The IMF wants Uganda to harmonize incentives it offers investors with those of other East African Community member-states. The position is contained in the Fund's country report for Uganda, Kenya and Tanzania. It recommends that a partner state should consult others before giving investors any incentive. This is not yet the official position of the IMF, but will be debated and may be considered by the Executive Board, the decision making of the Fund.

If adopted, Uganda with the poorest infrastructure in the region, will find itself offering the same incentives as Kenya and Tanzania. This, analysts say, may effectively erode Uganda’s only competitive edge.

Despite its generosity towards investors, Uganda still lags behind in attracting FDI compared to Kenya and Tanzania. Presently, Uganda offers more tax and non-tax incentives to investors than its regional counterparts as a way to attract investors. According to the World Investment Report 2008, Uganda attracted the least amount of Foreign Direct Investments last year. In a year that the country held the Commonwealth Heads of Government Meeting, which was expected to spur investments in construction, the amount of FDI to Uganda declined to $360 million in 2007 down from $400 million the previous year. 

Kenya outperformed its competitors when it realized a huge increase of FDI inflows. Investment inflows to East Africa’s biggest economy shot up to $728 million in 2007 up from $51 million the year before. Kenya received more FDI due to large privatization sales in its telecommunications industry and investments in railways, according to the report. Tanzania received $600 million in FDI in 2007, higher than the $522 million received in 2006. The report points out that much of the FDI in Tanzania was directed towards the country’s several natural resource exploitation projects. Such a stark difference in FDI inflows could have prompted the IMF team to suggest a harmonized incentive structure for the region.

 “This paper argues that a coordinated approach to providing investment incentives should become a priority in the EAC. To facilitate closer regional economic integration and to avoid the damaging uncoordinated contest to attract foreign investors, the EAC members should seek a closer coordination of investment and tax policies and the creation of an EAC-wide legal framework for foreign investment,” noted the IMF report, which based its recommendation on research carried out in late 2006.

Considering differences in infrastructure development among the three countries, Uganda may find it hard to compete on a level field with the other two—both with a coastline, better transport and utility services.

At the moment, the fight for foreign investors is being fought along the lines of who offers longer tax breaks and cheaper assets such as land. For example, while no East African country beats Uganda when it comes to dishing out free land to foreign investors, Kenya has a good tax structure that favours investors dealing in housing estates. Also, Kenya is considering endorsing a financial bailout package, worth more than $200 million, to write off debts for six sugar companies, and improve their competitiveness in the region. 

The IMF paper points out that the EAC countries should “discuss and coordinate their investment incentives policy, and that rules guiding the provision of incentives would be agreed upon. If a country feels that its incentives are insufficient, instead of acting unilaterally, it would be better to raise the issue with its EAC partners.”

The IMF report appears to be uneasy about import and export trade-related incentives that Uganda and Tanzania have handed investors, saying the countries were foregoing revenue that would otherwise be used to fund poverty eradication programs.

The release of the IMF report follows a July 2008 letter by Dr. Ezra Suruma, the Minister of Finance, to the Fund in which he said that Parliament had approved tax incentives to qualified investors. In the same letter, Suruma said he had set aside Shs60 billion for this purpose. Suruma said that only companies that exported more than 80% of their production would benefit from this incentive.

The call to harmonize tax incentives also comes on the back of growing pressure by Uganda’s private sector on government to create Export Processing Zones (EPZs). Kenya and Tanzania have EPZs, areas where exporters enjoy tax breaks and other incentives.

John Ssempebwa, the Head of Trade at the Private Sector Foundation, said that “the IMF recommendation is welcome. But Uganda should first speed up the opening of the Export Processing Zones to compete favorably with the other states.” 

Harmonizing incentive structure in the region, could throw the country’s budding private sector at the deep end of the competition with Kenya’s bigger economy. That is a situation Uganda has avoided for years.

Maggie Kigozi, the Executive Director Uganda Investment Authority, had reservations about taking further steps in harmonizing the incentives in the EAC bloc. “At the moment, tax policies in the region are almost the same,” she said. The corporate tax is one of the taxes that have been harmonized across the region. Although, there are stark differences on the taxes charged on petroleum and beverages, with Uganda said to have higher rates than its counterparts. But Kigozi argued that what Uganda needs is to “work on the road from Mombasa to Kampala.”

Uganda, unlike Kenya and Tanzania is landlocked. The country also has a poor transport network and low levels of energy. These barriers continue to undermine Uganda’s prospects of attracting businesses unless government gives the investors a good reason to set up shop here.

But the IMF warns that “Increased competition over FDI (Foreign Direct Investment) and growing pressure to provide tax holidays and other investment incentives to attract investors could result in a “race-to-bottom” that would eventually hurt all three EAC members. Left unchecked, the contest could result in revenue loss, especially in Tanzania and Uganda, threaten the objective of improving revenue collection.”

In his letter of intent – a report card outlining the country’s progress of adhering to policies set out by the IMF – Suruma said that revenue losses from the Shs60 billion incentive to exporters are expected to be very modest (not exceeding 0.1 percent of Gross Domestic Product. 

Jeff Mbanga jeff@observer.ug writes for The Weekly Observer