Where There are Bills, There are Other Ways: Informal Cross Border Trade in East Africa

Background

With so much of intra-East African trade carried out informally, it’s clear that wheelchairs are not the only method of transport. ICBT transactions can take many forms as traders attempt to avoid authorities and formal procedures. In Uganda in 2011, most goods (in terms of value) were exported by vehicles (62 percent), bicycle (18 percent), push carts (6 percent), hand/head (6 percent), and motorcycle (5 percent). In the other direction, imports of informally traded goods were carried out mainly by bicycles (38 percent), then vehicles (30 percent), hand/head (16 percent), motorcycles (7 percent), and wheelchairs (6 percent).

The discrepancy in the difference between modes of transport used for exports and imports is due to the clandestine nature of ICBT, which is often akin to smuggling. Traders have been known to use large vehicles to deposit their goods close to a border and then hire porters to ferry the goods to the next country. Operating at day and night, these porters will carry, push, and cycle the goods via footpaths to reach traders on the other side.

It is important to note that not all ICBT is intentionally deceptive. On the other side of Kenya, along the border with Somalia, livestock trade has been carried out for centuries, long before the creation of colonial boundaries. Long distance livestock caravans, particularly cattle, travel great distances to reach viable markets. When traders cross the porous border between Somalia and Kenya, they may not be maliciously breaking trade laws, but rather following trade routes that have been used for generations. Nevertheless, the scale of the trade which avoids standard trade procedures is significant: estimates suggest that informal livestock trade may actually exceed formal trade between markets like Kenya, Ethiopia and Somalia (typically, Ethiopia and Somalia act as the source markets and Kenya as the primary destination).

ICBT is mainly carried out by 3 groups: informal traders operating entirely outside the formal economy (e.g. individual smugglers and traditional Somali livestock traders); formal firms fully avoiding cross border regulations and duties; and formal firms partially evading regulations and duties. Firms that wholly avoid regulations and duties will resort to extreme measures such as avoiding border posts. Firms that just partially evade standard procedures prefer more bureaucratic tactics such as under-invoicing or misclassifying their goods. Most informal trade is conducted by micro- to medium-sized enterprises, as well as individual traders—the majority of whom are women. Smaller traders have a greater incentive to trade informally because they lack the resources to deal with the requirements of operating in the formal economy.

Informal trade is often encouraged by the existence of high duties, as well as trade quotas or bans, which are commonplace in East Africa. Additionally, complex regulatory requirements can increase the cost of trade, especially for smallholders. Where such requirements exist, they may be less likely to engage in legal trade.

One example of a complex and cumbersome trade regulation is the need for traders to produce sanitary and phytosanitary (SPS) certificates when trading certain agricultural products. These certificates—which attest to a product’s health and suitability for public consumption—not only represent another cost to a trader, but oftentimes can only be obtained in city centers far from border crossings. For example, all perishable items crossing the Kenyan-Tanzanian border at Namanga border require SPS certificates. Yet certificates can only be obtained in Nairobi (230 km away), Dar es Salaam (930 km away), or Arusha (110 km away). And even if SPS documentation is in order, border officials may decide to demand paperwork including obscure vehicle-related documentation.

Furthermore, there is a relationship between conflict and/or instability and cross border trade. For example, most of Uganda’s informal exports go to the Democratic Republic of the Congo (DRC), a country consistently grappling with instability and insecurity. The second most important destination for Ugandan informal exports in 2012 was South Sudan—which was relatively peaceful at the time, if somewhat unstable.

In East Africa, most informally traded goods are staple food commodities such as corn, rice, and cattle; as well as consumer goods such as clothes, shoes and electronics. In most cases, these two types of goods will flow in opposite directions. For example, Ugandan beans and coffee will enter Kenya—some of which will stay in the country, and some of which will make its way to the port city of Mombasa. Consumer goods that had entered into East Africa via Mombasa port will find their way to Uganda.

At Busia, one of the busiest border crossings in East Africa, substantial amounts of agricultural commodities flow into Kenya. In March 2014 alone, over 28,500 tonnes of agricultural goods were informally traded from Uganda into Kenya, about 20,000 tonnes of which were corn.

