Free zones are Uganda's best option to increase exports

According to the Bank of Uganda, the country's export value was $3822.99m in the last financial year, compared to $3962.47m recorded the financial year before. This represents a decline of about 3.52%.

With a weaker global demand due to the negative effects of the COVID-19 pandemic, the country's exports are likely to reduce further. In the recently released Monetary Policy Statement for August 2020, economic growth in the current financial year is projected to be in the range of 3.0-4.0%.

Economic growth is consequently expected to remain below the potential growth rate of 6%, until FY 2022/23. This calls for robust measures to counter the projected decline.

Although there are other development tools that support increase in exports, one of the major tools, the country has explored is the Free Zones scheme.

With the growth of international trade, economic liberalisation and relocation of manufacturing facilities in search of competitive advantage, the concept of Free Zones was born as far back as 1956 when the first globally recognised Free Zone was set up at Ireland's Shannon International Airport.

According to the Free Zones Act, 2014, Free Zones are geographic areas where raw materials and goods may be landed, handled, manufactured or reconfigured for export without being subjected to import duties.

Free Zones include Export Processing Zones and Free Port Zones.

The government has continually put in place various tools to stimulate economic growth, reduce business costs and support progress towards industrialisation.

Free Zones are a catalyst for industrialisation and value addition which earn the country more foreign exchange by negating export of raw materials in favour of processed and industrial goods.

Such a transformative shift is imperative in Uganda today, given the abundant raw materials that can be enhanced through value addition for export. This can be done by attracting both Domestic Direct Investment (DDI) and Foreign Direct Investment (FDI). The latter may be a challenge, given the disruptions in the major global economies by COVID-19.

Currently, Uganda Free Zones Authority (UFZA) has licensed developers and operators of free zones located in different districts across Uganda, such as Jinja, Wakiso, Tororo, Kasese, Ntungamo, Kalungu, Nakaseke, Buikwe, Kampala, Mukono and Mpigi, dealing in agriculture, manufacturing, textiles and garments, mineral processing, and software and digital innovation.

In FY2018/19, export earnings from free zones grew to a tune of $60.17m, from $53m recorded in the previous FY2017/18 (UFZA Annual Report, 2019).

UFZA is now focussing on Domestic Direct Investment (DDI) into the Free Zones by converting the net importers — majorly traders of goods and services to investors.

This should lead to import of machinery to produce the commodities that would otherwise be imported from China, United Arab Emirates and India, among others.

Export-oriented DDI is critical for changing the structure of Uganda's economy. The opportunity to export value added products broadens the market available to domestic producers and increases demand, leading to higher local commodity and prices.

This, in turn, permits large scale production, lowers unit costs, increases competitiveness and boosts profit margins.

Exporting also enables a country to align its production to both its comparative and competitive advantage, thereby earning more from its factor endowments. Exports also provide the much needed foreign exchange to import machinery and technology that is necessary in the short to medium term for technological upgrading.

Over time, higher revenues from exports make it easier to fund public investments (such as skills, technology development and infrastructure) to grow the country's Gross Domestic product (GDP). Exposed to competition on international markets, exporters increase their efficiency in production and marketing.

Therefore, exporting more processed products form Free Zones will enable Uganda's economy to expand, create employment and promote structural change through introduction of new products, services, production processes, and technologies resulting from exposing domestic entrepreneurs to global tastes, standards, technologies and best practices.

Writer is the executive director of Uganda Free Zones Authority (UFZA)