Assessing Implications of Trumps Tariffs on Intra East Africa’s Regional and International Trade

By Moses Kulaba, Governance and Economic Policy Centre

Effective 5th April 2025 (with a pause of 90 days) the US President Donald Trump slapped a global tariff of 10% on all exports to the US. The US tariffs has caused a lot of turbulence and uncertainty about the future of the WTO rules based global trade as we knew it. The future of EAC -US trade is unknown and during this period loses will be counted particularly in the agriculture, textiles, apparel and handcrafts sector. However, in the midst of turbulence, the EAC has an opportunity of re-inventing its intra-regional and international trade, and perhaps emerging stronger.  This policy brief analyses the implications of the US tariffs on EAC intra-regional trade and what options the member states can take.

Background on EAC -US Trade Relations and Trade Flows

The East African Community (EAC) and Sub-Saharan Africa generally have been major trading partners with the United States for decades and so far, the fastest growing markets in the world according to the International Monetary Fund.  The US has signed multiple trade agreements allowing smooth trade flows across the two regions, with the US enjoying an overwhelming trade surplus for decades. In 2008 the U.S. signed Trade and Investment Framework Agreements (TIFA) with the EAC regional economic block in 2008.

The purpose of the TIFA was to strengthen the United States-EAC trade and investment relationship, expand and diversify bilateral trade, and improve the climate for business between U.S. and East African firms. Earlier in 2000 the US had passed the African Growth Opportunity Act (AGOA), a trade preference program that allowed selected goods from EAC duty free market entrance into the United States. AGOA had helped expand and diversify African exports to the United States, while at the same time fostering an improved business environment in many African countries through the application of eligibility requirements.  In 2015, the U.S. Congress extended AGOA through 2025. 

According to the Office of US Trade Representative data the U.S. goods exports to East African Community in 2022 were $1.1 billion, up 2.0 percent ($22 million) from 2021 and up 15 percent from 2012. U.S. goods imports from East African Community totaled $1.3 billion in 2022, up 40.4 percent ($367 million) from 2021, and up 121 percent from 2012. The U.S. trade balance with East African Community shifted from a goods trade surplus of $211 million in 2021 to a goods trade deficit of $135 million in 2022[1].Although the US suffered a goods trade deficit in 2022, it has continued to enjoy trade surpluses with individual EAC member Countries as reported by the US trade Administration.

Table of US-EAC Trade flows and Surplus for 2023-2024

Country

Total Goods Trade with US 2024 (USD)

US Exports

(2024)

US Imports

(2024)

Surplus (2024)

% Increase in Surplus compared to 2023

Kenya

1.5Bln

782.5Mln

737.3Mln

45.2Mln

110 (454.6Mln)

Tanzania

778.1Mln

573.4Mln

204.7Mln

368.7Mln

45.8 (115.8Mln)

Uganda

238.9 Mln

106.3 Mln

132.6 Mln

26.3Mln

574.3 ($31.9Mln)

Rwanda

75.0Mln

44.8Mln

30.2Mln

14.5Mln

4,060 (($14.2Mln)

Democratic Republic of Congo

576.4Mln

253.3Mln

323.1Mln

69.8M

20.9 ($18.4 Mln)

Burundi

$10.4Mln

$6.6Mln

$3.7Mln

$2.9Mln

224.3 (5.2Mln)

South Sudan

$60.1Mln

$59.3 Mln

$0.8Mln

$58.5 Mln

16.0(8.1Mln)

Somalia

$51.6Mln

$49.1 Mln

$2.5 Mln

$46.6Mln

0

Source: Office of US Trade Representative data analyzed and presented by GEPC researcher

Over the years, through its trade diplomacy, the US had cemented long lasting relations paving way for other strategic economic, political and security relations, with the EAC member states including defense. With the new tariff wall, if not changed, this long-term relationship could be bound for a new trajectory.

Knock-on Effects of Tariffs

Tariffs have knock offs whose effects can trickle down the goods and services value chain in many ways, affecting both producers, exporters and consumers down the trade supply chain.

A tariff is a duty imposed by a national government, customs territory, or supranational union on imports of goods. Besides being a source of revenue, import duties can also be a form of regulation of foreign trade and policy that burden foreign products to encourage or safeguard domestic industry[1]. At their core, tariffs are simple: they raise the domestic price of imported goods. But their effects ripple through the economy in complex ways – altering prices, wages, exchange rates and trade patterns.

Simply put, a tariff is a tax on imported products. It creates a difference between the world price and the domestic price of a product. Tariffs raise the price of imported goods relative to domestic goods (good produced at home).  For example, if a US Tarif of 10% is applied on world price of coffee of USD200, the domestic price of coffee in the US market becomes USD 220 per kilogram. The government collects the difference of USD20 dollar as tariff revenue to finance other public expenditures.

Tariffs can also affect the world price of a product, particularly when they are imposed by a large economy. The logic is that higher domestic prices reduce domestic demand, which in turn lowers world demand, and thus world prices. In our example, the world price might fall to $150 after the tariff is imposed, resulting in a domestic price of $165. In this case, part of the tariff is effectively paid by foreign producers[2].

This cost-shifting creates incentives for large economies to unilaterally impose tariffs. However, this so-called optimal tariff argument overlooks the possibility of retaliation. If country A imposes tariffs on country B, country B has an incentive to respond in kind. The end result is a trade war that leaves both sides worse off[3].

With the current US tariffs, the prices of goods entering into the US market will increase by 10%. For example, the price of coffee will increase by 10% making it more expensive for Americans to afford. Similarly, the costs for other agricultural products, textiles and handcrafts will suffer the same fate. The resultant effect of this will be a low demand for these goods in the US markets affecting EAC farmers and exporters. We can further illustrate this with a simple of the effects of the tariffs on handicrafts from the EAC. 

Because of increased tariffs and a decline in demand for the Makonde carvings, the exporter of Makonde Carvings and paintings will buy less. The Makonde carver and painter in Mtwara and Mwenge will lose business and sell less. The transporter of Makonde carvings will have little business and therefore send a few trucks to collect and deliver the carvings to Dar es Salaam. The exporter will send a few containers and therefore the port handlers and clearing firms will have no business. The Makonde artist may completely close and ultimately the transporter and port handler may lay off staff. A similar experience can be the same for the Coffee producer in Uganda and Kenya, whose knock off effect of the US tariffs will trickle down the supply chain in a similar manner.

Tariffs in the Context of WTO and GATT rules

In the World Trade Organisation (WTO) rules-based system, when countries agree to open their markets for goods or services, they “bind” their commitments. A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade[1].

Under the WTO (GATTs, GAT and TRIPs agreements) international trade and commerce is run based on a rule-based system and principles. These include;

  1. Most-Favoured-Nation (MFN), which requires treating other people equally. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members[2]
  2. National Treatment of foreigners and locals equally where by imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. This also applies to services, trademarks, copyrights and patents. (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS) although there can be some variations in applications depending on an existing arrangement such as a Regional Economic block or once a product, service or item of intellectual property has entered the market can be a subject to customs duty or any other applicable duties.
  3. National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.
  4. Freer trade gradually through negotiations and reducing of trade barriers such customs duties (tariffs), import bans or quotas, selective restriction on quantities, bureaucracy and exchange rate policies.
  5. Predictability of trade through binding commitments and transparency. This encourages investment, job creation and consumers can enjoy the benefits of competition
  6. Promotion of fair competition, with an allowance of a limited. number of tariffs for limited protection, allowing thriving of domestic industry and protection against entry of harmful products.
  7. Generally, encouraging development and economic reforms aimed at increasing global trade flows and particularly allowing less developed countries to equally enjoy benefits of the global trade system.
    Tariffs as Tools for Trade Policy and Geopolitical Statecraft

    Tariffs are not universally banned from trade policy. Tariffs can be a useful tool for protecting domestic industries, generating revenue, and supporting economic development, especially in developing countries. They can equally be used as a foreign policy instrument to advance economic diplomatic ties between nations.

    According to the WTO, tariffs must not be used as weapon for trade distortion, carry the risk of increased costs for businesses and consumers, potentially stifling economic growth and competitiveness. However, the recent US Trump measures reorganize the rules on International Trade. Tariffs are now used as a political tool for advancing geopolitical and national security interests, including cajoling other trading partners and WTO member states into curving in to pressure aimed at achieving domestic political gains.

    There are contending views (including from the US Council on Foreign Relations) that according to the WTO rules, the US Trump tariffs are illegal, arbitrary, based on a wrong formular, not reciprocal, distortionary[1] and must be fought either at the WTO or through reciprocal measures taken by affected Countries. Poor application of tariffs can spark a contagion effect of tariffs wars across nations.

    EAC Response options for Trade Creation and Diversion to new markets

    To date the EAC as a regional block has remained silent while its respective member states have decided to individually not to retaliate.  Uganda’s Ministry of Finance, clearly stated that it had taken a decision not to retaliate[2].  Similar statements were made by Kenya’s Ministry of Trade[3].

    Uganda’s trade volumes with the US were small and the US was a major beneficiary of this trade relationship, enjoying a goods trade surplus, while its nationals enjoyed cheap high quality agricultural exports such as coffee, tea, fruits and handcrafts from the EAC.

    The AGOA partnership agreement was bound to expire at the end of 2025 and the US and EAC were already on the road towards negotiating new trade arrangements, if AGOA was not extended. Moreover, some Countries such as Uganda, Burundi, South Sudan and Somalia were not eligible for AGOA in 2024 due to among others sanctions imposed by the US for various reasons (including conflicts, human and political rights violations) and were already searching for markets elsewhere.

    The EAC as a regional block was pushing for increased intra-regional trade. The East African Business Council, an apex body of businesses and companies, has always been concerned with low volumes of intra EAC trade as compared to other economic regions. 

    This has been widely linked to existence of tariff and non-tariff barriers, including stringent rules of origin, Stay of Applications which allows member states to charge or exempt different tariffs on some specific goods different from the Common External Tariff, differences in taxes such VAT, Income Taxes and Exercise duties. It was further concerned with the bilateral negotiations of trade deals with third parties. The East African Business Council (EABC) advocated and has been pushing the EAC to continue negotiating the EAC-EU Economic Partnership Agreements (EPA) and the EAC-UK EPA as a region to avoid creating mistrust and distortion of the EAC Common External Tariff (CET)[4]

    The new US tariffs therefore offer the EAC and Sub-Saharan Africa region with a window of an opportunity to disconnect itself from the US markets by deepening intra-regional trade, diversifying and diverting its trade to other regions such as Africa via Africa Continental Free Trade Area (AfCFTA), the EU, the Middle East and China.

    AFCTA offers flexible rules and unfettered free access to a market population of about 1.3 billion people and a combined GDP of approximately US$ 3.4 trillion[5]. The AfCFTA aims to eliminate trade barriers and boost intra-Africa trade. In particular, it is to advance trade in value-added production across all service sectors of the African Economy[6]. There are a lot of opportunities in the AfCFTA for the Private sector in the EAC as it offers a larger and diversified market for goods and services. According to President Museveni Uganda will now focus on African markets[7]

    The EU has been a major trading partner and EU trade in goods (imports and exports) with the EAC has risen steadily comparatively to 2007 volumes[8]  In 2023 the EU trade in goods and services with the EAC region amounted to EUR106Bln. The EU trade in services amounted to EUR 5.9bln. If compared to 2022 the EU trade in goods with the EAC region reached EUR 5.7bln while imports from the EAC were EUR4.9bln. Exports in services were valued at EUR3.0Bln compared to EUR2.9 bln imported from the EAC[9]. The major exports to the EU from the East African Community are mainly coffee, cut flowers, tea, tobacco, fish and vegetables. Imports from the EU into the region are dominated by machinery and mechanical appliances, equipment and parts, vehicles and pharmaceutical products[10].  Kenya and Tanzania were the leading EU trade partners.

