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Uganda now taxes imported clothes at 35%, and local manufacturers see big opportunity

Workers at the "New Wide Garments" facility in Nairobi
Workers at the "New Wide Garments" facility in Nairobi

An executive at a textile company estimates that Uganda can raise its earnings from textiles manufacture from the current $29m per year to $600m a year if then government implements the right policies

Importers see the government’s move to increase the import duty levied on finished textile products as an attempt to drive them out of business. Uganda, like all East African Community (EAC) states, has increased the import duty in question from 25% to 35%.

The measure, policy makers say, is aimed at protecting the region’s Cotton, Textiles and Apparels (CTA) sector that is under threat from big suppliers of textile products, especially from Asia. The EAC states say the move will help enhance value addition in the textiles sector and reduce the export of cotton as raw material. This, they argue, will lead to increase in incomes derived from exporting finished cotton products and create more employment opportunities for people in the region.

The issues in the textiles sector are deep and go way back in time, and it makes sense to do a quick scan of the key factors that led to the near collapse of the sector in the region over the past decades. Some of the factors that led to trouble were self-inflicted while others were out of the region’s control.

In 2005, the Multifiber Arrangement (MFA) – an international agreement which imposed quotas on the amount of cloth and textiles developing countries could export to the developed world – came to an end. This opened up the international textiles market to intense competition, with each country fighting for market share on its own. As a result, Uganda’s textile industry faced an existential threat.

One of the immediate problems countries like Uganda faced was that there was no more allure for investors, since there was no guaranteed international market anymore. Investors who had come in from other countries, especially Asia, and had invested in East African countries to benefit from the quotas under the MFA, left and set up shop in their countries of origin where they had a comparative advantage in textiles.

The MFA had initially encouraged Chinese and Asian companies to set up shop in Africa due to the readily available raw material. But with the expiry of the MFA, the more readily labour which had more productivity, and overall lower production, transportation and handling costs made it more attractive for the textiles investors that had set up shop in countries like Uganda to relocate to their countries of origin. In any case, some of the Asian countries offered export incentives of up to 8% in some instances on textiles.

The cumulative effects of this development exposed the local textile sector, whereby leading textile manufacturers like China, Pakistan, Bangladesh and India leaped way ahead of African countries like Uganda in terms of the textile business.

Today, there is a wave of cheap textile and clothing products mainly from Asia that are a big threat to domestic textile industries in African countries because the countries were not adequately prepared to face the new challenge of doing business outside the MFA, and Uganda is no exception.

The second major development was brought about by the coming into force of the East African Community (EAC) Customs Union, coincidently on the same date the MFA expired – January 1, 2005.

The EAC adopted a three-band structure of Common External Tariff (CET) – 0-10-25. That is, 0% duty on importation of machinery and raw materials; 10% duty on yarn; and 25% on finished textile products.

At the same time, the EAC import duty for finished textile products imported into the region also stood at 25%. In other words, finished textile products made in the region were charged 25%, just like finished imported textile products that came in from Asia. This made it easy for Asian producers, who were mores established and enjoyed economies of scale, to outcompete those in Uganda and the rest of East Africa.

To counter this, the EAC has since adopted the four-band structure of 0-10-25-35, so that imported finished textile products from outside the region attract a levy of 35%.

Government intervention

In an effort to resuscitate Uganda’s textile sector, Finance Minister Matia Kasaija told Parliament in September 2020 about the government’s decision to increase import duty on imported finished textile products from the EAC’s 25% to 35% in order to protect the country’s value-adders in the textile industry. The import duty to be levied on finished imported textiles that originated out of the EAC region, Kasaija said, would be 35% of the value or $5 per kilo, whichever is higher.

Kasaija said the government aimed to support the development of value chains in sectors where the country has a comparative advantage – agro-industry, cotton, textiles etc.

This, he said, is necessary for the optimal development of a competitive textile and apparel industry in Uganda, by promoting vertically integrated textile mills that operate spinning, weaving/knitting, wet processing operations, and garmenting.

The minister revealed that at the time, only 10% of the cotton lint that was produced in the country was value-added. Put differently, if any producer would like to escape the high levy, they would be better advised to set up shop in Uganda and make use of the available cotton to produce finished textile products within the country.

That, Kasaija estimated, would result in 50,000 direct new jobs and 250,000 indirect jobs, and help generate $650 million in additional export revenues. This change, the minister said, was possible within an eight-year period.

Workers at the "New Wide Garments" facility in Nairobi

Workers at the “New Wide Garments” facility in Nairobi

Richard Mubiru, the corporate affairs director at NYTIL, a textiles company based in Jinja, is optimistic that the move the government has taken will be beneficial to the sector. Mubiru told this reporter that the new 4-band import duty structure of 0-10-25-35 will help improve matters is key in protecting the textiles sector and is in tandem with what happened in other agro sectors.

He pointed out that due to the EAC’s deliberate policy, commodities like sugar, milk and rice were prioritised, in some cases attracting import duties above 60% to counter huge agro subsidies in the developed world.

