An Evaluation of the Implementation and Impact of the EAC Customs Union Evarist Mugisa, PhD

STUDY OBJECTIVES To establish the impact of the CU on the Partner States since its launching in 2005; Specific objectives:  to examine and assess the implementation of the CU since its establishment in 2005;  to examine its impact on the economies of the Partner States so far, and  to identify the key challenges affecting the implementation of the Customs Union.

STRUCTURE OF PRESENTATION Study objectives The Terms of Reference Methodology Main Findings Application of the CU Instruments Impacts on Trade, Revenues, Investments, etc Challenges in the implementation of the CU Awareness of the CU Efficiency of the Institutional Framework Conclusions

TERMS OF REFERENCE  Evaluate the impact of the CU in relation to: Trade performance; Revenue performance; Investment flows; Application of the main instruments of the CU; Elimination of the NTBs; Awareness of the CU by stakeholders; Information exchange between the executing agencies.  Identify the challenges in implementation of (i) above;  Propose measures to address the gaps identified in (ii);  Propose policy measures to consolidate the CU from a transitional level to a full-fledged CU;  Assess the performance of the institutional framework the implementation of the CU as prescribed under the EAC CMA

METHODOLOGY  Literature review  Interviews: Government Ministries; Customs Authorities; Private sector representatives.  Report Writing

MAIN FINDINGS

THE CUSTOMS MANAGEMENT ACT Implementation of the CMA started in January 2005 and has been successful. Challenges: The link between the coordination and monitoring roles of the Directorate of Customs vs enforcement by the national authorities are not clear; Conflicting interests at national and regional levels (promotion of trade and investment vs revenue maximisation); Appeals system not yet working properly in spite of existence of appropriate provisions under the existing laws; No instrument to guide the discretionary powers of the Commissioners of Customs in the Partner States

THE COMMON EXTERNAL TARIFF (CET) Has greatly liberalised the EAC region, (average applied tariffs have come down in all Partner States; Has enhanced predictability for exporters and investors; Has led to an increase in imports under the 3 tariff bands, especially under the 0%-tariff band. Imports under the 0-tariff band were 63.6% (Kenya), 67.9% (Uganda), and 57.3% (Tanzania) Affected trade regimes in the three countries: oIncreased tariffs for Uganda and Tanzania; oReduced tariffs for Kenya Has led to an increase in tariff dispersions (a) from one product to another, (b) across products within sectors, and (c) across stages of production.

SENSITIVE PRODUCTS Deviation from regionally agreed rates, with applicable tariffs for sensitive products varying from country to country. Such differences in rates can distort trade and encourage smuggling.

APPLICATION OF EAC ROO Limited understanding of the ROO, especially within the business community (although also among customs officials); Cases of negligence by some authorities in abiding by the manual for application of the ROO Bureaucratic delays in issuance of Certificates of Origin; No standardisation in the issue of the certificates of origin; Application of EAC ROO – if product is wholly originating (otherwise – COMESA ROO); Enforcement/implementation compromised by fraud or negligence (by businessmen and issuing authorities).

EXEMPTIONS AND REMISSIONS The value of goods which qualified for exemptions and remissions has been growing (especially for Kenya and Tanzania); Revenue forgone has also increased; There are a number of implementation challenges regarding the exemption regime: o Exemptions not categorised and harmonised with other investment incentives provided by different agencies; o Lack of an appropriate monitoring mechanism

EXEMPTIONS AND REMISSIONS

HARMONISATION & DEV-T OF EAC STANDARDS Positive developments include: oAbout 1,100 standards harmonised, pending gazetting; oCreation of a coordination office at the EAC Secretariat; oIntroduction of the SQMT Act 2006 Challenges: oLack of awareness of standards especially by the private sector (particularly, companies producing for the local markets); oLack of unanimity in application of standards; oSlow implementation of the SQMT Act (2006); oFinancial constraints; oLack of a well-informed standards programme.