    China is already a major trading partner with the EAC and had surpassed the EU and the US. In 2023, China was the largest source of imports for the East African Community (EAC), with imports valued at $11 billion. The EAC’s exports to China in the same year were valued at $15.8 billion. China is closely followed by the United Arab Emirates (UAE) at US$6.4 billion in 2023[11].

    From the statistics, the EAC already enjoys a trade surplus with China. Although there are concerns over unethical business conducts, including the risk of stifling industrial growth by flooding the EAC with cheap substandard goods, China remains a huge market of about 1billion people, it is the second largest economy in the world and the largest one in RCEP with a GDP of 16,325 billion USD in 2022 (World Bank, 2023).  Chinese demand for EAC products is enormous and projected to grow.

    The EAC also has an opportunity of benefiting from arbitrage practices, whereby producers from highly US tariffed countries set up business to produce, buy, sell or reroute their products via the EAC to take advantage of the tax and price differences. In this case highly taxed countries such as China and Lesotho would be interested in setting up business in EAC.  Kenya has already made a move with President Ruto’s visit to Beijing to attract Chinese businesses to set business in Nairobi.

    Recommendations

    For this to happen, the EAC and its member states will have to

    1. Diversify, Divert and Create trade. This happens when new or existing regional economic grouping (Free Trade Areas or Customs Unions) leads to creation of new trade that never existed before or leads to shifts in trade flows from efficient nonmember exporters to non-efficient member exporters among others due to preferential tariffs charged amongst member states.
    2. Invest in processing and industrial production of agricultural products and raw materials into finished products that can be sold or consumed locally and in the new markets
    3. Address existing tariffs and non-tariff barriers to trade such as VAT, Excise duties, income taxes, bureaucracy and infrastructure which have been an obstacle to intra-regional trade.
    4. Revive old economic partnerships with the EU and explore new partnerships with the EU, South America, Middle East and China
    5. Establish linkages between the farmers and manufacturer so as to create value and sustainable supply chains of quality products for the market
    6. Address political differences, instability and conflicts affecting cordial economic cooperation and free flow of goods across EAC and African borders.

     References 

    European Commission: Trade and Security available at https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/east-african-community-eac_en

    Ralph Ossa; Views of the Chief Economist, World Trade Organisation, available at: https://www.wto.org/english/blogs_e/ce_ralph_ossa_e/blog_ro_11apr25_e.htm accessed 14 April 2025

    The New Times (May 02, 2025) available at https://www.newtimes.co.rw/article/21152/news/africa/eabcs-adrian-raphael-njau-advocates-for-stronger-eac-market

    WTO; Principles of the Trading system available at: https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm#:~:text=In%20the%20WTO%2C%20when%20countries,the%20case%20in%20developing%20countries.

    [1] https://www.cfr.org/blog/five-things-know-about-trumps-tariffs

    [2] Mr Ramadhan Ggobi , Permanent Secretary for Treasury made these remarks while addressing a press conference at the Ministry of Finance

    [3] Mr Lee Kinyanjui, PS for Trade, Kenya in an Interview with  Citizen TV available on Citizen digital via https://www.citizen.digital/news/what-it-means-for-kenya-after-us-imposes-10-export-tariff-trade-cs-kinyanjui-n360379

    [4] https://www.newtimes.co.rw/article/21152/news/africa/eabcs-adrian-raphael-njau-advocates-for-stronger-eac-market

    [5] https://au-afcfta.org/about/

    [6] ibid

    [7] https://eastleighvoice.co.ke/african%20markets/140091/museveni-says-uganda-to-focus-on-african-markets-amid-us-tariff-hike

    [8] https://www.europarl.europa.eu/RegData/etudes/BRIE/2024/766228/EPRS_BRI(2024)766228_EN.pdf

    [9] ibid

    [10] https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/east-african-community-eac_en

    [11] https://www.eac.int/trade/79-sector/trade#:~:text=China%20is%20the%20dominant%20source,US%246.4%20billion%20in%202023.

[1] ibid

[2] https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm#:~:text=In%20the%20WTO%2C%20when%20countries,the%20case%20in%20developing%20countries.

 

Webinar Series: Assessing Implications of Trumps Tariffs on Intra East Africa’s Regional and International Trade

The rules of world trade are being redefined. We are delighted to invite you to plug and join in as we explore and discuss this interesting topic on regional economic cooperation, trade and investment. 

The East African Community (EAC) and Sub-Saharan Africa generally have been major trading partners with the United States for decades and so far, the fastest growing markets in the world according to the International Monetary Fund.   Since 2001, the US has signed multiple trade agreements (including AGOA in 2001 and TIFA in 2008) allowing smooth trade flows across the two regions, with the US enjoying an overwhelming trade surplus for decades. Under AGOA EAC selected products had duty free access to US markets. US trade relations with EAC member states were booming.  For instance, in 2024 the US trade surplus with Rwanda increased more than 4000% compared to 2023.

Effective 5th April 2025 the US President Donald Trump slapped a global baseline tariff of 10% on all exports to the US. The US tariffs have caused a lot of turbulence and uncertainty about the future of the WTO rules based global trade as we know it. The future of EAC -US trade is unknown and during this period loses will be counted particularly in the agriculture, textiles, apparel and artifacts sector. However, in the midst of this turbulence, the EAC may have an opportunity of re-inventing its intra-regional and international trade, and perhaps emerging stronger by looking elsewhere. 

This webinar will enable stakeholders and the public understand the issues at play and the potentially new World Trade Order that we could moving towards. Expert speakers at this webinar will analyze the implications of the US tariffs on EAC intra-regional and international trade and what options the EAC block and member states can take.

The Governance and Economic Policy Centre (GEPC) is a regional governance and development policy organization, based in Tanzania, interested among others in promoting economic and fiscal governance, with a national and regional focus on East and Africa Great Lakes Region.

The webinar is organized as part of GEPC’s project on promoting regional economic cooperation, trade and investment implemented in collaboration with the Africa Economic Diplomatic Study Circle (AEDSC), a loose network of practicing professionals, students of economic diplomacy, international relations and development based on the African continent, working to promote Africa’s position in the global space.

Our distinguished speakers will be;

Ms McDowell Juko, Chairperson East Africa Business Network (EABN): Elsa Juko-McDowell, a native of Uganda, is a remarkable individual with a deep passion for people and business. Her journey began in 2015 when she joined the East Africa Chamber of Commerce (EACC), an 18-year organization devoted to fostering trade and investments between the United States and East Africa, currently known as the East Africa Business Network. owns multiple businesses, including real estate development, investments, and consulting ventures. Additionally, Elsa serves as a North Texas District Export Council member.  Can be reached via: info@eabn.co or chairman@eabn.co

Mr. Adrian Njau, Ag. Executive Director, East African Business Council: Adrian Njau is the Executive Director of the East African Business  Council (EABN), the apex advocacy body of private sector associations and corporates from the 7 East African Community (EAC) Partner States (Kenya, Democratic Republic of the Congo, Tanzania, Rwanda, Burundi, Uganda and South Sudan). Adrian holds a Master’s Degree in International Trade and a Bachelor’s Degree in Economics, both obtained from the University of Dar es Salaam. His academic background is complemented by professional certifications and specialized training in trade, investment, policy and regional integration from Switzerland, Singapore, and Sweden, among others. With over two decades of experience, Adrian has been instrumental in research and policy at the Chamber. Can be reached via: Email: info@eabc-online.com

Mr Robert Ssuna, International Trade and Tax Expert, Researcher and Consultant, Governance and Economic Policy Centre:  Robert is an Independent Consultant on Tax Trade and Investment. He is Chartered Economic Policy Analyst (CEPA), a Fellow of the Global Academy of Finance and Management with over 15 years of experience in economic policy analysis focusing on tax, trade, and investment at national, regional, and global levels. He is also a member of the Base Erosion Profit Shifting (BEPS) Monitoring Group. Prior to this, he served as a Supervisor Research Statistics and Policy Analysis in the Research and Planning Division of the Uganda Revenue Authority. Can be reached via: ssuunaster@gmail.com

Hon: Dr Abullah H Makame, Member of East Africa Legislative Assembly (EALA):  Dr Makame, is a distinguished member of the East African Legislative Assembly (EALA) based in Arusha, Tanzania, where he is a commissioner and a former Chairperson of the Standing Committee in Agriculture, Environment, Tourism and Natural Resources. Dr Makame has served in various senior capacities in both the Government of United Republic of Tanzania and Zanzibar; academically, his docorate is from Birmingham UK and MSc from Strathclyde – Scotland, he holds a Professional Certificate in International Trade from Adelaide and has published both locally and internationally. Dr Makame serves in various boards across the EAC region. Can be reached via email: abdullah.makame@gmail.com

Mr Moses Kulaba, Executive Director & Convenor, Governance and Economic Policy Centre: Mr Moses is a political economist, tax and economic diplomat with more than 20 years of active service in international public, private and civil society sector.  Prior to joining GEPC he served as the East Africa Regional Manager for the Natural Resources Governance Institute, where he worked with various stakeholders including governments to advance fiscal policies and governance of the extractive sector. Has served on the international board of the EITI and in consultancy roles for UN, DFID and the EU. Can be reached via : moses@gepc.or.tz or mkulaba2000@gmail.com

Webinar Date: Tuesday, 6th May, 2025

Time: 10:30AM-12:30 PM (Nairobi Time)/ 9:30AM (CAT)/ 7:30AM (GMT)

Online Participation via Google meet video link: https://meet.google.com/odd-ysgh-dtf

Tanzania’s Mining Investment Climate: Reforms that government should take to attract and retain new mining investors

According to the Ministry of Minerals, government stands ready to facilitate investor meetings and explore potential business ventures in Tanzania. However, investors operating under the current mining regime in Tanzania still face challenges which require a thorough regime review and fix, for the challenges to go.

Author:  Governance and Economic Policy Centre

Tanzania is endowed with a variety of mineral resources and has been successful in attracting large mining investments. However, over the past few years, this investment curve stagnated and has zigzaged out, as potential new investors stayed away in fear of a potentially unpredictable regulatory mining regime.  In order to attract and retain new large-scale projects, investors suggest, that pertinent reforms must be made.

This brief traces Tanzania’s mining history and from an investor perspective, shows how the country started losing the momentum and its share as a leading mining destination. It proposes some actions and reforms that could be made to reclaim its glory while at the same time achieving a win-win regime for sustainable mining and development.

Tanzania’s mining in a historical context

Mining and minerals trading has a long history in Tanzania, dating back to 18th century when Arab traders plied the Tanzanian coastal towns bringing spices from the Arabian gulf in exchange for gold, copper, iron and other minerals.  Records show that the German colonialists discovered gold in Geita and Sekenke (Singida) where the first gold mine was established in 1909.

In 1940 a Canadian Geologist Dr. John Williamson discovered the Mwadui Kimberlite pipe and established a diamond mine there.  After his death in 1958 his heirs sold the mine to De Beers (50%) and the British colonial government (50%).

In 1971 the government of Tanzania nationalised all mines.  The State Mining Corporation (STAMICO) took ownership of the Diamond mine and run it between 1974 to 1993 when years of ill maintenance took their toll to cause an urgent need of recapitalisation and equipment overhaul.  This need came at a time when the country was going through a tough economic situation that it was not possible to accommodate the need.  A decision was made to invite De Beers to the rescue. They agreed to recapitalise the company and in return acquired a 75% stake in the mine in 1994.  In 2009 DE Beers sold their 75% stake to Petra Diamonds.

Following economic troubles of the seventies, raising fuel prices, geopolitical tensions between ‘east and west’, the 1978/79 war between Tanzania and Uganda, low commodity prices for the country’s backbone agriculture produce (cotton, coffee & sisal) exports, the Tanzanian economy continued to deteriorate to the extent that the country was left with no other option but to embrace free market economic policies advocated by the Bretton Woods Institutions. 

