Uganda's textile industry is well protected

OPINION

The National Budget Framework Paper (NBFP) for FY2020/21 laid out planned interventions for Uganda's economic transformation, consistent with Government's Macroeconomic Objectives spelt out in the Charter for Fiscal Responsibility and the Strategic Objectives of the third National Development Plan (NDPIII).

The NDPIII was published earlier this year and its main theme is "Increasing household incomes and improving the quality of life of Ugandans", under the following strategic objectives

- Enhancing value addition to the productive sectors: - agro-processing, mineral-led industrialization, oil refining, tourism development, and labor-intensive light manufacturing.

- Strengthening the private sector to create jobs;

- Consolidating and increasing the stock and quality of productive infrastructure;

- Enhancing the productivity and social wellbeing of the population: - Increasing the generation of more skilled, better motivated and healthier workforce for all sectors of the economy, but particularly for the industrial sector as well as a modernized agricultural sector; and strengthening the role of the state in guiding and facilitating development.

In light of this agenda some tax policies were put in place to achieve this vision. Until this financial year 2020/21, the East African Community Common External Tariff (EAC CET) structure provided for a maximum import duty rate of 25% on textile fabrics.

However, it was realised the duty rate of 25% was not providing the level of protection that is adequate to attract investments and add value to the cotton and create jobs and thus guarantee a market and better prices to farmers.

There was need to revise this tariff to protect the local industry and incentivise local production. Currently, Uganda produces 150,000 bales of cotton lint annually, on average, with each bale weighing 185 kgs.

According to the National Textile Policy (2009), 2.5 million Ugandans derive their livelihoods from the cotton textile and apparel value chain.  Nevertheless, it will be noted that out of the total cotton production, 10% is processed locally into finished textile products. The rest (90%) is exported as lint.

As a result, we continue to import large quantities of finished textiles and related products and lose the much needed foreign exchange. Statistics from the Bank of Uganda reveal that in 2015/16, Uganda imported textiles and related products worth $149m as compared to financial year 2018/19 when we imported products worth $231m. 

This exponential increase in the importation of textile related imports informed the decision to increase the import duty rate on textile fabrics from 25% to 35%.

With a market of 40 million Ugandans, projections show we shall be able to create a market potential of 200 million metres of textile products per annum using a per capita demand of five metres per person on average. This would translate to $500m per annum based on a conservative price of $2.5 per metre.

To be able to achieve this objective, we would need to produce 200 million metres of fabric. Uganda needs more factories to churn this amount of yarn. Current production stands at 20 million metres per annum and so the only practicable way to attract more investments in this sector is to offer adequate tariff protection.

Furthermore, with the emergence of new markets and trading blocs such as the African Continental Free Trade Area (ACFTA), Uganda needs to prepare to be self-sustaining in the garments and apparel sector to be able to tap into these preferential markets. The ACFTA alone has a potential market of 1.2 billion people. With the right incentives and the creation of a conducive business environment, Ugandan manufacturers will be able to exploit this huge market, generate over 50,000 direct jobs and 250,000 indirect jobs.

Our previous experience shows that for the sectors where we successfully provided adequate protection through higher EAC Common External Tariffs (Import duty rates), we have registered significant growth and integration of the value chains of those sectors. These include: sugar, milk, rice and other agricultural products, where Uganda has competitive advantage.

Despite this grand vision, Uganda Revenue Authority and the Ministry of Finance, Planning and Economic Development (MOFPED) are mindful of the logistical challenges caused by the COVID-19 pandemic restrictions and gave importers and dealers in textile fabrics and related products a grace period of three months. The effective date of implementation for the import duty rate of 35% or $5.0/Kg whichever is higher, on textile fabrics will be October 1, 2020.

As the sun sets on what has been a topsy-turvy year, let us be conscious not to throw the baby out with the bath water.

The writer works with Uganda Revenue Authority