«Malaba Mutukula Lwakhakha May 2007 FOREWORD The Informal Cross Border Trade (ICBT) Survey is an economic survey covering unrecorded trade ...»
The policy recommendation is that deepening trade liberalization; with more appropriate national and regional trade policies will enhance the realization of a large trade potential existing between Uganda and her neighbours. Emphasis should be given to value addition and elimination of trade obstacles particularly non-tariff barriers to enhance intra-regional trade to allow smoother and efficient swift flow of goods and services.. Also, informal trade should be more organized where goods are declared under the COMESA Simplified Trade Regime (COMESA-STR) for easy compilation of statistics accruing from these transactions.
It is highly recommended that National Accounts Statistics, External Trade Statistics and the Balance of Payment Statistics should be revised to reflect these new developments. Furthermore, continuous monitoring for 12 months period to capture seasonal variations and the ever-changing trade environment is highly recommended.
1.0 INTRODUCTION The late 1980’s saw most developing countries embracing economic liberalization policies supported by the IMF, World Bank and the international donor community as a way of revamping their economies. Uganda was among the African countries that implemented most of these policies. Amongst the policies undertaken was trade liberalization which dismantled trade controls, the monopoly of the commodity marketing boards, reduced the role of government to impose farm gate prices, abolition of export duties and opened the trade sector to competition. The foreign exchange liberalization also allowed the forces of demand and supply to determine the market rates. The export sector, which was previous dominated by traditional cash crops (coffee, tea, tobacco and cotton), gave rise to emergence of non-traditional export commodities. Before the year 2000, the traditional exports were the main foreign exchange earner. However, in the past 5 years, the non-traditional exports surpassed the traditional exports in foreign exchange earnings. The drive for export diversification and reduced commodity prices in the world market for traditional exports increased further the share for non-traditional exports.
The export commodities comprise mainly of agricultural raw materials that are subject to climatic changes and price volatility in the world market. The export of raw materials undermines their competitiveness in the regional and world markets. On the other hand, the import sector is dominated by highly valued capital and consumer goods leading to unfavorable trade balance for most of the years. The expansion of the export products base coupled with strict quality control measures would greatly improve on the export earnings thereby narrowing the trade deficit.
The National Trade Policy (NTP) formulated by the Ministry of Tourism, Trade and Industry (MTTI) focuses on export-led growth and development with emphasis on value addition and creating a competitive environment for the private sector to produce and trade. The liberalized environment provides immense opportunities to both formal and informal traders to engage in international trade. The government targets trade liberalization as tool for poverty reduction that will allow exploitation of production potential and assist in optimal resource allocation that would lead to sustainable economic growth.
The informal cross border trade activities have grown in the past decade amongst the East and South African (ESA) Countries. The quest for economic survival and food security has been the main thrust behind informal (unrecorded) trade transactions among the border residents. Further more, the cumbersome documentation processes and delays involved at border points coupled with price and trade policy differences among the regional member states contribute to the growth of informal trade. Moreover, no formal monitoring system has been instituted by countries involved to study its impact on their economies. The communities spread along the territorial boundaries share a lot in common both culturally and socially. The communities speak the same or similar languages, they inter-marry and own land on either side of the borders. This alone provides an incentive to these communities to engage in informal trade to exploit available opportunities on either sides of the border.
The regional integration arrangement under COMESA and EAC adds new dimensions to intra-regional trade for unrecorded trade. The COMESA Free Trade Area (FTA) and EAC Customs Union protocol allows member states to engage in trade without barriers.
Although under EAC Customs Unions, Uganda and Tanzania are allowed to charge a small percent of 2-10% in a regressive manner on some selected products originating from Kenya, most commodities are traded at zero tax rates. This development therefore 1 encourages both formal and informal traders to participate in international trade to exploit opportunities offered under these protocols. The market opportunities available in the Southern Sudan and The Democratic Republic of Congo (DRC) have substantially increased formal and informal trade with Uganda.
For a long time, the main trading partners under formal trade are countries in the COMESA and EU regional blocs. During 2005, exports to COMESA countries accounted for 26.1 percent of total earnings, while imports from COMESA countries accounted for
36.2 percent of the imports bill. Meanwhile, exports and imports market share to EU stood at 35.8 percent and 18.8 percent respectively. Although COMESA regional bloc continues to be the main destination for Uganda’s exports, trade would further increase if the country joined the COMESA Free Trade Area (FTA). This would ensure her long-term sustainability of the regional trade share and benefit further from intra-regional interdependence.
1.1 Background to Informal Cross-Border Trade Survey
The International Trade Statistics Committee (ITSC) under the aegis of the Bank of Uganda, which comprises of Uganda Bureau of Statistics (UBOS), Ministry of Finance, Planning and Economic Development (MFPED), Uganda Revenue Authority (URA) and other stakeholders identified existing data gaps in Uganda’s international merchandise trade statistics. These gaps had partly contributed to data discrepancy for Balance of payments figures compiled by BOU using the flow of financial resources on one hand, and UBOS figures based on actual flow of goods on the other hand. The Committee acknowledged that whereas informal trade transactions were substantial, its magnitude could only be estimated. The ITSC proposed that a comprehensive study be carried out between Uganda and her neighbours to determine the composition of traded products and the magnitude of informal trade transactions. A similar study conducted by Prof.
Ackello-Ogutu along the borders of Tanzania and her neigbours, revealed that there was a lot of informal trade that took place whose contribution wasn’t recognized in the official trade statistics.