With advice and guidance from the World Bank and IMF, Tanzania liberalised its mining sector and invited foreign investors.  This was during the 3rd phase government of H.E. Benjamin William Mkapa (RIP). The shift to free market economy and liberalised mining industry required new policies, laws and regulations.

New Mining Reforms and knock off effects

A Mineral Policy was formulated in 1997.  The policy gave way for private sector to take the lead in mineral exploration, development, mining, beneficiation and marketing.  Instead of being an active participant, the government would become the facilitator, the regulator and the administrator. This policy was complimented by the Mining Act 1998.

The Mineral Policy 1997 and accompanying Mining Act 1998 together with personal efforts by the late President Benjamin William Mkapa resulted in foreign mining investors in their multitudes flocking the country.  In a span of about eleven years (1998 – 2009) six large scale gold mines were opened.  These are:

  • Golden Pride Mine in 1998, owned by Resolute Mining Limited of Australia
  • Geita Gold Mine in 2000, owned by Anglogold Ashanti of South Africa
  • Bulyanhulu Gold Mine in 2001, owned by Barrick Gold of Canada
  • North Mara Gold Mine in 2002, owned by Sutton Resources of Canada and later the mine was acquired by Barrick Gold of Canada
  • Tulawaka Gold Mine in 2005, owned by Pangea Minerals – a wholly owned subsidiary of Barrick Gold of Canada
  • Buzwagi Gold Mine in 2009, owned by Barrick Gold

Despite the many benefits that the new mines brought, including improved balance of trade realised by increased gold exports, increased government revenue collection through import & employment taxes, the multiplier effect that was created by new business opportunities to local suppliers and contractors, there was still a public outcry that the country was not getting enough.

It deemed necessary to form various committees and task them with reviewing the country’s policy, law, regulations and public views on the mining industry and compare the findings to the practice in other African countries.  The aim was to improve the playing field to achieve a win-win situation.  Four committees were formed for the cause at different times between 2002 and 2009:

  • General (Rtd) Robert Mboma Committee in 2002
  • Kipokola Committee in 2004
  • Lau Masha Committee in 2008
  • Judge Mark Bomani (RIP) Committee in 2009

Observations and opinions collected from the various committees led to the formation of a new Mineral Policy in 2009 and enactment of the (new) Mining Act 2010.

Vision of the Mineral Policy 2009 was to attain an effective mineral sector that contributes significantly to the acceleration of socio-economic development of the country, through sustainable development and utilization of mineral resources by the year 2025.  This included attaining a GDP contribution of 10%.  Note that the GDP contribution of the mining sector was 2.7% in 2010 (BOT Annual Report June 2011). Focus of the Mineral Policy 2009 was to integrate mining with other sectors of the economy.

It’s interesting to note that:

  • After establishment of the Mining Act 2010 and its accompanying regulations, only one ‘medium scale’ gold mine was constructed – the New Luika Mine in 2012.
  • Thereafter, there have been a limited number of medium scale mines (smaller in size and production capacity than New Luika) which have been constructed, but not a single large scale mine has been built ever since.

Following the change of government in 2015, the Mining Act 2010 was further overhauled in 2017 and led to the current version of the act – Mining Act CAP 123 R.E. 2019.  This overhaul was complemented by two new acts:

  • The Natural Wealth and Resources (Permanent Sovereignty) Act, 2017
  • The Natural Wealth and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Act, 2017

The Mining Act CAP 123 R.E. 2019 introduced new clauses which imposed more control of natural resources by the government.  It banned export of mineral concentrates and put more emphasis on local refining of extracted minerals.  It revoked retention licenses and introduced new clauses to govern local content and corporate social responsibility.  The intent was to see more participation of Tanzanians in management of the foreign owned mining companies and in the value chain of the mined minerals.  Instead of exporting raw minerals the companies were required to beneficiate locally before export. The Government was also enabled by the law to acquire at least 15% un-dilutable free carried interest in Mining Licenses and Special Mining Licenses.

Key takes from the new law on ‘permanent sovereignty’ were introduction of clauses which mandated for:

  • Arbitration of commercial disputes in local courts and using Tanzanian law
  • Review by Parliament of agreements entered on natural resources
  • Local beneficiation of mined minerals
  • Retention of earnings in local banks

The ‘review and renegotiation of unconscionable terms’ act gave mandate for the Parliament to review any agreement on natural resources previously entered by the government, to be reviewed and renegotiated if the terms entered appeared to be unconscionable.

In a 2017 commentary, titled: Tanzania Overhauls Mining Laws, Fines Investor US$190 Billion: Is Your Investment Protected?  the JonesDay, a leading commercial law firm wrote; ‘The new laws heighten the government’s role and power in investment contracts, increase the costs of foreign investment, and substantially reduce investment protections, including international arbitration. Investors should take immediate action to mitigate the risks associated with the Tanzanian government’s actions pertaining to the mining industry[1]. Despite current government reassurances, to date these fears have continued to revibrate among risk averse investors, who remain uncertain of Tanzania’s future investment climate. For these laws have never been repealed.

Factors driving mining investment decisions

To put matters in context, one crucial criterion that attracts mining investors to a country is rich geology that has a scientific potential to host high grade orebodies. Tanzania is among the African countries blessed with such geology.  But to attract mining investors rich geology cannot stand on its own.  Rich geology must be complemented by:

  1. A conducive business environment
  2. A stable fiscal/mining regime
  3. Security of tenure
  4. Political stability and peace in the country
  5. Skilled artisans
  6. Good infrastructure – roads, rails, power, etc.

Over the years until in the recent past the country managed to do well in the list above on items 4 to 6.  Items 1 to 3, however, have been a challenge.

 Wins and missed opportunity

When the first large scale mine was established in 1998 at Lusu ward, Nzega district, Tanzania had a challenging road, rail and power infrastructure.  Some important mining skills were lacking.  But the country was politically stable, mining companies owning Special Mining Licenses had their fiscal issues stabilised by the Mining Development Agreements (MDA) signed with the government, there was security of tenure and a good business environment.  Over time, good progress continued to be made in some areas, but there was deterioration of circumstances in other areas as noted by  investors. 

Frequent and unilateral changes to laws and regulations led to breach of mine development agreements (MDAs).  Some concessions given to investors through the signed Mine Development Agreements were not honoured by the Tanzania Revenue Authority because they were not gazetted, and despite requests from concerned investors the Ministry of Finance avoided gazetting the MDA’s.

Significant improvement and upgrade made to road and power infrastructure; and skills development was defeated by unnecessary red tape brought about by introduction of a multiplicity of regulators who appeared to be more focused in raising revenue through hefty fines rather than providing oversite and regulating the sector.

Security of tenure was put at risk by uncontrolled gold rushes and haphazard trespassing by unlicensed artisanal miners. Investors who had invested millions of US Dollars in green field exploration witnessed invasion of their tenements by unlicensed artisanal miners with no serious intervention by authorities to rescue the situation, allowing the invasions to be politically concluded at the demise of the investor.

In summary, the current mining industry in Tanzania has been a mixed grill of successes and failures. Despite the many ups and downs over the years, several ‘wins’ have been witnessed by the sector following revision of the Mining Act CAP 123 R.E. 2019 and enactment of the laws on sovereignty in natural resources and renegotiation of unconscionable terms on agreements entered by the government on natural resources:

  • Renegotiation of the Mining Development Agreement entered between the Government of Tanzania and Barrick Gold Corporation which led to Acquisition of a 15% un-dilutable free carried stake by the Government in Barrick Gold mining projects in Tanzania (Bulyanhulu & North Mara Gold Mines) and signing of a Framework Agreement between the Government and the company.
  • Acquisition of a 15% un-dilutable free carried stake by the Government of Tanzania in the Kabanga Nickel project (Tembo Nickel Corporation).
  • Acquisition by the Tanzanian Government of a 15% un-dilutable free carried stake in the Ecograph Epanko graphite project
  • Acquisition by the Tanzanian government of a 15% un-dilutable free carried stake in the Peak Resources Ngualla REE project (through Mamba Minerals)
  • Acquisition of a 15% un-dilutable free carried stake by the Government in the Strandline Resources Heavy Minerals Sands project through Nyati Resources
  • Acquisition by the government of a 15% un-dilutable free carried stake in the Evolution Energy Chilalo Graphite project through Kudu Graphite Limited
  • Acquisition of a 20% un-dilutable free carried government stake in the Perseus Mining Nyanzaga Gold Project through Sota Mining Ltd.
  • Increased royalty collections following increase of the royalty on gold to 6% from the previous 4%
  • Increased gold revenue collections through the introduction of 1% inspection fee on gold exports
  • Construction of 3 gold refineries in Mwanza, Geita and Dodoma which have not only facilitated purchase of refined gold by the Bank of Tanzania but have also created employment opportunities to Tanzanians.
  • Enforcement of local content regulations which have in turn facilitated the participation of Tanzanians in the mines supply chain.
  • Enforcement of new local content regulations have made it possible for several Tanzanians to take over senior management positions in foreign mining companies investing in Tanzania
  • Enforcement of new CSR regulations have enabled CSR projects to be managed in a fair and transparent manner, ensuring value for money of the projects.
  • Introduction of the online Mining Cadastre system has revolutionised the licensing process by modernising it. The ‘first come first served’ approach in license application is working fine and fairly.  So long as they have all the required supporting documents in soft / electronic form, applicants are now able to lodge license applications from wherever they are in the world. They just need to be connected to the internet.
  • Significant improvements in power generation and transmission capacity have enabled connection of major mines to the national electricity grid. It was heartwarming to witness connection of the Geita Gold Mine (Anglogold Ashanti) to the national power grid.  This event shall not only save the company millions of US Dollars in energy cost, but it will also increase Tanesco’s revenue.  The Geita mine used to consume about 8 million litres of diesel every month to generate electricity using a rented thermal plant.

But, have the country now achieved a win-win situation? How is this goal going to be realised?

In the business world the investors would always want to maximise their profits and governments would always want to maximise their tax and fees collections to support socioeconomic development.  An attractive and well researched mining regime that involved stakeholder participation in its making is the only one that will manage to at least strike a delicate balance between the profits anticipated by the investors and the taxes and fees anticipated by the Government.

Obstacles that Tanzania Mining investors face

Courtesy Photo: Tanzania Minerals Minister, Anthony Mavunde speaks to stakeholders in Dar es Salaam

According to the Ministry of Minerals, government stands ready to facilitate investor meetings and explore potential business ventures in Tanzania. This unwavering commitment to attracting foreign investment underscores the nation’s dedication to unlocking the full potential of its mining sector. Tanzania Mining industry is highly important since it accounts for a significant share of the country’s export revenues. The Government plans to have this sector contribute 10% of GDP by 2025.

However, investors operating under the current mining regime in Tanzania still face challenges which require a thorough regime review and fix, for the challenges to go.

  • Several advanced mining projects including the ones in Graphite, REE, Heavy Mineral Sands and Gold have continued to struggle in raising project finance due to some clauses in different laws governing the mining sector in relation to the ownership of won minerals as well as banking of mineral sales proceeds
  • Extended negotiations on the making of framework agreements have been one area that frustrates many investors whose projects have reached that stage in their development
  • If left the way they are, some local content procurement tendering procedures have the potential to cause costly delays during the construction phase of the advanced projects
  • If left as currently reads, some wording on Section 56 of the Income Tax Act CAP 332 R.E. 2006 will end up ‘taxing’ capital of exploration companies when shareholding changes. Triggering imposition of Section 56 will cause a 30% capital gain tax on a junior exploration company when part of whose shares are acquired by another company for the intent of capitalising the junior company.  It should be noted here that exploration companies are not operating mines and instead of making money they normally burn money trying to find a mineable mineral deposit.  Trying to tax a non-trading company is weird and unheard in the mining industry.  The only way we can generate new mines to replace closed ones is by promoting exploration – not discouraging, investors say
  • The Income Tax Act CAP 332 R.E. 2006 disallows deduction of Royalty costs when calculating taxable income of a mining entity. This is a concern because no company is allowed to export minerals unless it has paid Royalty, meaning that royalty is part and parcel of the costs incurred to generate revenue of the company and should therefore be an allowable deduction

The above listed are only a few issues of concern to mining investors and something that the Government needs to have another look about or even conduct a study to see their quantitative impact in discouraging mining investment in Tanzania and what will be the impact (pro or cons) if some of the clauses will be amended to reflect investor’s proposals.

