Kenya’s dominance of East Africa’s trade flows is being challenged by Uganda, writes Edward George at Ecobank Research.
The East Africa Community (EAC) is Sub-Saharan Africa’s most developed trade block, with the most extensive and interlinked intra-regional trade flows. Despite the fact that the EAC is a major exporter of commodities to the international market – including tea, coffee, gold, mineral ores (such as manganese and copper) and horticultural goods – intra-regional trade accounted for 16% of all trade flows in 2012, the highest for any trade block in Africa. Moreover, given the huge volumes of food, petroleum products and consumer goods traded informally across the region, the true size of intra-regional trade is likely to be much higher. Kenya has historically dominated these trade flows, by virtue of its extensive port and processing facilities in Mombasa, the key road and rail route through Nairobi into the interior and the extensive distribution network of Kenyan traders across the region. As a result, Kenya accounted for 44% of the EAC’s trade with the world in 2012, and an equally impressive 39% of intra-regional trade flows.
However, the balance is changing with the emergence of Uganda as a trade hub in its own right. Uganda is already the EAC’s second-largest intra-regional trader – accounting for 25% of flows in 2011 – and it is the leading offtaker of Kenyan exports to the EAC, worth US$872mn in 2011, more than all the other members of the EAC combined. The bulk of these goods are industrial raw materials, capital goods and consumer goods. Although Kenya remains the preferred entry point into East Africa for goods from overseas, Uganda is emerging as the principal entrepôt for distributing these goods across East and Central Africa. The country’s geographic location at the northwest corner of the EAC enables it to tap into trade flows across the region, not only drawing in flows from the coastal regions of Kenya and Tanzania, but also distributing them northwards to South Sudan and Sudan, north-east to Ethiopia, west to the DRC and south to Rwanda.
The re-export hub for Central Africa
Uganda’s role as a re-export hub is reflected in the country’s trade flows. Most of Uganda’s imports come from outside Africa – just 15% of the country’s top 12 imports were from other African countries in 2012. The vast majority of petroleum products, machinery, vehicles, electronics, iron and steel, pharmaceuticals and plastics – worth a combined US$4.4bn in 2012 – come from Europe, North America and Asia. Uganda’s few African imports consist of cement and sugar for domestic consumption, and cash crops such as coffee and tea from Central Africa which transit Uganda en route to international markets.
However, the country’s export flows paint a very different picture, with the vast majority of exports going to other countries in the sub-region. The notable exceptions are cash crops such as coffee and tea, two-thirds of which are exported to offtakers in Western Europe, frozen fish which is exported to the EU, Hong Kong and the UAE, cotton to Singapore and tobacco to Europe. But nearly all other exports are to sub-regional markets. Given that Uganda has no domestic refining capacity, all of its US$156mn worth of petroleum products exports are re-exports. This makes Uganda the largest importer and re-exporter of petroleum products in East Africa; moreover, given the level of informal trade in order to avoid taxes the true volume of Ugandan re-exports of petroleum products is probably much higher. Similarly, given the poorly developed manufacturing base, nearly all of the country’s exports of machinery, vehicles, iron and steel, cement and beverages are also re-exports. Uganda does export some of its own commodities to Africa, such as cereal, sugar and tobacco, but even these flows include large volumes of processed foods (such as flour) from Kenya and Tanzania.
Uganda’s role as a regional trade hub is reflected in its export partners, which include four African countries in the top five. The single-largest export market is Sudan which is taking an increasing share of Uganda’s robusta exports (around a third in October 2013) and which is displacing Uganda’s traditional export markets. Total volumes of exports to Sudan are greater than those for the entire EU, with which Uganda enjoys preferential access for a number of agricultural products, indicating the importance of its trade relationship with Sudan. Indeed, Sudan accounts for a third of all Ugandan exports to African markets, dwarfing those to SADC and not far behind those for the entire EAC. Kenya takes around 11% of Ugandan exports, mostly re-exports of commodities from Uganda’s regional neighbours, while the DRC and Rwanda rely heavily on Uganda for imports of food, capital and consumer goods and raw industrial materials.
However, if we strip out the geographical advantages of being a coastal country, Uganda’s competitive edge as a logistics hub becomes clear. In the World Bank’s Logistics Performance Index, which measures the effectiveness of each country’s logistics infrastructure, Uganda stands head and shoulders above its EAC peers. The country’s score of 2.82 is significantly higher than the average not just for Sub-Saharan Africa, but also for Latin America, East Asia and Pacific, and Mena.
And it is not just a question of the country having superior infrastructure, which given its landlocked status is unlikely to compete with the port complexes in Kenya and Tanzania. Rather, this score reflects Uganda’s superior customs clearance procedures, which result in quicker international shipments and timeliness of moving goods. In contrast Tanzania and Kenya score marginally above the average for Sub-Saharan Africa. Given that this average includes landlocked countries, this indicates that both countries are performing below their potential as transit hubs. As a result, Uganda exerts a dominating grip over trade flows into Central Africa, and has become the key transit point for flows of goods across the region, not just from its EAC neighbours but increasingly from its African neighbours to the north and west.
Given Uganda’s competitive advantage as a logistics hub, the country stands to be the prime beneficiary of efforts to integrate the region’s trade infrastructure and bring down trade barriers. Large-scale infrastructure projects such as the Lamu Port-South Sudan-Ethiopia transport corridor (the LAPSSET project) are initially focused on building a multi-sectoral trade corridor linking Kenya with Ethiopia and South Sudan. But this corridor is intended to be connected to Uganda’s road and rail network, which will serve as a staging post for longer-term plans to extend the rail network as far as Gabon on the Atlantic coast, creating a truly pan-African rail connection with Uganda at its centre.
As a result, Uganda will be the linchpin in facilitating trade between East and Central Africa. Trade flows between these two regions have been disrupted for many years, owing to security issues, poorly integrated transport connections and the high volume of smuggled minerals which has discouraged formal flows of food and consumer goods. This has proved a major constraint to the DRC which, despite being Sub-Saharan Africa’s largest country, has a single outlet to the sea on the Congo River, and as a result remains dependent on flows of goods from Zambia to the south and from Uganda to the east.
Uganda could prove the key to unlocking the potential of trade between East and Central Africa, helping formalise trade flows and increase volumes through new railways and roads. But in order to take full advantage of its position as a regional trade hub, Uganda must invest heavily in local processing of food, petroleum products and consumer goods in order to extract more value out of the flows that pass through the country en route to final markets in Central Africa.