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Manufacturers blame ill-timed tax as prices of bar soap shoot through the roof

The Uganda Bureau of Statistics says the price of bar soap has increased by over 85% since mid-2021

The prices of bar soap, other cleaning products and vegetable oil have increased exponentially as manufacturers blame an import duty that the government slapped on a vital raw material ostensibly to stimulate domestic production.

At the beginning of July 2021, while Ugandans were under lockdown imposed due to the most devastating Covid-19 pandemic wave that the country has experienced to-date, the government introduced a 10% import duty on crude palm oil (CPO), an intermediate good in the manufacture of soap and vegetable oil.

Previously, crude palm oil was zero-rated. A top executive in one of the companies that manufacture soap said the actual levy on crude palm oil is 11.5%, including the 10% import duty and1.5% infrastructure levy. The official asked not to be named for fear of antagonising the authorities.

The Covid-19 pandemic has not been declared over even though the government has eased most of the restrictions that it had imposed during the lockdowns to control the spread of the disease. To control further spread during the much freer environment that now exists, the Ministry of Health has recommended a string of measures, including consistently washing hands with soap.

It is therefore a paradox that a tax intervention that the government introduced in the middle of the pandemic is being blamed for pushing up the prices of soap. The Covid-19 pandemic has devastated economies and, according to the John Hopkins University in the US, has caused the death of 5.8 million and illness of 414 million people globally.

For most Ugandan households, soap is that long, white or blue laundry soap that is usually cut into pieces and used for handing washing, bathing, dish washing and other forms of cleaning.

Its price has since mid-2021 increased by approximately 85.7 per cent. Information from the Uganda Bureau of Statistics (UBOS) shows that a kilogram of laundry bar soap used to cost Ush3, 415 in September 2020.

A player in the oils and soaps industry says prices of laundry bar soap had for a long time remained stable, ranging between Shs3,000 and Shs3,500 a kilogram. But changes in the tax regime breached the pricing cap and prompted a rapid increase in price to as high Shs7,000 for a kilogram of laundry bar soap in some outlets in Kampala.

“The government and the people think we are profiteering. The fact is we are actually not even breaking even, when you factor in other costs,” says one manufacturer who asked not to be named. We were unable to independently verify this claim.

 

Players in the business of oils and cleaning products say that following the introduction of the 10% duty, it was no longer tenable to import and then refine crude palm oil. The manufacturers chose instead to import oilen, which is a refined version of crude palm oil.

“Pre-July 2021, processers imported crude palm oil for manufacturing oil and soap, now everyone had to shift to crude palm oilen for reasons of efficiency,” an official in the oils and soap business said.

The problem is that oilen, which is mainly imported to facilitate the manufacturing of cooking oil, does not have enough ingredients that would be used in the production of cleaning products.

The effect is that while manufacturers could produce soap using what can be considered residue from the process of manufacturing cooking oil, it is now necessary to import palm stearine and palm fatty acid to manufacture cleaning products including soap.

Crude palm oilen, stearine and fatty acids are all intermediate goods, attracting 10% duty on top of the purchase, shipping and transportation costs, but according to the manufacturers that’s a better a proposition than importing crude palm oil for conversion.

“The cost of converting crude palm oil into oilen and other by-products only makes sense if there is no import duty,” says Daniel Birungi, the Uganda Manufacturers’ Association executive director.

In effect, manufacturers say the government’s new tax not only increased the cost of making soap and cooking oil, it is also reducing the amount of value addition done in Uganda, as palm oilen, fatty acid and stearine are items that have to some extent been refined.

In addition to the import duty, the manufacturers say the prices of goods increased further because of other taxes such as the Shs200 excise duty on every litre of cooking oil, the $70 (Shs244,665) tax on each metric tonne of plastic.

The taxes on plastics affect packaging costs, and the manufacturers have to deal with taxes targeting palm oil exports by producer countries like Indonesia. There is also a problem of rising shipping costs that were occasioned by Covid-19 upsetting the global logistics industry.

“Shipping rates are up by 200% to 500%,” says one manufacturer.

Since the initial Covid-19 lockdowns ended, the logistics industry has suffered several setbacks, including a shortage of truck drivers for major economies in the West, delayed return of intermodal containers, and general longer waiting time for ships to get cleared, which in turn caused a global increase in shipping costs.

The shipping costs have also been made worse by rising fuel prices. Crude oil prices have in recent days broken decades-old records. Since Uganda is still a net importer of fuel, the manufacturers say this will remain an issue in the pricing of goods like soap and cooking oil.

The manufacturers also warn that Ugandans should expect further increases in prices in May 2022 when the government starts implementing the digital stamp tax on cooking oil. Since importation of vegetable oils for production of cooking oil previously subsidised cleaning products like laundry soap, manufacturers say that the government’s decision to target both businesses can only lead to price increases.

Connie Magomu Masaba, the project manager of the National Oil Palm Project (NOPP) in the Ministry of Agriculture, said the government introduced a 10% import tax on crude palm oil with the aim of protecting Ugandan producers of vegetable oil.

This is backed by the manufacturers who say they were told by government that the import duty on crude palm oil was intended to push investment and production of local oils through the planting of more oil palm, sunflower and soya bean.

But according to Magomu, the decision to control imports would only make sense if Uganda could wait a little, until the country can grow its palm oil production capacity.

Currently, she says Uganda produces roughly 80,000 metric tonnes of vegetable oil, half of which is palm oil. She adds that the vegetable oil produced locally is way below what the Ugandan market needs, since 350,000 metric tonnes were imported in 2020.

According to Magomu, 96% of the vegetable oil imports are of palm, suggesting it is the preferred product for the manufacturers. To reach a point where Uganda can block imports, Magomu said, the country needs to plant about 100,000 acres of vegetable oil producing crops.

The manufacturers also say that in addition to domestic production of vegetable oil being low, it is also unpredictable because some grain is exported before processing.

The manufacturers add that a lot of grain that would be processed into oil is exported to Kenya and Tanzania, and that the government would have to adopt retrogressive policies to control this practice.

But even with Uganda banning the export of grain to other East African countries, the manufacturers say overall domestic production of seed oil would be inefficient.

“Local production is expensive as yields are still low,” says one of the manufacturers.

He adds that locally grown vegetable oil plants are still more expensive than importation of palm from the Far East, meaning consumers of things like cooking oil and laundry bar soap are forced to pay expensively for goods to subsidise an area in the agriculture sector where Uganda doesn’t have a comparative advantage.

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