Proposed remedial actions and reforms that government should take

 There is a raft of measures that government can take. These include;

  1. Asses the current investment climate with a view to determine whether the 2017 mining reforms achieved any significant dividend to the mining sector
  2. Re-examine the current laws, particularly those passed in 2016 and 2017 to see if there are any remaining clauses that may be of concern to the mining investors. Some changes were made , however government should evaluate and see if there are any areas that need further review, without losing the core purpose of securing maximum value for Tanzania.
  3. Re-evaluate Tanzania’s mineral geology and mining potential in the current context and future mining investments trends, with a view of keeping aligned and on course to attract and retain new large-scale investors
  4. The final approach would be to form yet another task force made of representatives who are experts in the field of mining business and mining taxation, from the government and the mining private sector, to mutually consult and come up with a proposal that would attain a level play field balancing the profit anticipation of the investors and the tax and fees anticipation of the Government.

Minerals will always be a finite resource. Value can only be derived from them when they are extracted from underground and used to the benefit of the country.

The opportunity is still there to exploit minerals in Tanzania for the fair benefit of both the Government of Tanzania (on behalf of its people) and the investors. With tweaks to some of the current mining laws, bolstered with stability and government confidence building measures, the Tanzania can recapture and retain its glory as the prime mining investment destination in Africa.

While contemplating on the next move, the government should also make a thorough assessment of mark-timing mining projects – public (like the Liganga iron ore and Mchuchuma coal) and private ones (like the Kabanga Nickel, Mkuju River Uranium and Nyanzaga Gold), to see how such projects can be fast tracked and brought to production stage. With the speed at which technology is developing in the world, Tanzania faces the big risk of having some of its mineral deposit being stranded.  The coal deposits at Mchuchuma are faced with the highest risk with the current push for the world to go green and stop the use of fossil fuels.

With determination and the right people and policies at the forefront, the government can profitably and timely exploit the country’s minerals for the social economic development of its people.

[1] https://www.jonesday.com/en/insights/2017/08/tanzania-overhauls-mining-laws-fines-investor-us190-billion-is-your-investment-protected

Debt Budgets: A post budget political economy analysis of EAC Countries 2024/25 budget priorities, viabilities, risks and how governments can restore public confidence

Economists have always asserted that you know a country’s priorities from its budget while political scientists further suggest that a state and government’s health is reflected by the budget it makes and implements. In short, show us a good budget and we will show you a prosperous nation!

By Moses Kulaba, Gloria Shechambo, Robert Ssuuna, Dorine Irakoze, and Boboya James Edimond

Governance and Economic Policy Centre

@GEPC_TZ

The budget is an essential social contract that establishes the relationship between the government and its citizens, and the only one renewed annually, yet budget making in East Africa is becoming an exercise in futility.

This brief uses a political economy and trend analysis of the budget allocation priorities and estimates for 2023/4 and 2024/2025 as a basis to evaluate the extent to which East Africa Community (EAC) Countries budget policies and priorities are viable, fit into the local and global context but at the same time promote equity and reduce the economic burden on ordinary citizens.  We exposes the embedded risks, misalignments and further highlights the magnitude of the debt burden plaguing all EAC countries and its likely impact on budget viability and future macro-economic targets. We rekindle the need for an evaluation of budgeting processes in EAC, a revival of citizens participation in budgeting and repositioning the budget at the Centre for public policy. Our final conclusion is that there are malignant risks. Governments must budget better, tax wisely, address debt and strengthen public participation to revamp citizens confidence and trust in the national budget processes.

The 2024/25 Budget Context

The 2024/25 year’s budgeting was met with insurmountable obstacles and political economy pressures never anticipated before. East Africa is undergoing extreme budgetary pressures amidst a hectic political cycle. Governments are experiencing constantly, dwindling foreign aid, high indebtedness, a restless population, apathy to more taxation, ahead of a sensitive election period in many EAC Countries. The years 2024 to 2027 will be election years in Rwanda, South Sudan, Tanzania, Uganda and Kenya. 

Normally election budgets tend to be quite generous as the incumbent regimes seeking re-election avoid taking drastic measures that alarm citizens and discourage their courted voters.   The 2024/25 financial year’s budgets however came at a time of increasing economic hardships, outcries over taxation, violent tax protests, a persistent global economic slowdown and jobless growth. This complicates the budget choices that governments can take and whether the desired budget goals can be achieved.

According to the Africa Development Bank, East Africa and Africa’s is expected to record an economic growth of 3.4% in 2024[1] but we project that this growth could be staggered by a myriad of externalities such as the ongoing tax protests, conflict, climate change hazards and a general slowdown in global economic growth.

Moreover, there is increasing uncertainty about the impact of the continuing Russia-Ukraine war and an escalating and endless Israel-Palestine war on the global economy by exerting political pressures and extracting resources away from development. Besides disruptions in international trade and commerce, the wars have devastating economic impacts on EAC country’s traditional donors such as the United States, the United Kingdom and the European Union.

These traditional donors are constrained with multiple domestic political, social and economic challenges to finance at home.  There is uncertainty about foreign policy shifts. For example, the outcomes of the United States (US) Presidential election may determine a major shift in US foreign policy and therefore the future US-Africa foreign policy cannot be guaranteed.

The European Union (EU) has witnessed a resurgence in nationalistic tendencies and drastic swing to the right with increasing demands for inward looking policies to secure Europe’s future. The EU faces huge political and social challenges such as immigration to tackle. All these constrain EU budgets for external aid assistance and their continued support for Africa is jeopardized.

Faced by such unpleasant realities, EAC governments are obliged to make national budgets that can realistically be achieved, balancing economic and political targets at the same time, while reducing the economic burdens on ordinary citizens. However, a quick review of the 2024/25 national budgets passed by EAC countries indicates that this year’s budgets were a major gamble and fumble. 

Some countries such as Kenya has already failed to pass the test.  Others muddled through however their expectations look ambitious, plans misaligned, over burdened with debt. Precisely, the political and economic budgeting terrain is quite murky and tenacious and end of year collection out turns for 2024/25 financial may never be achieved.  

Yet in recent years, the budget exercise has become of less interest to ordinary citizens, viewed as quite top-down executive driven exercise, led by technocrats with less consideration of citizens views[2]. Questions are asked how can governments in the future balance between political and economic expediency, debt financing and development most significantly restore public confidence in the budget process as means of raising legitimate public money and delivering public goods. In this analysis, we explore and share commentary perspectives to answer this question and what citizens and governments can do.

Aligning EAC Budgeting to Regional and Global Context

The regional and global economic trajectory and potential outlook shows a zig zag pattern or mixed bag of hits and misses.  Globally there are signs of a general economic slowdown and inequitable growth. 

According to the OECD’s latest Economic Outlook, the global economy is continuing to growing at a modest pace, The Economic Outlook projects steady global GDP growth of 3.1% in 2024, the same as the 3.1% in 2023, followed by a slight pick-up to 3.2% in 2025[3]. The International Monetary Fund (IMF) baseline forecasts the world economy to continue growing at 3.2 percent during 2024 and 2025, at the same pace as in 2023. The IMF notes that a slight acceleration for advanced economies—where growth is expected to rise from 1.6 percent in 2023 to 1.7 percent in 2024 and 1.8 percent in 2025—will be offset by a modest slowdown in emerging market and developing economies from 4.3 percent in 2023 to 4.2 percent in both 2024 and 2025. The forecast for global growth five years from now—at 3.1 percent—is at its lowest in decades[4]. Even some spikes of growth in some insular countries such as Rwanda, Senegal and regions like Asia will not catapult the global economies to the desired targets of about 7% consistent economic growth over the next three years.

Moreover, multiple reports indicate that over 60% of Africa’s GDP is spent on debt serving and this significantly affects resources available to spend on development and real economic growth. According to the Economic Commission for Africa, the average debt-to-GDP ratio for the entire continent was projected to rise to 63.5% in 2023. The Commission warns that escalating debt levels in Africa are prompting concerns that repayment may not only constrain economic performance but could become virtually impossible for many African countries.

The AfrexExim Bank reports that Africa’s debt burden has grown significantly in the past 15 years surging by 39.3 percentage points between 2008 and 2023, resting at 68.6% of GDP in 2023[5].  At the current interest rates, less developed countries will never wean themselves off external debt and many countries defaulting in the near future is real.

The EAC governments therefore need to be extremely cautious and trend with maximum care on the economic their targets and priorities they make. The following guard rails are essential must be considered in advance planning of the budgets in the current obtaining and foreseeable context.

  • Avoid over taxation and stifling of nascent businesses by taking a precautionary facilitative approach verses ambitious revenue collection targets. Spare disposable incomes in the pockets of citizens and small business could stimulate both consumption, production and growth
  • Addressing economic stagnation, inflationary pressures and jobless growth
  • Addressing climate change and transition to clean energy by encouraging investment and financing of green businesses
  • Harnessing natural resources such as critical minerals to maximize benefits and revenues during the current and future envisaged boom
  • Weaning off the exorbitant external debt pressures and addressing persistent distortions in the global financial lending architecture
  • Designing and setting of long-term goals and tax policies which can drive politics, investment and trade into the future
  • Funding agriculture to support food security, create jobs and agriculture-based industrialization and value addition

An analysis of the budget statements indicates that these critical elements were largely missed by many governments’ economic planners. The net effect of the year’s (2024/25) budget processes is that the midterm and long-term targets in most EAC countries may never be fully gained and economic hardships could remain a persistent future moving forward.

Summary Analysis of EAC Countries Budget Priorities: A detailed Country Analysis of each is available via: xxx

Country Budget Allocation Summary Commentary
Tanzania Allocated Tsh49.35 Tln . Prioritized debt servicing (27%) and infrastructure (11%) with moderate funding of social-economic development sectors. Sectors such as Preoccupied on financing legacy infrastructure projects and continuity, missed revenue targets by 2% over the last two years raising concerns over budget sustainability. Limited citizen participation and budget reliability and credibility of have been flagged by studies and development partners under the FISCUS PEFA report 2022.
Uganda Allocated a budget of Ush72.139 Tln up from up from an initial Ush 58.34Tln (increase of Shs14.050 trillion) proposed in May 2024 and Shs 52.74 Tln in the financial year 2023/24, representing a 36% increase over the last year’s resource envelope. Debt servicing accounts for 57.8% of the total budget allocation with Human Development following at a paltry 14% A quite ambitious budget, overtaking Tanzania’s total budget allocation for the first time in history. Given the economic growth, missed revenue targets and tax protests, it is not clear how those resources will be raised. Moreover, wide spread corruption and over expenditure on political organs and projects has raised concerns, reducing credibility and interest among citizens.
Rwanda For the fiscal year 2024/25 Rwanda passed a budget of Frw 5,690.1 billion (USD4.3bln). Has prioritized Economic transformation pillar (59.6%), social transformation (26.6%) and Transformational Governance (13.8%) Despite stellar economic performance, Rwanda faces constant external threats such as the war in the neighboring DRC and a tainted image from UN accusations of Rwanda as a regional destabilizer.  Over reliance on agriculture is a risk too.
Burundi Allocated 4.4 trillion Burundi francs ($1.5 billion) in the 2024/25 representing an increase of 15% from previous years. Prioritised funding public service and agriculture. Public debt rose from 68.4% of GDP in 2022 to 72.7% in 2023.Has an international credibility issue to regain. Opportunities in Burundi’s critical minerals sector could offer a major breakthrough.
Democratic Republic of Congo (DRC) 2024 budget data is scanty, reports indicate DRC prioritized funding defense against the war in the Eastern Part of DRC and public service. Social development sectors and infrastructure are still underfunded DRC Faces serious instability in the East, and public management challenges, a debt problem. Potential from its mineral wealth but a risk of expensive resource backed loans is real
South Sudan Failed to pass the 2024/2025 national budget. In the FY 2023/2024, allocated a budget of South Sudanese Pounds2.105 trillion (USD1.32bln). Prioritized infrastructure (22%). Other social development sectors took less than 10% each. South Sudan has a huge external debt estimated at over USD $ 2,051,335,901 The government’s petroleum revenues have suffered from the ongoing conflict in Sudan, stifling its economy and ability to raise revenue. Many public servants and essential social delivery are yet to be paid. The ongoing conflict amidst reports of corruption and a huge national debt will affect the country’s future economic possibilities.
Kenya Failed to pass a budget of Ksh3.99Tln    and reverted to using the Finance Bill 2023 to raise revenue. The country has witnessed wide spread violent tax protests, forcing the government to backdown on major tax measures.  The government is under siege and not able to tax. With a bludgeoning external debt, a government under siege and restless population opposed to more taxation, Kenya’s economy is at its weakest.  Kenya was downgraded to Junk status making it more expensive to borrow and raise external capital.  A risk of an economic meltdown is real.