Because informal traders avoid dealing with official regulations, they can be more responsive to shifting demand than legitimate operations. In the first half of 2014, Kenya’s corn stocks were dwindling due to a poor harvest the previous year. Recognizing this demand, informal traders doubled their imports of Tanzanian corn between January and September 2014, reacting more quickly to new realities than the governments of either country—and thereby helping to ensure that supply levels did not drop too drastically.

Uganda – Kenya sugar trade

Kenya consumes at least 200,000 tonnes more sugar than it produces every year. However, Kenya also has laws designed to protect its domestic sugar industry, including restrictions on how much sugar can be imported from neighboring countries, where the cost of production can be much lower. This situation creates the perfect conditions for ICBT: demand, trade restrictions, and favorable margins. In June of this year, the CEO and commercial director of the Kenya-based Mumias Sugar Company, which has milling operations within 60 kilometers of the Ugandan border, were fired after being found culpable of illegally importing 10,000 bags of sugar worth $12.1 million. The allegations in this case extended back to 2012-2013.

As these accusations were unfolding, the Mumias Sugar Company was grappling with major cane shortages. This, combined with the need for factory maintenance, meant that operations were closed down for 2 months in October (operations of 3 other firms were also suspended). This reduced production capacity only further encouraged ICBT. Towards the end of November, as trucks filled with sugar lined up at the border into Kenya to await clearance, bicycles, motorcycles, and cars filled to their limits raced across the border to take advantage of the handsome profit margins. Some of this smuggled sugar was confiscated when 3 trailers with a total of 4.9 tonnes of Ugandan sugar were stopped along the road from Busia to Mumias in late November.

Kenya’s informal importation of Ugandan sugar does not show any signs of stopping. With production capacity in Kenya declining, Kenyan prices rising, and legal sugar shipments getting bogged down at customs, informal traders will only have more reason to speed across the border.

ICBT remedies

Efforts to formalize segments of ICBT shouldn’t focus on eliminating the practice, but rather on incorporating informal traders into the formal economy.Reducing border requirements and increasing the efficiency of legitimate trade would go a long way in the effort towards encouraging formal trade. Beyond reducing duties and fees on imports and exports, governments could simplify the required documentation and make the process accessible to even the smallest trading operation.

There have been a number of attempts to simplify trade documentation in the region. For example, COMESA (The Common Market for East and Southern Africa) recently implemented the Simplified Trade Regimes, which were designed to encourage smallholder participation in cross-border trade. The program is still new, and it will have to overcome challenges around prohibitive processing fees, low awareness, and alleged associated corruption.

Reducing corruption alone would be a major boon to formalizing ICBT. Weak law enforcement can be persuaded to allow and overlook smuggling. At the same time traders will be encouraged to trade informally in order to avoid corruption.

In terms of efficiency, the speed with which documentation and inspections are carried out must be improved. Simplified documentation procedures, if accessible, processed in a timely manner, and advertised would be highly appealing for informal traders. While the documentation process may still provide an extra barrier, no matter how minor, the benefits of securing their goods from confiscation, theft, or repossession should outweigh these costs.

Indirect costs that arise from formal trade, such as excessive waiting times at the border while goods are cleared, could also be minimized. If goods are going to deteriorate in quality, or trade opportunities are going to be lost while waiting for lengthy clearing procedures, traders will be encouraged to avoid these burdens. Streamlined clearing procedures for small-scale traders—the majority of informal traders—would encourage usage of government procedures. Lastly, programs and policies that specifically reach out to small-scale traders and provide them with the skills and ability to participate formally would aid the entire industry. Traders could be provided assistance to understand existing trade regulations and given support in order to comply with formal procedures. Open market information systems, business management advice, and trade fairs are a few basic services that, if provided, would encourage integration into the formal economy.

Conclusions

At the same border crossing in Busia where a man regularly smuggles sugar into Kenya on his wheelchair, bigger operations devise even more complex tactics. Sometimes, these smugglers will successfully move a small amount of illicitly traded goods across the border. They will then call a border patrol commander to report that illegal goods have been smuggled into the country. When the commander dispatches his or her officers to track down the goods, a bigger consignment will slip through with little opposition.

Informal cross border trade is an integral part of East African trade. Governments must not make the same mistake as the patrol commander when designing trade policies to curb ICBT. They should not focus on the small-scale traders as a problem, but rather they must recognize the greater picture of regional trade and why ICBT exists. The end result should be a more inclusive and more formal trade environment.