Mubiru used his own company to give an example. He said the annual turnover of NYTIL is in the region of $30 million even when NYTIL consumes only about 5% of the lint produced in the country.  On the other hand, Uganda only earned about $29 million when she exported 90% of the cotton lint, less than what NYTIL attained by processing 5% lint.

He used these figures to extrapolate that with full value addition in the textiles sector, Uganda can generate $600m in revenues and between 250,000 to 300,000 blue collar jobs, given that NYTIL currently employs 3,000 people from less than 1,000 10 years ago.

Keeping with NYTIL, Mubiru said the company intends to make a further investment of at least $30 million to enhance lint value addition, targeting to consume 30,000 bales of cotton or 20% of national lint production. But this, he said, is dependent on the government maintaining a tax regime that is predictable for investments.

Mubiru said NYTIL advances monies to ginners who do crop finance. “With the former Lint Marketing Board out of the picture, there has been no funding for cotton production. Through our partners under the Uganda Ginners and Cotton Exporters Association, NYTIL advances funds and when they harvest the product, they supply to NYTIL the product equivalent to the advanced funds.”

Today, Uganda produces 150,000 bales of cotton per year, yet in 2008, at the time of drafting the National Textile Policy, the country was producing 254,000 bales per year and it was projected that if the sector is at full employment level, it has the capacity to produce one million bales per year.

If you play in the textiles sector, there are incentives

 The government has been going on and on about value addition, and those who are involved in the business in the textiles sector, like in a number of other sectors like iron and steel, dairy and coffee, get certain exemptions and incentives from the government.

Commenting on the subject, Mubiru, whose company NYTIL takes the lion’s share of exemptions in the textiles sector, said the National Textile Policy passed in 2008 provides for the exemptions that the government offers them.

Mubiru said: “EAC member states agreed on a duty remission scheme, which allows value-adders access to inputs (raw materials) that are not readily available in their countries and the EAC. For example, if NYTIL wants to produce textile products out of a mixture of cotton which is readily available in the region, and viscose or polyester which are not available in East Africa, we have to import those two products on which we do not pay import duty because those products come in as raw materials, thus the tax exemptions. otherwise if we pay import duty on imported raw materials, the finished product will become too expensive for consumers to afford. That is why even machinery which is not made in the region comes in with 0% import duty despite the fact that they come as finished products.”

Mubiru argues in favour of the policy the government has adopted to reverse the unfettered liberalisation which it had adopted.

Says Mubiru: “Back in the day, he added, the liberalisation policy led to some mistakes, that is why we thought then that cooperatives were wrong, but today we have SACCOs. NYTIL was also privatized then, but government has realized that it was a wrong move, we have had Uganda Development Corporation (UDC) revived and recently Uganda Airlines, implying that the free-market economy as envisaged during the liberalization process has failed to fully deliver, thus the reasons we are now seeing state intervention in projects that had been divested during the privatisation exercise.”

In the final analysis, the challenges are many, but so are the prospects. Some Ugandan value-adders are slowly beginning to access the international market, but production in the sector is still largely for the local and regional markets, focused on production of suiting and uniform materials, corporate promotional wear, bed sheets, curtains, Institutional and Armed Forces uniforms and a wide range of knits and smart coarse casuals, and of late, masks and other textile requirements in the fight against COVID 19.

The sub-sector is expanding again, slowly but steadily.

Brief history of the Textile sector in Uganda

The Ugandan textile sub-sector was born in the 1950s and 60s, spearheaded by the Uganda Development Corporation (UDC), a government of Uganda holding company that worked hand in hand with international partners like the Calico Printers of the United Kingdom and YAMATO International as well as other Asian families to establish mills across Uganda.

Textile Mills, apart from the defunct Rayon Textiles in Kawempe and the Uganda Garment Industries Limited (UGIL) that were established under the above arrangement in Kampala, were located up-country near sources of either raw materials or energy. These included Nyanza Textile Industries Limited (NYTIL) in Jinja, MULCO Textiles in Jinja, African Textile Mills (ATM) in Mbale and Lira Spinning Mill in Lira. Under the auspices of UDC as the vehicle for industrialization in Uganda, a National Textile Board was established in the late 1960s to guide textile industry activity in Uganda that focused at import substitution.

 Following the Nationalisation Policy in the early 1970s when Idi Amin’s government ordered Asians to leave the country, the textile mills in Uganda were nationalised like any other investments in Uganda, marking the beginning of the sub-sector’s journey to total collapse, and by the early 1990s, the sector was on its last legs. Other factors, like the end of the Multifiber Arrangement (MFA) in 2005, just made an already bad situation worse.  

 At its peak in 1972/3, the textile industry consumed approximately 400,000 bales of cotton. By the time government owned mills were divested in the 1990s, machinery was obsolete due to a long period of disrepair and mismanagement across the board, which is why mills like NYTIL had to invest millions of dollars to modernise and upgrade equipment.

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