Risks to EAC Countries National Budget Priorities, Viability and Success

In the final Analysis we identify the following risks to the 2024/25 budgets and budgeting generally in  East Africa

Debt Risk: Huge public debt risk is real and if unchecked will literary transform EAC governments into debt collectors on behalf of their lenders. At the current rates, over 50-60% of tax collected by EAC governments in the next 2-3 years will be spent on debt servicing, effectively locking the region into a permanent cycle of debt payment and slow progress. As observed by Uganda’s legislator, Hon Semuju Nganda, “Next financial year (2024/25) Uganda will spend Shs 34 trillion (close to half) on debt servicing  and yet the country thinks it is processing a budget.” The debt risk is significant.

Political and Democracy risks.  Politics and governance in EAC are driven with political alliances and favoritism.  As governments head towards elections there is an increased risk of proposing ambitious budgets that are unviable and could be misaligned with citizens demands. Moreover, large proportions of the budget are being spent on politicians (large cabinets, large parliaments, political advisors, Governors, MCAs etc) and political enterprises such as subsiding political parties. Political parties with representation in parliament have become state enterprises funded by public resources. This is a risk

Credibility risks– The national budgets are losing credibility as statements of macroeconomic policy and social contracts between the governments and citizens. Citizens are increasingly getting detached from the budget with stronger perceptions that their views do not matter- The tendency is never to understand government incentives and plans. If unaddressed will drive constant apathy and resistance against taxation and revenue collection strangling public expenditure.

Economic growth and equity risks: Caused by among others persistent jobless growth, misaligned priorities, unfulfilled earlier economic promises, global economic slowdown and shifting economic policies that may have significant impacts on the EAC countries and region’s growth. The risk is that Budgets may not create tangible economic impacts on ordinary people.

Conflict and Distress risks- This risk is aggravated by the ongoing internal protests against taxation and civil wars such as in the ones in Somalia, Sudan, South Sudan and the DRC. The risk is that available resources will continue being channeled towards war. Further, the international conflicts such as the Ukraine-Russia war will disrupt global supply chains of essential such as grain and redefine geo-economics’ alignments affecting volumes and direction flow of supportive development linkages to the EAC Countries.

Climate Risks: Unpredictability of whether patterns affecting heavily agricultural reliant countries and economies such as Burundi, Uganda and Rwanda. Affecting food supplies and foreign revenues from agricultural sources.

Corruption and Public Management risk– Rising opulence and failure to tame corruption, place and enforce guard rails to mismanagement of public expenditure, exacerbating resistances or rebellion against taxation and budgets generally.

Forward looking, Restoring National Budget Credibility and Public Confidence

  1. Develop and pass realistic national budgets with less ambitious and white elephant projects to be funded in the next few years
  2. Leverage on existing natural resources such as critical minerals and the abundant blue economy as new levers to driver the economy further
  3. Mitigate expectations of large streams revenues from fossil-based projects such as Oil and Gas, factoring in the climate change global pressure to decarbonize and how this could impact on fossil-based revenues in the future
  4. Repurpose investment in young people (the Gen-Z) with jobs created in non-traditional fields and professions such as technology, e-commerce, content creation and redistribution of economic opportunities and wealth beyond the political class
  5. Re-channel heavy investment into agriculture, as a ‘go back to basics’of agriculture as the backbone of our economies, given its potential and ability to cushion other sectors of the economy, including providing food security and incomes to millions of citizens. Remember a hungry person will always be an angry person. Addressing agriculture and food constraints can radically address the spiraling costs of living and desperation that we are currently experiencing in the region.
  6. Tax rationally, modestly, and spend less on nugatory public finance expenditures, tame corruption and malfeasance of public resources. Clearly punish the corrupt and reward the best performers.
  7. Ramp up a global campaign against debt and reform the shylock global lending system which is designed to largely constrain and drain more resources from less developed countries. 
  8. Avoid mistakes in Tax policy and administration that we experienced this year. Be consultative, listen to the views and concerns of stakeholders with mutual respect and consideration. No one wants more demonstrations and violent tax protests next year.

 

NB: The full policy brief and individual country analysis reports for Tanzania, Uganda, Kenya, DRC, Rwanda, Burundi and South Sudan  will be published soon

 

[1] https://www.afdb.org/en/news-and-events/press-releases/41-african-countries-set-stronger-growth-2024-keeping-continent-second-fastest-growing-region-world-african-development-banks-economic-outlook-71384

[2] https://theconversation.com/kenya-protests-show-citizens-dont-trust-government-with-their-tax-money-can-ruto-make-a-meaningful-new-deal-234008

[3] https://www.oecd.org/newsroom/economic-outlook-steady-global-growth-expected-for-2024-and-2025.htm#:~:text=The%20global%20economy%20is%20continuing,up%20to%203.2%25%20in%202025.

[4] https://www.imf.org/en/Publications/WEO/Issues/2024/04/16/world-economic-outlook-april-2024

[5] https://media.afreximbank.com/afrexim/State-of-Play-of-Debt-Burden-in-Africa-2024-Debt-Dynamics-and-Mounting-Vulnerability.pdf

Political Risk and Investment in EA: An Expose of violent tax protests and political risk on Trade and Investment in East Africa

In our previous brief on Tax and Fiscal governance in East Africa, we observed that with dwindling foreign aid, it appears the governments in East Africa have resorted to squeezing everywhere to raise some dime.  We cautioned that Taxation may be good however, when the extremes are beyond reasonableness, governments are bound to break their break the back of the economies they aspire to build[1]. The recent and ongoing tax protests that have rocked the East African regions, with violence and vandalism spiraling out of control in Kenya, clearly underscore this point. A failed tax administration and an irate society.

By Moses Kulaba, Governance and Economic Policy Centre

@taxjustice @politicalrisk

Freedom of expression, the right to picket and demonstrate and resist punitive taxation has been established over the years.  The doctrine of no taxation without proper representation was long established by the Romans, Greeks and Americans during the famous Boston Tea Party 1773) and American war of independence, The French Revolution and the English, paving way into the famous Magna Carta.

This was further advanced by Adam Smith in his legendary Canons of Taxation asserting that generally, a good tax system must be underlined by proportionality and ability to pay[2] and political scientist Harold D Laswell’s tax law of who pays, what and when, and each individual or group should “pay their fair share. These principles that tax liability should be based on the taxpayer’s ability to pay is accepted in most countries as one of the bases of a socially just tax system and generally citizens are duty bound to reject a system that is regarded as unfair and disproportionally beyond their means[3].

However, when peaceful protests and demonstrations strategically drift towards violence, vandalism and murder like the ones we saw in Kenya, then these effectively transform into high level political risks to trade and investment.

According to multiple sources a political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. In simple terms, a political risk is the possibility that your business could suffer because of instability or political changes in a country: conflicts and unrest, changes in regime or government, changes in international policies or relations between countries, as well as changes that occur in a country’s policies, business laws or investment regulations[4]. Examples of political risks include; unilateral state decisions, war, terrorism, and civil unrest

By their nature, these risks are expensive to be insured against and constitute a major determinant factor for business in deciding where to invest or do business. Highly political risk countries experience sharp declines in investment and may attract low new trade and investments flows.

According to Trade and Investment experts such as Pierre Lamourelle, Deputy Global Head of Specialty Credit within Allianz Trade for Multinationals, the interconnected nature of the global economy makes it very possible that a political risk in one country may affect many businesses across the globe.

“What has changed in the 25 years since I started in this business is that we are living in a more connected world today,” says Pierre. On the upside, that means business is easier to conduct on a global scale. Almost everybody now has the ability to reach out to emerging countries or to conclude a contract and secure a sale in a foreign country.

On the downside, this means that when something goes wrong in one part of the world, you can feel the impact halfway around the globe – directly, if you are dealing with the country in question, or indirectly because of your diverse supply chain. Remember when the 20,000-ton container ship “Ever Given” got stuck in the Suez Canal in March 2021, shutting down international trade for a week?

In today’s increasingly interconnected world, “just-in-time” supply chains, global internet connection, and smartphones give SMEs the ability to conduct business in a global arena. This means the possibility for great opportunities, but also that every business is just steps away from political risk.

Persistent violent tax protests can make it difficult and unpredictable for the government to raise enough tax revenue to finance its obligations, including servicing of sovereign commitments such as paying off its debts and makes the economic environment very unpredictable. This can lead  global economic and financial institutions to flag or down grade the Country’s economic status as risky , making difficult and more expensive for the country and companies to raise external capital for investment.

Moreover, the violent protests occurred or are happening at a critical period of the year when East African Countries such as Kenya record the highest number of tourist arrivals into the Country for the summer holiday. Before the protests, national parks, hotels and beaches in Kenya’s tourist hot spots had already recorded high tourist bookings and were expecting a bumper harvest this season as the global economies and travelers rebound from the COVID 19 lock down.  Reports from multiple travel agents and hoteliers already indicate that most tourists have either cancelled or postponed their decisions to travel to Kenya and East Africa generally. Indeed, some already in the Country were gripped with fear of uncertainty and have left.

The burning image of an old plane at Uhuru Park did not send a good image either as most people around the world, unfamiliar with Kenya, thought Jomo Kenyatta International Airport was attacked and planes on the tarmac set on fire.  A recorded video clip that trended on social media of passengers crammed up at JKIA with a voice note indicating that many were fleeing the country added salt to the pinch suggesting Kenya was not safe anymore!

Similarly, travel advisories have been issued to foreigners in country and intending to travel to Kenya, to do that if it is essential and be vigilant of their security as safety during this violent period cannot be guaranteed. With all these at play, Kenya may remain a blacklisted destination among some foreign tourists for some period to come, denying the country the much-needed foreign revenue and jobs in its service sector. At least a number of high conferences that were planned for Nairobi were cancelled.

The net effects of the demonstrations therefore go beyond having the bill rejected but have long-term economic effects on Kenya’s economy. The violent Gen-Z’s may have to reconsider their approach to avoid a full economic meltdown.

Of course, there are legitimate concerns that some current established large business and investments were already not providing benefits to the young people. Multiple reports have shown that some businesses were tax dodgers while others belong to the politically connected who used their political connections to shove deals and amassing wealth on the backbone of the majority Kenyans. Moreover, given the current loopholes in the governance systems, new trade and investment opportunities would not support or create many new economic opportunities either.

However, when these arguments are advanced, it is also imperative to look at the broader picture of the net effect that violent protests can have on Kenya’s economy and future that the Gen-Z seeks to address. Kenya’s economy is extensively connected and dependent on the global economy with most global business having chosen Nairobi as a regional financial hub.  Violent demonstrations and disruption of such a magnitude can have significant long-term impacts.

