Trade taxes have long underpinned public finance across East Africa. For decades, they formed a critical revenue stream that supported national budgets — particularly in economies where domestic tax bases were narrow and informality widespread.
As global trade expanded, the East African Community (EAC) embraced regional integration as a vehicle for growth, efficiency, and competitiveness.
Nominal customs revenue rose in tandem with these trends. Yet, when revenue is scaled to GDP and viewed over time, a different picture emerges — one that raises pressing questions about the long-term fiscal implications of integration.
Data from the World Bank and national authorities confirm a clear shift: while trade values and customs collections have increased in nominal terms, their share of GDP has steadily declined since the 1990s.
In 1994, Kenya’s trade tax revenue stood at above 3.5 percent of GDP. By 2022, it had dropped to just 1.2 percent, despite a more than fourfold increase in import volumes and strong GDP growth.
Similar trends are observed in Rwanda, Uganda, and Tanzania, where revenues are not keeping pace with economic or trade expansion. The drop is not merely cyclical; it is structural.
This trend poses a fiscal question that is often under-emphasised: how do we finance the state in a region still heavily reliant on border taxes, even as we liberalise trade?
To understand the stakes, consider the World Bank’s Stochastic Frontier Analysis, which estimates suggest that trade tax potential may exceed two percent of GDP, indicating room for improvement relative to current performance.
However, realising this potential depends on institutional, policy, and economic factors beyond revenue agencies alone.
Uganda and Rwanda face similar underperformance. While some argue that domestic taxes (such as VAT and income tax) are designed to offset trade revenue losses, empirical evidence confirming this compensation remains limited, particularly in countries with large informal sectors.
This is not just a matter of accounting. Fiscal space — the government’s ability to finance development without undermining sustainability — depends in part on maintaining a reliable, elastic revenue base.
In emerging economies like those in the EAC, where debt ratios are rising and public investment needs remain high, revenue losses from border liberalisation represent foregone opportunity.
Integration has brought many economic gains, including increased trade flows, reduced transaction costs, and improved logistics. But if deeper integration comes at the cost of shrinking trade tax-to-GDP ratios, then policy recalibration is needed.
The evidence is not universally discouraging. The Southern African Customs Union provides an example of regional integration that protects and shares trade revenue equitably.
Even within the EAC, initiatives like the Single Customs Territory, customs digitalisation, and improved valuation systems have begun to show promise in enhancing compliance and enforcement. However, these efforts must be strengthened and aligned with broader fiscal frameworks.
A 2021 WIDER Working Paper studying Tanzania’s trade trajectory after joining the EAC Customs Union found a significant shift in trade flows — but without commensurate growth in trade tax revenue.
Tanzania’s later decision to withdraw from COMESA, citing fiscal sustainability concerns, underscores the need for realism in designing integration pathways.
Trade liberalisation, while beneficial for market access, can strain border revenue if not matched with complementary tax reforms and institutional strengthening.
The policy dilemma is thus clear: how do we balance regional trade facilitation with the preservation of fiscal space in low- and middle-income countries?
Ignoring this question risks leaving substantial revenue on the table — revenue that could otherwise fund health systems, infrastructure, and human capital development.
Integration is not the problem. But integration without strategic fiscal planning can create vulnerabilities. As the continent prepares to deepen trade under the African Continental Free Trade Area (AfCFTA), the experience of the EAC offers valuable lessons.
A more deliberate approach to integration — one that includes revenue safeguards, compensation mechanisms, and institutional accountability — is not only feasible, but necessary.
Because at the end of the day, the goal isn’t just to trade more — it’s to build the fiscal resilience that makes development possible.
The writer is a Macroeconomist and Research & Surveys head at the Kenya Revenue Authority.
