Indian exporters require a strategy to tap the East African market

Prof. A.K. Sen Gupta | The Dollar Business

The realisation of a large regional economic bloc with a combined population of more than 141.1 million people, land area of 1.82 million sq.km and a combined Gross Domestic Product of $99.8 billion, bears great strategic and geopolitical significance and prospects of a renewed and reinvigorated East African Community (EAC). The East African Community (EAC) is a regional intergovernmental organisation of the Republics of Burundi, Kenya, Rwanda, Uganda and the United Republic of Tanzania, with its headquarters in Arusha, Tanzania. The Treaty for Establishment of the East African Community was signed on November 30, 1999 and entered into force on July 7, 2000 following its ratification by the original three Partner States – Kenya, Tanzania and Uganda. The Republic of Rwanda and the Republic of Burundi acceded to the EAC Treaty on June 18, 2007 and became full Members of the Community with effect from July 1, 2007. The EAC aims at deepening economic, social and political integration and enhance the region’s competitiveness through enhanced value chain, trade and investments. To achieve such goals, the EAC countries established a Customs Union in 2005 and a Common Market in 2010 which provides “four Freedoms” namely, free movement of goods, labour, services and capital, to significantly boost trade and investments and make the region more productive and prosperous. EAC Partner States also qualify for duty-free access to the US market under the African Growth and Opportunity Act (AGOA), as well as European Union (EU), and the Common market of Eastern & Southern Africa (COMESA).