With a government under siege and  constrained with a debt tinkering on the margins of default and  unrelenting rancorous youth roaming and burning the streets of Nairobi armed with negative social media, Kenya’s economy could slide into a free fall and recession, whose impacts on everyone could be far reaching.

Taxation and a strong tax system may contribute to improved governance through 3 maximum channels. Taxation establishes a fiscal social contract between citizens and the taxing state. Tax payers have a legitimate cause to expect something in return for paying taxes and are more likely to hold their governments to account. Governments have a stronger incentive to promote economic growth when they are dependent on fair taxes.

In this regard, we suggest the following;

  1. Resistance demonstrations and protests for tax rights must be expressed with limitations and restraint from both sides- The state and citizens alike
  1. Government must be rational when imposing taxes. Tax policies must be clear and predictable.  Clearly, imposing taxes on bread and blanket exemption of choppers is a sign missed priorities.
  1. Government communication apparatus must be robust enough to explain to the citizens the justifications for taxation and the political class must lead by example demonstrating frugality in public expenditure.
  1. There must be distinction between private, public and national critical infrastructure, whose destruction may or can affect Kenya’s national security interest and state existence. Lest we forget, Kenya has been a victim of terrorism and still faces extensive threats from both internal and external elements, whose interests to harm Kenya has never wavered. Attacks on its critical infrastructure exposes the Country and Kenyans further to major threats.
  1. Re-engineering of Kenya’s governance and economy to address the contemporary needs for the Gen-Z. Times have changed and the Gen-Z who now constitute an overwhelming majority will effectively from 2027 be forever a major determinant of East Africa’s political future. Women will no longer be a game changer in electoral politics and outcomes but the Gen-Z will be.
  1. There is need for both political and social sobriety. East Africa needs good leadership and peace!

[1] Tax and Fiscal Governance: Is VAT milking the broken tax cow dry? An analysis of tax trends and impacts on EAC small traders, with a case of the recent traders’ demonstrations and boycotts in Uganda:

[2] Adam Smith, in his book, The Wealth of Nations, 1776

[3] Schronharl, K,  etal; Histories of Tax Evasion , Avoidance and Resistance; https://library.oapen.org/bitstream/id/346cfc5f-6001-40e3-8a3b-fe46405df8c2/9781000823882.pdf

[4] https://www.allianz-trade.com/en_US/insights/what-is-political-risk.html#:~:text=Political%20risk%20is%20the%20possibility,country’s%20policies%2C%20business%20laws%20or

Tax and Fiscal Governance: Is VAT milking the broken tax cow dry? An analysis of tax trends and impacts on EAC small traders and citizens, with a case of the recent traders’ boycotts in Uganda

With dwindling foreign aid, it appears the governments in East Africa have resorted to squeezing everywhere to raise some dime. Taxation may be good however, when the extremes are beyond reasonableness, countries are bound to break the back of the economies they aspire to build. Could the recent demonstrations in Kampala show a mismatch of tax policy and that the tax cow may be now broken or is it a case of misunderstanding of the tax system and the dividends of taxation?

By Robert Ssuuna, Researcher, Trainer, and Consultant,

Governance and Economic Policy Centre

@ Tax policy @ Tax justice @africataxproffessionals @fiscalgovernance

KAMPALA, UGANDA – APRIL 17TH 2018.
People go about their everyday business in Kikuubo, one of Kampala’s busiest trading areas.

Recently media in Uganda has been inundated by the stand-off between the Government and traders in the Central Business District of Kampala’s Capital Uganda locally known as Kikuubo with traders choosing to close shops in protest. The protest which later spread to other cities like Jinja, Mityana, and Masaka was triggered by the implementation of the Electronic Fiscal Receipt and Invoicing System (EFRIS) by the Uganda Revenue Authority.

According to the Taxman, the solution is intended to address concerns related to Value Added Tax (VAT) fraud.  VAT is known as an indirect tax charged by businesses at each stage of the production and distribution chain up to the retail stage of goods and services. VAT was introduced in 1996 replacing the sales tax and has since proved a reliable source of revenue contributing 30% of Total Tax Revenues on average and 4.4% of GDP[1]. To understand how well the VAT regime is managed in the country we use two main metrics, these are;-

  • VAT productivity which is the VAT revenue yield to GDP divided by the nominal VAT tax rate. VAT productivity measures how much each percentage point of the standard VAT rate collects in terms of GDP as given by the following ratio.
  • VAT Productivity= VAT Revenue/ GDP (Standard VAT rate)
  • VAT C-Efficiency which measures the VAT revenue performance and overall efficiency of the VAT system in an economy. The efficiency ratio is given by VAT revenue yield to the approximated proxy (Final Consumption) divided by the VAT tax rat It follows that, if VAT compliance was perfect, actual revenue over potential revenue, would be one. C-efficiency ratio is given as:- 
  • VAT-C Efficiency = Actual VAT revenue/(Final Consumption)(Standard VAT Rate)

Where actual VAT Revenue implies Total VAT collections less VAT refunds.

Using the above indicators,  we establish that in 2023 Uganda registered VAT productivity of   22%  while the VAT C-efficiency ratio  stood at 21% way below the African averages of 27.6% and 37.8% respectively (ATO, 2023)

Lower VAT productivity and C-Efficiency ratios imply a higher difference between real and declared revenues and consequently few economic agents meet their VAT obligations.

From the simple results indicated above, one might argue that the Government is justified to institute both policy and administrative mechanisms to address the low VAT productivity and VAT C- efficiency. One such intervention is the introduction of the EFRIS.

The system manages business transactions, tracks stock movements, automatically applies VAT-inclusive taxes (which directly affect informal traders’ profits), issues precise and traceable invoices, and promptly reports sales data to the revenue authority in real time. Through automated cross-checks the URA can more effectively match buyer and seller invoices, thereby preventing taxpayers from claiming input VAT credits without corresponding reports from sellers. Theoretically, this system tackles tax evasion in two main ways: Firstly, by creating a more accurate digital trail, it enhances URA’s monitoring capabilities and raises the likelihood of detecting evasion. Secondly, by offering clearer transaction records and facilitating pre-filled tax returns, it encourages voluntary compliance by simplifying the tax filing process. So one wonders why traders and the Government fail to agree on such a solution given the associated benefits.

From the informal trader’s perspective,  EFRIS exposes them to the risk of “premature formalization,” where their tax compliance costs, including penalties for non-compliance, escalate faster than any benefits gained from their efforts to sustain themselves. Traders believe that any measure that decreases the amount of money they have to spend freely is essentially a tax.

The challenges posed by the EFRIS system stem from concerns about reduced incomes caused by lower sales due to increased prices resulting from VAT on purchases made by informal sector operators, particularly Kikubo Traders, from formal sector operators. Additionally, there’s a decrease in income from their imports. These worries are intensified by URA’s strict enforcement tactics and the looming possibility of facing full taxation scrutiny from tax authorities. Critical issues associated with EFRIS are:-

First, is the general lack of awareness among the trading community on what EFRIS is,  its objectives, benefits, and associated challenges despite URA’s investment in taxpayer education since 2021 when the solution was rolled out.  It is no surprise that some traders regard this as another tax. Some of the traders also clearly seem not aware of how the VAT mechanism operates especially the Input versus output approach.

The second factor is the mode of implementation and per-requisites for the EFRIS. Traders are worried about the costs associated with  EFRIS. These include among others, hiring accountants or at least personnel with electronic numerical literacy, purchase of software, internet, purchase of the EFRIS gadgets, etc. Although all these are allowable expenses under the Income Tax Act, in the medium term they eat into traders’ working capital. To curtail these, the EFRIS regulations prescribe penalties for non-issuance of receipts generated by EFRIS and nonuse of EFRIS gadgets. The penalties are from UGX 6,000,000 and  UGX 8,000,000 respectively ( USD1700&USD 2200).

Third, is the VAT threshold. Currently, EFRIS is a requirement for only VAT-registered taxpayers with annual gross sales of UGX 150,000,000 (USD 42000).  The initial registration threshold was set at shs.20 million, and then increased to shs.50 million in November 1996, following a strike by traders. The threshold was further increased to shs.150 million in 2015, and it was argued, that including small businesses in the tax net by setting a very low VAT registration threshold can drain the limited resources available to the tax authority for administration, and yet the revenue potential is insignificant because of the low turnover and low-value addition. This is because VAT tends to impose high compliance costs on small informal traders who generally do not have sufficient resources to keep proper records of their transactions and comply with accounting rules.

With the depreciation of the UGX against the dollar since 2015, traders argue that the VAT registration threshold should be increased at least to UGX 1Bn to reflect current economic trends. Traders are also concerned that non-VAT qualifying suppliers are being denied by large supermarkets and departmental stores if they do not prove adherence to EFRIS requirements. This locks small-scale traders out of the supply chain affecting their earnings.

Finally, we note that traders are using the demonstration on EFRIS to buttress other perennial issues affecting their operations and contributing to taxpayer apathy. These include unclear application of import duties and valuation for used clothing (a blend of advalorem and specific duties), protracted VAT refund processes, general poor public service delivery, and glaring corruption scandals by politically exposed persons.

It must however be noted that the issue of VAT has been a concern of small traders across the East African Member states. The recent Ugandan demonstrations perhaps are a manifestation of the weaknesses and challenges of Tax policy and administration across the region.VAT is generally considered a regressive tax and one whose implementation has always been a source of concern and perhaps should be evaluated. 

VAT protest trends across East Africa

A man protesting Kenya’s Finance Bill 2023 is tackled by security outside Kenya’s Parliamentary Buildings in Nairobi, June 13th 2023. Courtesy Photo-Bizina

The litany of small traders’ strikes started last year (May 2023)  in Tanzania when the traders in Kariakoo, Tanzania’s, and perhaps East, Central, and Southern Africa’s largest commercial hub locked up their shops in protest over what was considered as taxation. Among the multiple taxes and levies protested was VAT. The traders wanted this reduced to 16% among others.   This later picked momentum with strikes and protests in Kenya, when the government proposed in its 2023 Finance Bill to increase the VAT, particularly on fuel products from an earlier 8% to 16%. To date, the Kenyan business community is not happy with this increase and has been complaining that a higher VAT increases the costs of living to the citizens,  doing business in Kenya and is detrimental to Kenya’s industrialization agenda.

In its 2024 Finance Bill,  the Kenyan government has proposed to introduce VAT on bread, which is largely viewed as a staple breakfast food for Kenyans.  If the proposal sails through parliament, bread, which is currently on a list of items that are zero-rated for VAT purposes— including flour, milk, and sanitary products— will attract the 16 percent tax that will see the commodity increase by at least Sh10 for 400-gram loaf. The government argues that levying bread with VAT is necessary because its zero rating was misplaced since it benefits the middle class who shop in supermarkets rather than the targeted low-income households.

Kenyans are generally not happy with this and if it is passed there could be another round of protests from different sections of what is already considered an ‘over-taxed’ Kenyan taxpayer.

Therefore the following measures should be taken to ensure that the Governments continue to milk the cow without breaking it,

  1. Invest in Taxpayer education and awareness should be a continuous process
  2. Improve accountability for the use of taxpayer money by improving the quality of public services and apprehending the corrupt to encourage voluntary compliance.
  3. Improve tax administrative efficiencies by continuously equipping URA staff with skills and ensuring that the staff numbers are adequate to manage the tax register.
  4. When introducing new systems such as EFRIS, tax administration should invest in reasonably wider consultation and ensure the participation of all those likely to be affected by the system from the design stage.
  5. Invest in agricultural commercialization, productivity, and industrialization to ensure that the majority of the agricultural sector actors are within the money economy to broaden the tax base.
  6. The government must develop a proper Tax policy to guide taxation and predictability of tax administration

 

Forthcoming Expert Webinar on Taxation and Tax Policy in East Africa

To discuss  and dissect this further we have organised an expert webinar on this subject will be coming up on the 30th May, 2024.  Please register to attend via the links below:

Title: Tax and Fiscal Governance: Is VAT milking the broken tax cow dry? An analysis of tax trends and impacts on small traders and citizens in EAC

Date: 30th May, 2024

Time: 11:00 AM to 12:30 PM EAT/ 10AMCAT
 
Meeting ID: 857 8760 2335
Passcode: 897276

[1] Author computation based on Revenue Statistics from the URA

How EAC can benefit from its Critical or Transitional Minerals

The EAC has vast deposits of minerals critical to driving technology to support the green industrial revolution and yet the region lacks a proper framework to govern and maximize benefit from this mineral potential.  Our analysis shows that all is not lost. There is still an opportunity for the EAC to reorganize and take a share from the increasing critical or transitional minerals demand.

