget.

This is because import substitution is about the optimal allocation of scarce resources, managing the balance between supply and demand, and extracting maximum value for stakeholders, in this case, local producers.

First of all, this year’s budget theme - Stimulating the Economy to Safeguard Livelihoods, Jobs, Businesses and Industrial Recovery, speaks to the import substitution agenda.

The tax reliefs to businesses, namely the deferred payment of Corporate Income Tax or presumptive tax for corporations and small, medium enterprises (SMEs) until September 2020, defer of PAYE payments to selected sectors to, waiver of interest on accumulated tax arrears and expedited payment of outstanding VAT refunds are all welcome.

Government also plans to invest in various community irrigation projects/schemes as well as provide Shs 300 billion for agricultural inputs using NAADS e-Voucher Scheme to farmers. To reduce post-harvest losses, government is also investing in the construction of storage facilities of 42,000 metric tonnes capacity in Iganga, Isingiro, Amuru, Kalungu and Nebbi districts.

Other key measures in the budget, such as increasing import duties on goods that are produced or can be produced locally, especially agricultural products (60 per cent) and other products to 35 per cent will go a long way in propping up local enterprises.

Other measures like the Shs 1,045 billion recapitalisation of Uganda Development Bank (UDB), the provision of Shs 94 billion for FY2020/21 in credit through SACCOs and microfinance institutions and the Shs 138 billion injection into Uganda Development Corporation for public-private partnership investments is absolutely the right thing to do. We must now support execution and ensure we become part of positively shaping this agenda.

One last thing to note whereas increasing production is important, equally important is the post-production marketing and sales because this is where the cycle is completed. We need to take advantage of EAC and COMESA markets and the emerging African Continental Free Trade Area (AFTA).

It would, for example, be a good idea to have qualified marketers/sales/trade negotiators at every Ugandan embassy whose job every day is to sell Uganda’s products and services to the world. 

In the words of former US President, Barack Obama, sustainable “Change will not come if we wait for some other person or some other time. We are the ones we’ve been waiting for. We are the change that we seek.”

The author is the managing director of Uganda Breweries Limited.

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