Reforms and a growing participation in global trade has helped the EAC region to grow. It has been the second fastest growing economic bloc in the world in recent years with an average growth of 5.8% in 2012 (behind ASEAN at 6.1%) which is the best rate of growth in the Sub-Saharan Africa region. Tanzania, Uganda and Rwanda showed a robust annual growth of over 7% from 2002 to 2012, and the total FDI inflow in the EAC region has almost tripled from $1.3 billion in 2005 to $3.8 billion in 2012. All countries in the EAC region have recognised the private sector as an essential growth engine for economic and social development and have introduced favourable policies to attract domestic and foreign investment. Governments are encouraging investment by providing fiscal incentives, establishing Export Processing Zones (EPZs) and industrial parks, setting up exports and investment promotion agencies (IPAs), and doing outreach activities. Foreign investors receive National treatment and generous incentives especially when their investment and business plans lead to foreign exchange generation, technology transfer, job creation, and skill enhancement in national development priority areas such as value‐added agro‐processing, manufacturing, tourism and infrastructure. The EAC region is projected to continue showing a strong macro‐economic performance in coming years. According to the World Bank, Rwanda’s economy is projected to grow by 7.5% in 2015, Tanzania 6.8%, Uganda 6.2%, Kenya 4.9% and Burundi by 4.3%. The population in the region is forecast to grow to 150 million by 2015 and to 237 million by 2030. The EAC is expected to expand its membership to South Sudan and possibly the Democratic Republic of Congo in the near future as well. Intra-EAC Trade The intra-regional trade among EAC is growing rapidly, doubling from $1.6 billion (7.8% of total east Africa’s trade) in 2006 to $3.8 billion in 2010 (11.4%). The share of intra-EAC exports to total east Africa’s exports has also increased from 14% in 2006 to over 20% in 2010, while the share of intra-EAC imports in total east Africa’s imports remains small at around 5%. Kenya, Uganda and Tanzania are the main intra‐regional exporters. Kenya has played a dominant role in the intra¬‐regional trade, exporting manufactured goods, chemicals and machinery to the landlocked countries such as Uganda and Rwanda. Major EAC exports within the region comprise manufactured products (food products, beverage, tobacco, cement) and oil re‐exports, while EAC exports to other regions mainly consist of commodities. The fast‐growing intra‐regional trade in manufactured goods implies potential growth in manufacturing in the region backed up by the regional demand. Regional trade in manufactured goods (plastics, chemicals, paints, and cosmetics, construction materials and pharmaceuticals) and regional production chains can generate jobs and increase GDP of the region. EAC’s Trade with the World The EAC region borders with eight countries including Ethiopia, Somalia, Sudan, South Sudan, Mozambique, Democratic Republic of Congo, Zambia and Malawi, of which five are landlocked. This central location of the EAC region presents significant market potential in largely untapped markets, not only in East Africa but also in Central and Southern Africa. EAC’s trade with the world increased over five-fold from $8.9 billion in 2002 to $49.3 billion in 2012. Exports of the EAC have increased to $13.8 billion in 2012, up from $2.8 billion in 2002, while imports have also witnessed almost six-fold increase to $35.4 billion in 2012, compared to $6.1 billion in 2002. The region’s major exports are agricultural products such as tea, coffee, flowers, fish, tobacco, and cashews, which account for 36% of the region’s total exports. Major imports include petroleum and related products, vehicles and transport equipment, machinery, and pharmaceutical products. The relatively small share of intra¬‐regional imports to total EAC imports shows that manufacturing in the region has remained under developed even while the demand is growing. EU is the region’s biggest trading partner, accounting for nearly a quarter of the region’s total imports followed by India, UAE, China, South Africa, and Japan. Coffee, cut flowers, tea, tobacco, fish and vegetables dominate exports to the EU from EAC. Machinery and mechanical appliances, equipment and parts, vehicles and pharmaceutical products dominate imports from the EU into the region. COMESA and South African Development Community (SADC) are among the region’s other important export destinations. While, SADC accounts for a major share of EAC imports, which is mainly due to imports from South Africa, imports from the rest of world are mainly from the Middle East and Asia, including India and China. India and EAC relations Helped by a vibrant business and commercial relationship driven by the presence of a large Indian community in EAC, India has become a leading trading and investment partner of EAC. India is an important source of essential machinery, pharmaceutical products, mineral fuels, motor vehicles (including auto parts), textiles, iron & steel and rubber products. Exports from EAC to India mainly consist of hides & skins, leather, metal ores & metal scrap, cashew nuts, coffee, gem stones and gold. EAC countries have opened their doors to both public and private sectors of India for investments and expansion of industrial base. Sectors identified are agri-processing, power, IT, transportation, telecommunication, food processing, and commercial farming. EAC provides good opportunities to Indian service providers as well. The main areas for rendering services are in education, consultancy and healthcare services. India has been an important destination for higher education for the students of EAC under the Indian Technical & Economic Cooperation Program (ITEC). There is great demand for consultancy services in the EAC as all countries in the region are witnessing economic development initiatives at various levels. The sectors which show maximum potential for consultancy services are infrastructure, energy, IT enabled services, agriculture, rural development and hotel management. Bilateral trade between India and the EAC has risen 13-fold, from $490.8 million in 2002 to $6.6 billion in 2012. India’s exports to the EAC countries have risen significantly, by 16-fold from $369.3 million in 2002 to around $5.9 billion in 2012. As a result, the share of the EAC countries in India’s total exports to Africa has risen from 12.2% in 2002 to a healthy 21.7% in 2012. India’s imports from the EAC region have also risen over 5-fold from $121.5 million in 2002 to $624.1 million in 2012, accounting for 1.5% of India’s total imports from Africa. Potential items for India’s exports to the EAC region include petroleum products, machinery and instruments, electrical and electronic equipment, vehicles other than railway, cereals, animal, vegetable fats and oils, iron & steel, and plastics. Potential sectors for India’s investment in the region include agriculture, horticulture, manufacturing, construction, energy, banking and other financial services, information and communication technology (ICT) and tourism. The Broad Strategy The broad strategy to enhance India's commercial relations with the EAC region could include cooperation in key sectors such as transport related infrastructure; meeting power and energy requirements of EAC; financial/ banking sector development; agriculture and food security; capacity building, technology transfer and human resource development; ICT and knowledge sharing; environment and natural resources development and management; industry and micro, small and medium enterprises (MSME) development; hospitality industry; multilateral funded projects; and in developing linkages with trade promotion institutions, investment promotion agencies, chambers of commerce. However, it is essential that India and EAC should undertake supply and demand surveys, organise buyers and sellers meetings and other multi-country contact promotion events to identify and exploit the potential of intra-Common Market trade. It is high time for India to turn its attention to EAC as an investment location because of growing political stability, commitment to provide liberal foreign-exchange regime, availability of cheap labour, agro-fertile land for agricultural research & food processing and social development in the region. In addition, there is a need to assert EAC and India as building block to realise the Pan Afro-Asia vision through a Common Union. India should also observe the strategic areas of great economic importance of EAC member states like trade liberalisation, custom cooperation, trade related issues, industry and energy, monetary affairs, agriculture, economic and social development.  

Prof. A.K. Sen Gupta is Chair Professor,

JIMS, and Former Dean, Indian Institute of Foreign Trade (IIFT)