By Moses Kulaba, Governance and Economic Policy Center

@critical minerals @mineralsgovernance @eac 

What is the EAC’s regional problem?

Critical or transitional minerals are loosely defined as mineral commodities that have important uses to industrial technology to support the transition to a clean energy future, have no viable substitutes, yet face potential disruption in supply. These minerals include (but limited to); Graphite, Coltan, Nickel, Tungsten, Tantalum, Tin, Lithium, Manganese, Magnesium, palladium, Platinum, Beryllium, copper, fluorspar, Holmium Niobium, Rhodium, Titanium, Zinc etc. The EAC has vast deposits of some these and yet the region lacks a proper framework to govern and maximize benefit from this mineral potential.

Minerals as a national resource vs regional resource

The issue of mineral is politically sensitive. It lies at the intersection of national pride and sovereignty. Minerals are considered as a national resource whose value cannot be discussed or shared at regional level. Most countries have chosen to address mineral issues at a national level, carefully safeguarding what they consider their national interests.

Unfortunately, by taking this route, EAC mineral rich countries have exposed themselves to weaker negotiation power, and fallen easy prey to the divide and rule game played by some quick profit accumulation seeking multinational mining companies.  These mining companies take on each country as an independent jurisdiction, setting each up for competition against the other and demanding exorbitant favorable terms to invest.  The net effect is that EAC mineral rich countries have weaker negotiating powers and signed off bad deals. It is perhaps for this reasons that the EAC has selected to focus on protecting aquatic and terrestrial ecosystems such as forests and mountains in shared areas.

Raging political instability and counter accusations for harboring insurgents.  East Africa’s mineral rich regions face raging political instability, with each member states accusing the other of supporting and harboring hostile insurgent’s, violation territorial sovereignty and plundering of the abundant mineral resources.  For example, the DRC accuses Rwanda of supporting the M23 in Eastern Congo while Rwanda has constantly accused the DRC of harboring the FDRL. Similarly, Uganda’s Ailed Democratic Forces (ADF) rebels have found refuge in the DRC.  Burundi accuses Rwanda of supporting hostile rebel groups against the Burundi government. As a consequence, EAC’s mineral rich regions have failed to secure maximum economic benefits from its mineral wealth. Efforts to jointly pacify the region through a military intervention by the East Africa Regional Standby Force failed miserably with the force withdrawn at the end of 2023.

Failure to curb cross border smuggling and illicit minerals trade.  The UNCTAD data from COMTRADE and other online sources show a big difference between reported mineral exports and imports data from receiving countries. For example, in 2021 the DRC reported exporting a net weight of cobalt of 898,869 kg valued at USD 3,277,615 while China reported importing a net weight of 190032 kg valued at valued at USD92,065, 332 in the same period. The difference between the reported export value by the DRC and the reported import value by China was a whooping USD 88,784,717. There are large disparities between the DRC’s minerals trade data with Dubai and similarly Kenya’s mineral trade data with Dubai.

Yet, the vice has continued unabated. The recent arrests of fake gold traders in Nairobi’s upscale Kileleshwa suburb confirms that illicit mineral business is rife in the region. Illicit minerals are crossing borders undocumented, with cartels exploiting the weaknesses in the border control mechanisms to make shoddy deals worth millions of dollars. The arrested illegal mineral traders had fake Uganda Revenue Authority (URA) documents and stamps showing that Uganda was the source country. There are reports that DRC’s gold and coltan is smuggled through Rwanda and Uganda. Rwanda , a fairly none rich mineral country is a large mineral exporter. According to government reports, Rwanda’s annual mineral export earnings in 2023 was USD1.1billion reflecting a 43% increase from USD772bln in 2022. Clearly illegal trade is denying the EAC millions of dollars in economic benefits.

Lack of regional harmonization of the extractive sector regulatory framework. There were attempts to develop a model minerals legislation but all these efforts suffered a silent death. As expressed by one of the EAC members of parliament, Arusha has become a cemetery of good policy intentions. Good at expressing desire and slow at action and implementation.

Poor geological survey data, compared to superior data sets in possession of mineral companies. This has often tilted the negotiation power balance in favor of the companies, leading to signing off poor deals by mineral rich host countries.

What opportunities exist?

 Maximizing on current EAC partners trade in minerals and mineral based products.

According to EAC regional statistics, the trade by EAC partner states in minerals fuels, mineral oils, products of their distillation, bituminous substances and mineral waxes were the most traded with a value of USD810.7million dollars in 2022. This was followed by trade in natural or cultural pearls, precious or semi-precious stones, precious metals valued at USD588.3million. Trade in nuclear reactors, boilers, machinery and mechanical appliances thereof ranked third with a value of USD238million[1]

This therefore shows there are a raw material and there is a market for mineral based products even within the EAC.  Scaled value addition and intra trade in minerals and mineral based products to serve the existing demand can significantly boost internal regional industrialization, create jobs and economic growth

Leveraging on current and future global critical/transitional minerals demand

With a regional approach, the EAC could benefit from the rapidly expanding demand and prices for green transitional minerals. Since 2020 the global commodity prices for Nickel, Cobalt, Coltan, Lithium and Copper has been on the rise. According industry experts, such as Equity Group’s CEO, Dr James Mwangi, the demand for these minerals can only go up, and prices can only go up because of their limited supply versus the global targets to reduce emissions by 2030. It is for this reason that global consumers such as China, Australia are in the rush to secure supply chains all over the World.  Tech players such as Tesla’s Boss, Elon Musk have equally explored possibilities to establish plants in the DRC and Tanzania so as to secure the raw materials and add value at source. So far, neither the EAC nor its member states have capitalized on these interests to develop a regional road map for investments into the green or transitional minerals subsector. Elon Musk’s investment plans have not materialized.

Use critical/transitional minerals demand to forge new strategic economic relationship

According to the Carnegie foundation, the combination of key mineral endowments in African countries and U.S. objectives to reorient clean energy supply chains away from competitors like China can serve as the foundation for a new economic and strategic relationship. In 2022 the US announced its desire to re-establish a new relationship with Africa driven by trade and investment. The EAC can use its abundant critical or transitional minerals potential to negotiate new long-term relationships based on mutual economic benefits away from the traditional donor recipient approach.

Attracting investments in Energy Sector

The EAC has large opportunity for investment into its renewable energy sector. Uranium, a key fuel in nuclear plants and nuclear fission, is found in eight locations in the South Kivu and Katanga provinces in the south of DRC. Tanzania and Uganda have large deposits of Uranium. These clean energy minerals are also backed with hydropower potential of the giant inga dam and Kenya’s geothermal potential.

The EAC commits to development of the energy sector covering both renewable and non-renewable energy sources. This is aimed at facilitating the broader EAC objectives of attracting investments, competitiveness and trade for mutual benefit. Despite this, there has not been joint EAC investment attraction drive purposed towards its regional power potential.  The regional plans to develop the giant inga dam as a flagship Agenda 2023 project contributing to the towards East Africa’s power pool have remained stagnant.

What EAC member states can do

  • Abandon limited nationalistic views and pursue large economic interests, from a regional lens
  • Conduct regional mapping and improve mineral geodata sets
  • Rekindle and accomplish plans to develop regional frameworks for mineral governance
  • Facilitate regional investment campaigns profiling critical minerals and clean energy sources as tier one commodities available for investment for the EAC
  • Stop the guns and think development

What would be the benefits of acting as an EAC region

  1. Joint investment promotions and attraction of the best investors
  2. Increased negotiation power and leverage for better deals
  3. Expanded regional value additional chains and industrial projects driven by large economies of scale. According to global statistics the DRC was the largest cobalt reserve (about 3.6million metric tons yet China was the largest processor(85Mt)
  4. Increased cooperation and opportunities for lasting peace
  5. Expanded economic opportunity and benefit for citizens.

 

[1] https://eac.opendataforafrica.org/

Critical Minerals: EAC destined large critical minerals block, yet benefits remain elusive

With the DRC and Somalia on board and new coltan discoveries made in Kenya, the East Africa Community (EAC) is now destined to become one of the largest critical minerals deposits rich and source region in the world, yet maximizing value and benefits as region remains elusive.

By Moses Kulaba, Governance and Economic Policy Center

@criticalminerals @energytransition

On the 15th December 2023, the Federal Republic of Somalia became a full member of the EAC becoming the 8th country to join this economic block. With its admission following closely on the DRC in 2022, the EAC has a total population of 320 million people with a geographical size of about 5.4million sqkm straddling from the Indian Ocean coastline to the Atlantic coastline.

The EAC now boasts as one of the largest single economic block with large deposits of minerals critical for mitigating climate change by driving the green industrial revolution and transition to clean energy. There are already prospects that Ethiopia and Djibouti will be joining the EAC. If this happens the EAC’s geographical size, population and mineral wealth will expand to rival or overtake other economic regions such as the European Union.

The size of Mineral Deposits combined

According to the EAC reports, the region is endowed with a variety of minerals, including fluorspar, titanium and zirconium, gold, oil, gas, cobalt and nickel, diamonds, copper, coal and iron ore. Such mineral resources present an opportunity for development of the mining industry, which is currently underdeveloped.

Mineral Resources in EAC

Country Precious metal, Gemstones & Semi-Precious Metal Metallic Minerals Industrial minerals
Burundi Gold Tin, Nickel, copper, cobalt, niobium, coltan, vanadium, tungsten Phosphate, Peat
Kenya Gemstones, gold Lead, zircon, iron, titanium Soda ash, flour spar, salt, mica, chaum, oil, coal, diatomite, gypsum, meers, kaolin, rear earth
Rwanda Gold, gemstones Tin, tungsten, tantalum, niobium, columbium pozzolana
Tanzania Gold, diamond, gemstones, silver, PGMs Nickel, bauxite, copper, cobalt, uranium Coal, phosphate, gypsum, pozzolana, soda ash, gas
Uganda Gold, diamond Copper, tin, lead, nickel, cobalt, tungsten, uranium, niobium, tantalum, iron Gypsum, kaolin, salt, vermiculite, pozzolana, marble, soapstone, rear earth, oil
South Sudan Gold, silver Iron, copper, tungsten, zinc, chromium Oil, mica

Source: EAC Vision 2050 and South Sudan Development Strategy

With the pressure of climate change and the 4th industrial revolution driven by a few green minerals, the EAC hosts vast deposits of minerals such as coltan, nickel, tantalum, copper and others vital in driving the green technological revolution to a cleaner energy future.

The admission of the DRC to the EAC was a game changer to the region’s positioning as a global player in the critical and strategic mineral’s space.  According to multiple sources the DRC is the world’s leading producer of cobalt, used in the manufacture of batteries. It is also the world’s fourth-largest producer of copper, used in the assembly of electric cars and the infrastructure of most renewable energy sources. Lithium deposits, estimated at over 130 million tones, are also present in the southeast.

The DRC has most of the mineral ores that produce key components in making computer chips and electric vehicles, technologies that are powering the drive to the future. In a typical computer, copper and gold are key components used in making the monitor, printed circuit boards and chips. Cobalt constitutes 6.45 percent of the materials that make electric vehicle batteries while copper constitutes 25.8 percent. Jointly, copper and cobalt constitute more than a third of EV batteries.

