Improving competitiveness is the key to robust economic growth in EA

16Jan 2019
By Financial Times Reporter
Dar es Salaam
Financial Times
Improving competitiveness is the key to robust economic growth in EA

East African countries have been urged to deal with factors which hinder their competitiveness in doing business to as to quickly unlock their economies.

 

In its East Africa Economic Outlook 2018 report, the African Development Bank (AfDB), one of the major lenders in the continent, notes that competitiveness in the region is largely being boggled by poor infrastructure.

 

“East Africa’s economic infrastructure is weak by global standards, and even by African standards. This costs businesses. In a highly competitive world, constraints to participating in the value chain undercut local firms’ competitiveness in export markets,” reads part of the report.

 

In the recent past, governments in the region have developed many schemes and policies to promote industrialization, privatization, incentive schemes for private businesses, special programs for priority sectors and horizontal initiatives, all aimed at creating an enabling business environment.

 

But these efforts have dismal impact in economic growth in many countries because they face major constraints in transport and logistics, energy supply, telecommunications and policy and institutional support, notes AfDB.

 

Transport and logistics

The bank notes that most roads in East Africa are still in a poor state making surface transportation, a major means of moving cargo and services in the region cumbersome.

This results in combinations of low speeds and long transport hours causing high transportation costs.

 

The report notes that a study of the two main road corridors showed that the Northern Corridor, anchored by the port of Mombasa and running north of Lake Victoria through Kampala and south through Kigali to Bujumbura, was almost entirely paved, but only 13 per cent of the roads were in good condition, 44 per cent in fair condition, and 43 per cent in bad condition.

 

On the other hand, the Central Corridor, anchored by the port of Dar es Salaam and running to the Tanzanian hinterland as well as to Burundi, Rwanda, and Uganda, was in especially poor condition.

 

“Many road projects are under way, and the situation is evolving rapidly,” says AfDB.

 

The bank further notes that rail transport’s limitations push goods transport onto roads, compounding the problems of roads, creating congestion and raising the unit cost of transport over longer distances, particularly for landlocked countries.

 

But things are about to change as a rail route from Addis Ababa to Djibouti is under construction, and a standard gauge rail link is planned from Mombasa to Malaba with a branch line to Kisumu, financed by China.

 

Tanzania has also started construction of a standard gauge railway (SGR) from Dar es Salaam to Kigoma and Mwanza through Dodoma and Tabora. A Turkish construction company has already accomplished major works on the Dar es Salaam-Morogoro section, with a tender for Morogoro-Dodoma being worked on.

 

Ports

According to AfDB, East African ports generally underperform global competitors across a range of indicators. The report notes that two-thirds of the containers shipped from East African ports are empty.

 

The report further say Mombasa and Dar es Salaam, the two main ports in the region, have very little capacity but this is also about to change as Mombasa’s performance may improve following the commissioning of a new berth facility that aims at expanding handling capacity by 200,000 twenty-foot equivalent units (TEUs).

 

Not to be outdone, the Tanzania Ports Authority (TPA) is undertaking several projects aimed at improving and boosting performance of the Dar es Salaam, Mtwara and Tanga ports.

 

But East Africa countries should work to unlock surface transport hurdles including holdups at national borders and checkpoints along road networks. Improving export capabilities could greatly reduce trade costs and increase the region’s participation in global value chains.

 

To address such issues, construction of One Border Post facilities have picked up in the region and several of such posts have already been commissioned.

 

Energy supply

Inadequate energy supply is the biggest infrastructure problem, AfDB says, noting that the region has the lowest energy generating capacity per capita on the continent, and stakeholders identify inconsistent supply as a major cost.

 

Poor energy supply causes blackouts and demands expensive supplementary generators and this affects energy- intensive production. According to AfDB, the region has untapped hydro, wind and fossil fuel resources that could increase energy supply.

 

President John Magufuli’s insistence on building a 2,100MW Stiegler’s Gorge hydropower project might offset this challenge as it will enable Tanzania to produce more power than it could consume.

 

Egyptian construction firm Arab Contractors recently signed a contract with the government for designing and building the huge dam along the Rufiji River basin.

The tender for the $3 billion hydroelectric dam was advertised last year receiving over 70 bids.

 

Upon completion, the hydro dam project will provide 2,100MW of electricity to a country that is currently extremely under-supplied. With a population of approximately 54 million, Tanzania has just 1,400MW of installed grid capacity.

 

On the other hand, the AfDB Economy Outlook report points out that new fossil fuel revenues that are expected to be realized in some countries in the region in the near future such as Kenya, Tanzania and Uganda need proper management to avoid the macroeconomic imbalances that can arise from foreign currency inflows, as well as the damage to development that often accompanies natural resource wealth.

 

“The problem of electricity supply is acute for small firms and households. For cooking, for example, the vast majority of households in the region still rely on wood and charcoal, which is one of the most environmentally inefficient energy sources,” says the report.

 

Telecommunications

East Africa has experienced a technological revolution, but the same has not translated into cost reduction in telecommunication services.

 

The region has the lowest penetration rates in Africa for fixed telephone lines, mobile phones and especially internet services, though rates vary widely across countries. Even in the relatively advanced Seychelles, internet penetration is half the rate in advanced countries.

 

But the situation has improved markedly, the bank says, noting for instance that Tanzania’s economic reforms have remarkably improved telephone service quantity and quality, although access to the internet remains a challenge.

 

The Ethiopian Commodity Exchange, the first such initiative in Africa, empowered 2.4 million mobile phone users in its first four years. The exchange now fields 1.2 million calls per month for price information.

 

Policy and institutional support

Although soft infrastructure - the regulatory and business environment - has made progress in some East African countries, it continues to constrain manufacturing.

 

In the World Bank’s Doing Business 2018 survey, only Kenya, Rwanda and Seychelles rank higher than 100 of 185 countries in the overall ranking as well as across a number of indices except obtaining a construction permits.

 

Rwanda ranks second in ease of registering property, and its overall ranking is 41. Kenya has also made some progress, notably in ease of obtaining credit, investor protection, and getting electricity.

 

“East African manufacturing’s failure to take off does not necessarily impugn any single policy. Rather, combined policies and institutional mechanisms have failed. Identifying these constraints on industrialization is inevitably a country-by-country, sector-by-sector exercise,” says AfDB.