Short-term shocks ahead in customs Union

Rwanda jumps into a bumpy start but looks at promising future by implementing the EAC customs pact today. The economy will have to swallow a short term bitter pillar as revenues fall after today’s acceding to the EAC customs union. Although policy makers point to a better picture in the long-run, some existing policies which the country has to fore-go are bound to produce shockwaves throughout the economy. “As we joined the East African Community (EAC), it become a necessity to also join the Customs Union in the EAC that entails the elimination of tariffs and all levies and surcharges on imports from the EAC,” read a technical working document by Rwanda Revenue Authority(RRA) on the country’s accession to the EAC customs Union. Rwanda is scheduled to officially start implementing the East African Community Customs Union (EACCU) today, 1st July 2009. The East African Community Customs Union commenced its operations within Kenya, Tanzania and Uganda on 1 January 2005. In the spirit of “give and take’ RRA predicts certain losses in the short run but also hopes reaping dividends as the country consolidates its position within the trading bloc. “It was proved that it would be difficult for Rwanda to operate in isolation in an increasingly economically bloc-oriented environment,” RRA documents said. Tax lossesPart of the implementation of the EACU calls for our tax body running away from the four band tax structure to a three band regime, common to the rest of EAC. Though RRA does not document how much Rwanda will lose from this shift, indications are that government coffers will lose a significant amount of revenues. The shift in computation of duties and taxes based on CIF (Cost, Insurance and Freight), calculated from the port of entry instead of the country’s entry points is also another element that will negatively impact of RRA’s collections. CIF will now be calculated when goods land at the ports of Mombasa or Dar-es-salaam instead of Kigali. As Rwanda accedes to the customs union, it will discontinue levying its import tariffs and instead apply the EAC common external tariff (CET) which is lower for the majority of the tariff lines. According to the tax body, these changes will have implications for government revenue from international trade. Overall, the implementation of the EAC lower tariff rates will lead to a projected revenue loss in the short-term of about 15.9 million Euro or RwF 12.2 billion. However Rwanda says this loss will be compensated through a fund within the COMESA trading bloc. Long-term prospectsRRA has shoved aside the fears by countering that ‘once the final accession is endorsed Rwanda stands to benefit tremendously’. It pointed out certain benefits from this move which can only be recouped in the medium and the long terms. It pointed to Rwanda having greater market access whereby member countries will boast a combined population of 120 million. “While the economic integration becomes firm and strong, the barriers of trade between markets will ultimately diminish and, in effect, give access to a newly created wider market to which Rwanda will freely tap into.” The report states that this move will compel partner states to adapt best practices in developing business environment which will ultimately bolster Rwanda’s private sector. A stronger voice in global trade negotiations is another key benefit according to this report. RRA expects that the EA’s customs union will offer a platform for meaningful negotiations at the world stage. Ends

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Short-term shocks ahead in customs Union