DRC is rich in these minerals, producing 68 percent of the world’s cobalt — the largest globally — and over 1.8 million tons of copper annually. Copper is estimated to gain and maintain more value on longterm compared to other minerals.

Before the DRC and Somalia’s membership, the EAC was already a major player. According to Geological Survey of Tanzania, Tanzania has close to 24 documented critical minerals such as Nickel, Tantalum and sits on the 4th largest premium grade graphite deposits in the world. Between 2005 and 2020, there was an exploration boom relative to other minerals for Tanzania’s Critical Minerals.

Uganda has vast deposits of copper and tungsten in its south western border areas while Rwanda is one of the world’s largest producers of tin, tantalum, and tungsten (3Ts) and coltan. Burundi has copper, cobalt and nickel in 2019, Burundi produced about 2% of the world’s production of tantalum.  Kenya has vast deposits of titanium, a mineral used in the manufacturing of aircraft transportation and solar panel parts. The new discoveries of coltan announced in Embu County in 2024 adds to Kenya’s list of valuable minerals. Although the commercial volumes of the new discoveries are yet to be determined, Kenya’s announcement expands the EAC’s critical or green mineral deposit map and its role in the green energy transition. Somalia, the EAC’s new entrant has some deposits of tantalum, tin and uranium.

These minerals lie along a common geological mineral belt running from Ethiopia and South Sudan downwards across the DRC, Uganda, Kenya, Rwanda, Burundi and Tanzania into Mozambique. The combined volume of these green minerals’ deposits competitively will rival other countries like China, Australia and regions such as the Lithium triangle in Latin America.

Given the global challenges related to climate change and the potential transition to a clean future. Energy Security and Energy transition are among the hottest areas of investment. The dash to secure deposits and supply chains of minerals critical to the development of green technology is on. Many countries endowed with these minerals are seeking to create wealth based on this transition.

Despite this critical mineral resources’ wealth, the EAC has failed so far to leverage and maximize economic benefits as a single region remains elusive. The EAC’s share of global investment in this lucrative extractive sector remains small. The EAC is riddled with extractive policy fragmentation, overriding nationalistic political desires and catastrophic death of joint extractive policy and governance actions.

According to the EAC treaty, the EAC partner states have agreed to take concerted measures to foster co-operation in the joint and efficient management and sustainable utilization of natural resources within the Community. Yet the EAC has no publicly available documented comprehensive regional plan on governing or managing mineral resources. The EAC has focused on management of aquatic and terrestrial ecosystems.  Minerals are categorized as other natural resources.

By treating Minerals as a somewhat lesser regional priority, the EAC is missing out on a huge current and future economic opportunity internally and externally to drive the region to prosperity. We will discuss more about what these opportunities are and how the EAC can benefit in a separate article. Keep reading.

 

Evaluating East Africa’s economic trends and outlook 2024: What should EAC governments do to reduce further hardships?

The East Africa Community is so far the largest economic block, with 7 members states with a vast territory straddling from the Indian ocean coast to the Atlantic Coast, with a staggering population of estimated 283.7 million citizens, 4.8 million square kilometers of land area and a combined Gross Domestic Product of US$ 305.3 billion[1], the EAC region is a big silent economic giant.  As of November, the UNDP estimated the EAC had 489,766,467 million people (6% of the total world population)[2], making it one of the fastest growing regional economic blocs in the world and number 1 in Africa among subregions ranked by population. Despite this potential, the region faces multiple economic and political setbacks.

In 2023, the EAC faced significant economic meltdown, with depreciating currencies, rising costs of living and political unrests, tainting the prospects for 2024. The rising cost of fuel, high costs of transportation and production, exerted high pressure on the cost of living, with inflation hoovering above 6% and reduced the region’s economic growth to around to about 3.3% in 2023. Already, the tight economic hardship has caused general anxiety across the East Africa region and social-political unrests in some countries such as Kenya.  Governments have experienced a crunch on revenue collections and significant reductions in external aid. They have resorted increasing taxation to shelter the governments against adverse effects of depreciating shilling against the dollar and heavy costs of borrowing which have surged over the past one year.

The latest World Economic Outlook report released in October predicts that the world’s economy will remain on a downward trajectory for the rest of 2023 and 2024, with the rate of growth decelerating to 2.9 percent next year, from this year’s 3.0 percent. Although the World Bank has predicted a positive outlook for East Africa, with a projected growth of 5.7%, amongst ordinary citizens, life is difficult and questions are everywhere. Where have governments gone wrong.

The purpose of this webinar is to facilitate public discussion assessing the current economic trend and government economic performance, with a view of influencing policy priorities, and practical economic choices that governments should make now to cushion its citizen against the rising cost of living and future hardships in 2024.  During this webinar our experts will paint an economic slate of the region and the extent to which socio-economic interventions such the Parish Development Model in Uganda and heavy taxation, can be a solution to the current and future economic quagmire facing the region. Most significantly, they will try to answer whether Kenya is headed to lose its economic mantra and Tanzania could emerge as new economic giant in the region

Expert Speakers

Dr Kasirye Ibrahim, Executive Director, Economic Policy Research Centre (EPRC), Makerere University, Kampala: Uganda’s experience: Are government social interventions such as PDM working to shelter the poor and vulnerable against poverty?

Expert perspectives on Uganda’s economy, the government interventions through projects such as the PDM and a quick glimpse of what 2024 could look like and what practical measures the government should take to avert the increasing economic hardships.

 

Mr Kwame Owino, Chief Executive Officer, Institute of Economic Affairs (IEA), Kenya: Can taxation be a solution and should we expect more taxes moving forward?

Perspectives on Kenya’s economy, the government’s economic hardship interventions and a quick glimpse of what 2024 could look like. With a depreciating shilling, dwindling FDI and choking debt are we likely to see more taxation in Kenya and this gradually snowballing across East Africa? Is there a significant risk that Kenya is or could fall from its pedestal as a major economic hub in the near future?  What practical measures should the government take to avert the increasing economic hardships across the country and the East African region.

Dr Mugisha Rweyemamu, Research Fellow, Economic Social Research Foundation, ESRF-Tanzania: Could Tanzania overtake its regional peers as the new regional economic giant?

Expert perspectives on Tanzania’s economy, the government’s economic hardship interventions and a quick glimpse of what 2024 could look like. With major strides made in attracting tourism, FDI and having a significant cache of valuable Minerals such as gold and green or critical minerals such as Nickel, Tungsten etc., could Tanzania overtake its East African peers to become a major economic hub in the near future?  What practical measures should the government take to avert the increasing economic hardships across the country and the East African region.

Hon: Zittto Kabwe, Economist and President of AcT-Wazalendo Political Party, Tanzania:  What is totally wrong-Could we expect economic-political unrest amongst the youth-What should political actors do to avert a near economic catastrophe and social uprising (Azania Spring) similar to the famous Arab Spring. Is an economic inspired Azania Spring inevitable if things don’t change?

Professional perspectives on the current economic hardships and what governments could do to avert further hardships in 2024. What are governments not getting politically or fundamentally right. In some countries such as Kenya we have seen some socio-political unrests over economic times, are we likely to see this ‘Azania economic springs’ in more countries in 2024?

Moses Kulaba, Convener, Governance and Economic Policy Centre

Can the EAC escape the current global economic meltdown, evade social-economic disruptions to remain soaring above its peers as the strongest economic subregion in Africa. What political-economic choices will make it maintain a comparative and competitive advantage against the tide

 

 

 Date: Thursday, 30th November, 2023

Time:  11AM-12:30 PM EAT

Registration and participation link: https://zoom.us/j/94699182519 

Meeting ID: 946 9918 2519

Passcode:  yJC673

 

[1] https://www.eac.int/overview-of-eac

[2] https://www.worldometers.info/world-population/eastern-africa-population/

TAXING E-COMMERCE IN A RAPID EXPANDING DIGITAL ECONOMY: Managing the delicate balance between DRM, and Employment in East Africa-How do we get right?

Taxation of e-commerce is an emerging area of challenge in tax policy and administration and yet the rapidly expanding digital economy has recorded a proliferation of technological innovations in the form of online business platforms, employing hundreds of youths and women, generating millions of revenues through innovation and e-commerce in Tanzania and East Africa generally.

Many research findings consistently suggest that a deeply integrated and competitive digital market among the EAC countries alone can boost the GDP by about $2.6 billion and create up to 4.5 million new jobs[1].  In Kenya alone, the digital economy is expected to add KSh 1.4 trillion or 9.24% of the GDP to Kenya’s economy by 2025 according to the Accenture, Africa iGDP Forecast. It is one of the fastest-growing sectors in the country with Kenya leading other African countries in terms of the digital economy’s contribution to the GDP at 7.7%, followed by Morocco and South Africa at 6.82% and 6.51% respectively[2]. The online industry contributed Ksh810 billion to Kenya’s GDP (7.7%) in 2020.

Some of the major businesses driving the online industry in Kenya are E-commerce firms such as Copia and Jumia, Fintech products like MPESA, and MShwari, HealthTech platforms like Daktari Africa, and Food-delivery startups. With an emerging army or tech talent and online trading platforms, the trend is upward in all the other East African countries.

And yet online businesses and e-commerce has been found to be a conduit for tax avoidance, evasion, and thus thwarting the government’s Domestic Resource Mobilisation (DRM) efforts.

With crunching national budgets and dwindling external aid, there is a reinvigorated push for governments to ramp up DRM efforts by expanding the tax bases through targeted new sources such as e-commerce.

Clearly, given the economic context at play, suggest that taking this trajectory as a new targeted area of taxation appears to be a delicate one that should be approached with caution.  Revenues should be collected but business and employment must be created and protected. Therefore, there is a need for a balance between the government’s imperative of maximizing DRM and promoting business and job creation for tech nerds, hundreds of digital entrepreneurs, and a bulging unemployed youth.

How can we manage this balance to be met without losing the gains achieved so far, by promoting fair taxation, DRM, and business opportunities to support innovation, business entrepreneurship, employment, and livelihoods required to meet the national development goals? What advances have been made by tax bodies, challenges so far, and concerns from digital entrepreneurs?

Our distinguished speakers at this webinar will dissect this subject with the purpose of creating a space for sensitization and public dialogue with key stakeholders such as Tax authorities and practitioners, private sector and digital entrepreneurs, Financial institutions, Civil Society Organizations, Africa’s economic diplomats, Government Officials and Agencies, development partners, and other interest groups.

They will help us understand the challenges facing this new area of taxation, including tax evasion, avoidance by transboundary online multinationals, and how the governments have integrated fiscal regimes in this year’s National budgets but significantly how do we get it right moving forward?

Our distinguished speakers will be:

1. Ms. Edna Gitachu,  Associate Director and Tax Policy Lead, PWC, Kenya: Budgets of Tough Times; An expert overview of digital taxation in Kenya’s National Budget 2023/24 and practical recommendations of fiscal measures that East African governments could take.

 

2. Ms. Leah Karunde, Tax Expert and Consultant, Tanzania:  Taxing the Invisible Red Hering: Practical Experiences in tackling online businesses and works of art such as television content, online content, marketing, sports betting, transportation, music, etc.

 

 

3. Mr. Francis Kairu, Policy Advisor, Tax Justice Network Africa; The Buffalo in the tent:  Tackling Tax avoidance, evasion, and illicit financial flows by Online Multinationals through e-commerce

 

 

4. Moses Kulaba, Convenor

Date and Time:  Wednesday, July 19, 2023 12:00 PM Nairobi , 11 AM CET and 9AM West Africa Time

Meeting ID: 99027631281   Personal Meeting ID: 321 806 9582

Pass Code:

Registration Link: https://zoom.us/j/99027631281

 

[1] https://www.trademarkafrica.com/news/east-africas-need-for-a-unified-digital-economy/

[2] https://kenyanwallstreet.com/kenya-to-earn-ksh-1-4-trillion-from-digital-economy-by-2025/