President Museveni recently issued a directive banning the importation of used clothes into Uganda. This was after he had commissioned over 10 factories at the Sino-Uganda industrial park in Mbale.
The ban on such importations was issued in line with the 2017 Buy Uganda Build Uganda government policy that was launched to promote the consumption of Ugandan products. It follows a 2016 decision made by the East African Community (EAC) summit to ban used clothes in the EAC with effect from 2019.
President Museveni, whilst issuing the directive, reasoned that the importation of such articles nips the growth of domestic textile industries in the bud. The other reason, as advanced by the state minister for Privatization and Investment, Evelyne Anite, is that the ban would save Uganda a whopping ‘Shs 17 billion in the importation of socks.’
The position adopted by the Ugandan president is a justifiable act of protectionism. Protectionism is a government policy that restricts international trade in a country with an aim of helping domestic industries.
The reasoning by the president, however, sound and appealing as it is, is not conclusive and does not offer viable solutions to problems endemic to Uganda’s economy and is likely to come with certain negative repercussions.
This directive will encourage systemic smuggling. Several importers that already have their shipments in line are likely to smuggle the used clothes into the country using Uganda’s porous borders.
Reports obtained from Uganda’s revenue body indicate that the Country loses over $300,000 per day through smuggling of goods, a figure that is likely to increase as a result of this directive. This begs the question as to whether the directive was well-thought-out. According to the Kampala City Traders Association (KACITA), traders in Uganda import, on average, 250 containers of used clothes with every container contributing about $26,781 in government revenue.
This ban would close this revenue out of the reach of the taxman. Uganda will also lose out on the stringent benefits that come with having a duty-free access to the United States market under the Africa Growth and Opportunity Act.
In 2018, after Rwanda had banned the importation of second-hand clothes with a similar ambition that’s being advanced by Uganda, the United States ended its duty-free export privileges. Even though Rwanda coped up well, the same cannot be envisaged for Uganda if the United States were to end Uganda’s duty-free export privileges.
The president has over time been insistent on aiding growth of the infant textile industry. There was, however, need to look at the challenges faced by this industry and finding solutions before issuing a blanket ban on importation of used clothes as this ban can only ensure that these industries are not subjected to intense cut-throat competition from foreign suppliers of used clothes.
In as much as the president’s idea is effective on reducing cut-throat competition, there’s need for more to be done in order to effectively ensure that results of the president’s directive are achieved.
The main problem that affects the country’s local industries is the high cost of production alongside a high, corrosive taxation regime. With a high cost of production, the local textile industries will still have to increase the prices of their items in order to meet these costs. If Uganda were to achieve results from the presidential directive, there would be need to not only cut the cost of production but also provide tax subsidies to these industries.
Government can, for example, agree to pay the electricity and water bills incurred by industries that fit within a certain criterion for a period of five years. This would enable these industries to have competitive prices enjoyed by both the local and foreign market.
Government can also provide subsidies in form of exemptions and tax breaks, among others. In Rwanda, for instance, in order to encourage the growth of their textile industry, the corporate tax rate of 30% that applies to other sectors was effectively reduced to 15% for the textile sector. This offered a 50% reduction in the corporate income tax.
By doing this, Uganda would have resolved one of the endemic challenges that the country’s infant industries face. The president seemed to have been alive to this problem when, in his communication, he hinted on a 10-year tax holiday for textile industries in traditional areas in the country.
This will, however, be problematic given that recent income tax amendments that were signed into law on August 17 repealed the law that allowed for deductions of 50% of the cost base of setting up factories in areas that were outside a fifty-kilometer radius from the boundaries of Kampala and the law that provided for deductions on construction of industrial buildings.
As it stands, the president’s directive is not conclusive in absence of the above policy considerations. Once these are put in place, his intention to have growth in the textile industries would come to fruition.
The writer is an advocate of the High court.