NON-TARIFF BARRIERS NTBs remain a serious concern (continue to raise the cost of doing business, and to impact negatively on trade cooperation); Most common NTBS include (customs and admin. procedures, inspection requirements, police roadblocks, varying, cumbersome and costly transiting procedures, etc); Mechanism for elimination of NTBs still not working.

CHALLENGES TO THE IMPLEMENTATION OF THE CU National sovereignty; Structural rigidities; Non-tariff barriers; Language barriers; Unrecorded/ informal cross-border trade; Dispute settlement mechanism; Overlapping membership.

TRADE IMPACTS OF THE CU There has been a general increase of trade for all the three countries; Kenya – benefiting most from the regional market; Trade between Uganda and Tanzania still very low; Commodities traded: oUganda and Tz – mostly agricultural commodities oKenya – industrial goods; oRe-exports.

KENYA’S EXPORTS TO EAC 2002 – 2007

UGANDA’S EXPORTS TO THE EAC ( )

TZ TRADE WITH KENYA AND UGANDA (2003 – 2008)

OTHER TRADE IMPACTS A rise in import duty on some raw materials and inputs; Main taxes affecting trade not harmonised: VAT  18% in Uganda  16% in Kenya  Until June % in Tanzania (Now 18%) Excise duties Withholding tax, etc.  Duty drawback claims – slow, long and cumbersome.

REVENUE IMPACTS There has been an increase in revenue despite initial fears. Main factors for this were: oImprovements in economic performance; oImprovement in tax administration (e.g. simplification of tax laws and regulations, improvement in staff competencies, etc); oGrowth in trading activities; oGreater reliance on other taxes (income tax, VAT, etc) other than trade taxes (import duties).

KENYA’S TAX REVENUE PERFORMANCE (US$ MILL.)

UGANDA’S REVENUE PERFORMANCE

TANZANIA’S REVENUE PERFORMANCE

INVESTMENT IMPACTS Progress made in harmonising investment policies, incentives and laws; There are variations in minimum capital threshold requirements. Cross-border investments still low, with most of them coming from Kenya into the other EAC Partner States.

MINIMUM CAPITAL THRESHOLD FOR INVESTORS IN EAC (US $) Note: Zanzibar maintains a different approach that focuses on sectoral thresholds for investment capital per project. Thus, foreigners wishing to invest in hotels require a minimum capital of US$ 4 million, while local investors must have at least US$ 300,000. Source: EAC Secretariat, 2008.

AWARENESS OF THE CUSTOMS UNION

EFFICIENCY OF THE INSTITUTIONAL FRAMEWORK Both Directorates have endeavoured to perform according to their mandates (Pages of the report); Challenges: oMandates limited largely to coordination – not much involvement in technical issues, including research & analysis; oLack of enforcement powers; oSlow response by Partner States to proposals put forward; oSlow implementation of decisions reached regionally; oNo institutional structure to deal with policy harmonisation; oLimited personnel.

CUSTOMS ADMINISTRATIONS Efforts have been made to improve the work of the customs departments in the Partner States; Challenges o Inadequate coordination with other government agencies; o Problems of information exchange; o Fraudulent acts associated with ROOs; o Limited implementation of the customs regulations; o Variations in the ICT software used (Kenya – Simba, Uganda and Tanzania – ASYCUDA ++)

MINISTRIES (TRADE, FINANCE, JUSTICE, MEACA) Each of the ministries have a distinct role to play in supporting regional integration in the EAC; In all the Partner States, there are variations in the level of involvement and their actual capacities to do so; In some cases, the ministries have been constrained by limitations in financial resources

CONCLUSIONS The analysis shows a mixed picture – with both positive developments and challenges, arising from the implementation of the CU. The positive developments far outweigh the challenges. There are improvements in trade and revenue performance, there is predictability in the policy environment, there is confidence in the region, etc and a lot of potential is yet to be exploited. Based on the provisions of the Protocol and the objectives set out, indeed the CU has been successful. The most important features in the Protocol were the CET and the CMA, which have been implemented. There are still challenges, the most important of these include NTBs, problems with compliance among Partner States, structural problems, etc. These should be seen in the context of an ideal situation. They should be worked on.

Thank you for your attention!