What you need to know:
When fully ratified, the AfCFTA will be the largest free trade area in the world…
To generate enough jobs for one of the fastest growing populations in the world, accelerate growth in incomes and lift its population out of poverty, the Ugandan economy will need to grow rapidly, sustainably, and broadly. The country needs to unlock its growth potential by efficiently using inputs to the production process. However, like many developing countries, Uganda suffers from a small domestic market and distortions, which leads to misallocation of resources. International trade can solve many of these challenges and ultimately boost Uganda’s economic growth and development.
Although its trade flows have grown rapidly over the past decade, Uganda remains less open to import and export trade than most middle-income countries — whose ranks it aspires to join by 2040 — and its exports are still dominated by unprocessed raw materials and agricultural commodities. The total value of its trade — exports plus imports — is 36 percent of GDP, well below the 48 percent average for middle-income countries. For Uganda, greater integration into global value chains will be crucial to create jobs outside of subsistence agriculture and the informal economy. Sustained growth in trade would also increase people’s welfare by expanding options and lowering prices of consumer goods.
In the 20th edition of its Uganda Economic Update, which will be launched this Thursday, December 15, the World Bank urges the country to strengthen regional trade. Doing so offers Uganda a stepping-stone to the international arena by diversifying its markets and products, while mitigating impacts of external shocks (geopolitical tensions, financial crises and pandemics) by lessening dependence on a few trading partners. Greater intra-African trade also offers opportunities to add more value to export commodities and to leverage the potential of agribusiness to promote inclusive growth.
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Regional trade under the East African Community (EAC) and the Common Market for Eastern and Southern Africa (Comesa) has been key to the success of Uganda’s exports. Ugandan merchandise exports (excluding small-scale cross-border trade) to EAC members accounted for 46.5 percent of officially recorded exports. However, its exports to African Continental Free Trade Area (AfCFTA) countries remain the lowest in the region, underscoring the potential gains from greater intra-African trade under AfCFTA.
When fully ratified, the AfCFTA will be the largest free trade area in the world, encompassing 55 countries, 1.3 billion people, and $3.4 trillion in economic output. It has several protocols that cover services, investment, and digital trade that Uganda should embrace.
Notwithstanding the potential economies of scale, new export opportunities, access to higher levels of the value chain, and forums to improve trade facilitation, non-tariff barriers may continue to limit Uganda’s trade. These barriers include the discriminatory use of technical regulations, non-harmonised sanitary and phytosanitary requirements, and complex rules of origin. The AfCFTA stands against these barriers.
The AfCFTA seeks to enable African countries to engage more fully in regional and global value chains. Participating firms will operate in a more unified business environment across multiple countries, creating opportunities to expand their scale and increase their efficiency to levels necessary to compete with established global players. Firms will also gain experience in exporting goods and services, upgrade their management capabilities, better understand product requirements in foreign markets, and identify myriad global business opportunities.
The Country Private Sector Diagnostic, another World Bank Group study, notes that for a start, Uganda would do well to focus on growth in sectors that have significant private sector potential and can leverage demand from abroad; are labour intensive; and low skilled. The three sectors are agribusiness, which is important for productivity, employment (600,000 Ugandans join the labour market every year and the number is growing), and export growth; energy as an enabler of overall productivity; and housing because of its role in fuelling growth in the labour-intensive construction sector and alleviating the demographic pressures that rapid urbanisation puts on Ugandan cities.
To benefit fully from the AfCFTA, Uganda and its neighbours will need to take deliberate steps to overcome hurdles that have long weakened the effectiveness of existing regional arrangements, and facilitate better trade through improved logistics, transport infrastructure, addressing non-tariff barriers and avoiding border closures. The ongoing EAC MSMEs Trade Fair in Kampala, the 22nd one, is the way to go for the region. Efforts such as this build the momentum for and need to be enhanced.
Co-authoured by Mukami Kariuki, the World Bank Country Manager for Uganda & Sashana Whyteis, a senior economist.