The Informal Cross-Border Trade (ICBT) Survey was designed to generate information on informal trade transactions to bridge the missing data gaps in order to improve on the coverage and completeness of external trade statistics. Previous attempts to estimate unrecorded trade by Balance of Payments (BOP) and National Accounts compilers grossly underestimated the contribution of informal cross border trade transactions to overall international merchandise trade statistics. The pilot and main survey results confirmed that the volume and value of unrecorded trade were substantial between Uganda and her neighbours. Therefore, without the unrecorded trade component, trade statistics are incomplete and could give wrong signals to policy makers and underplay the true intra-regional trade levels.
A clear distinction exists between Informal Cross Border Trade (ICBT) and Smuggling.
Informal cross-border trade refers to trade transactions that involve residents and nonresidents across the economic boundaries of two or more countries, and, are largely not recorded by customs authorities. Goods under ICBT arrangement cross territorial boundaries both in bulk and small quantities in broad daylight. Therefore, the commodities involved are easily identified and recorded. Some of the goods involved especially exports attract no duties at all. While smuggling is an illegal undertaking, which involves taking in or out goods illicitly/stealthily without paying lawful charges or duties to customs authorities. Smugglers under informal cross-border trade usually transact their business at odd hours (usually at night) in a concealed manner. Smuggled goods are mostly imports and prohibited exports under the laws of Uganda and can not be easily accessible or estimated. Sometimes smuggling under formal (official) trade takes place in form of under declaration, commodity misclassification, wrong declaration of country of 2 origin and falsification of goods. Important to note is that, the smugglers are sometimes armed with dangerous weapons that pose a serious security risk to customs authorities and security officials at the frontiers.
Under the United Nations (UN) general framework of compiling international merchandise trade statistics, all goods entering or leaving the country are recorded and included in external trade statistics, except transit goods. At the moment, the Customs Department of URA collects data for formal trade transactions using the Single Declaration Document and F88 forms submitted by clearing agents on behalf of exporters and importers.
However, all transactions involving inflow or outflow of goods under informal trade arrangement are largely unrecorded.
The need for comprehensive, reliable, consistent and complete trade statistics cannot be over emphasized. Trade information is crucial in the monitoring of the flow of resources across international boundaries and is used for compilation of Balance of Payments and National Accounts statistics worldwide. Trade information is also useful for monitoring of the performance of the trade sector and formulation of sound trade policies necessary for economic development. The information could further be used for settling trade disputes, monitoring trade agreements and for computation of import and export indices.
1.2 Statement of the problem
There exists a lot of cross-border trade amongst African countries, which remains largely unrecorded. Merchandise cross international boundaries both in bulk and small quantities without being recorded and included in the official external trade statistics. This leads to under estimation of the true levels of intra-regional trade and the Balance of Payments current account (especially the goods account), and, National Accounts statistics, which are key to computing the Gross Domestic Product (GDP) of the Country.
There were specific pertinent issues that the survey sought to address in relation to informal/unrecorded trade activities along Uganda borders with her neighbours. The questions about the composition of traded items, direction of trade, quantity and value, the net trade balance accruing from ICBT transactions, and Uganda’s position in terms of comparative and competitive advantage regionally under ICBT arrangement needed to be answered.
The main objective of ICBT Survey was to establish the magnitude of unrecorded trade between Uganda and her neighbours. However, specific objective are as outlined below as follows.
1.3.1 Specific objectives To determine the composition of commodities transacted under unrecorded trade To establish the direction of trade for transacted goods (Country of Destination/Origin);
To estimate flows in terms of values and quantities;
To provide a comparative analysis of recorded and unrecorded trade including net trade balances ;
To generate monthly and annual ICBT estimates for Balance of Payments and National Accounts compilation;
The survey covered fourteen customs stations distributed along the frontiers of all the five neighbouring countries. These were purposively selected border points that are known to have high concentration of informal trade activities, supporting government institutions (for instance immigration and revenue offices), and are accessible by road network. In the East, Malaba, Busia, Lwakhakha and Suam River stations along the Kenyan border were monitored; in the West, Bunagana, Ishasha and Mpondwe along DR Congo border were monitored; Mirama Hills and Katuna along the Rwandan border were monitored. In the Northwest, Paidha/Padea, Vurra, and Odramachaku located along DR Congo border were monitored. In the South, Mutukula along the Tanzania border and Oraba on the Sudanese border were monitored.
The information generated on informal trade transactions will improve on the coverage and completeness of external trade statistics and highlight the economic interdependence between the regional states in terms of food security. The informal trade statistics will be integrated into the BOP and National Accounts Statistics frameworks that will greatly improve on the Trade Balance and GDP estimates. The information will contribute to effective monitoring of the economy, inform decision makers and guide trade policy formulation
2.0 METHODOLOGY The techniques for data collection took into account the characteristics and prevailing habits of informal/unrecorded trade practitioners at the borders. These techniques were deemed most appropriate for the circumstances in Eastern Africa as experimented earlier in the survey carried out by Prof. Ackello-Ogutu in 1996, and, the ICBT pilot and main survey of 2003 and 2004/05 respectively.
2.1 Selection of Customs Stations for monitoring
Although the survey technical team had planned a complete enumeration (Census) to be carried out for all customs stations, it wasn’t possible due to cost implications. This necessitated the selection of some border stations purposively to yield desired results. At present, there are many customs stations that are officially gazetted with most of them having no evidence of ICBT activities taking place within their vicinity.