November 9, 2016     Leonie Staas     Economics
Uganda’s trade deficit is alarming – with imports significantly exceeding exports and recent trends not indicating any improvements. Indeed, export volumes have risen during the last couple of years in Uganda, but so have the volumes of imports. This deficit in exports is harmful to Uganda’s development, employment situation and society. How can Uganda reverse this worrying trend? And which role does the private sector play in this regard?
According to Bank of Uganda, Uganda’s external trade position is fragile, largely due to higher import growth, as export earnings remain sluggish. The trade deficit remained persistent at USD 437 Million, equivalent to 7.7 per cent of GDP in 2015/16.
However, trade is a major driver of growth, associated with increased employment opportunities and higher incomes. Therefore, exports need to be increased as means of creating jobs, stabilizing the exchange rate for better business planning and boosting the overall development of the country. So what is needed to reverse the trade deficit in Uganda? Is the current deficit a governance challenge? How can the struggling private sector be supported to be more competitive in the region and globally?
Uganda is well linked to the global economy, as can be deduced from similar trends of macro-economic indicators. Building on this observation, two key recommendations can be identified in order to boost Uganda’s exports: 1. as a means to evade global regression, Uganda needs to identify its trade niche and 2. Uganda needs to narrow its trade focus on its most dominant trading partners in order to boost exports.
These trading partners can be found in three major regions: COMESA (Common Market for Eastern and Southern Africa), the EU (European Union) and the Middle East (mainly represented in this case by the United Arab Emirates). But there is more to take into account when developing a strategy reverse Uganda’s trade deficit.
It is highly important to integrate all the small- scale farmers in Uganda when thinking about ways to boost exports. Every single farmer is a business-man, and they need to be taken into account. Small- and medium sized enterprises, especially in the agricultural sector, are the backbone of Uganda’s economy; therefore they should be where to set off from to increase exports.
In this regard, the lack of processing facilities portrays one of the central problems. In the communities, the potential of agricultural commodities is not fully maxed out, as significant parts of the crop go to waste due to insufficient equipment. Interestingly, this challenge is embedded in the context of Uganda’s linkage to the global economy: as two indices determine a country’s export revenues – the price set by the world-market and the volume of exports – Uganda’s primary strategy should be to boost the volumes of production for export products in order to affect its troubling trade balance.
Another issue related to Uganda’s trade deficit is the problem of corruption in government ministries. Significant amounts of money are being wasted by government agencies instead of being invested in, for example, more sophisticated equipment for small-scale farmers in local communities, drawing back to the topic mentioned earlier. Moreover, government generally lacks the skills and know-how of how to encourage business-growth and production. Therefore, the idea of public-private partnerships (PPPs) bears promising potential to combine funds and know-how for Uganda’s economic growth.
However, the most important step when it comes to increasing Uganda’s export volumes is the need to narrow down Uganda’s focus on a specific niche and a specific export area. Uganda’s major export products are fish and fish products, tobacco and tea, flowers, cotton and maize.
Uganda should concentrate on these products, identify them as its niche, and increase productivity and export volumes. Why reinventing the wheel when Uganda could instead gain from existing ties and networks? Therefore, Uganda should refocus export and economic activity to the biggest trading partner worldwide: COMESA, with special regard to Kenya. Existing trading relationships with COMESA indicate that basic physical infrastructure is already in place. The closest neighbors of Uganda should therefore be treated with utmost priority when it comes to export promotion.
In this regard, the East African Community (EAC) plays a significant and influential role. Even though the partnership bears a huge potential for Uganda’s economic growth, numerous tariff- as well as non-tariff-barriers continue to hold Uganda back. The EAC is the way forward, but Uganda needs to address those challenges that limit free trade within.
Leonie Staas is a student at the University of Twente and currently doing an Internship Programme at Uganda and South Sudan office of the Konrad-Adenauer-Stiftung.