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Africa in focus

East African Community: The unfinished agenda

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The East African Community (EAC)—comprising Burundi, Kenya, Rwanda, Tanzania, and Uganda—has the ambitious goal of introducing a single currency by 2024. This journey towards integration commenced in 2000 and is underpinned by three main protocols: the customs union (2005), the common market (2010), and, more recently, the monetary union (2013). This increasing integration, which the East African heads of state see as steps towards their ultimate goal of a political federation, facilitates the free movement of goods, services, and capital around the region, which in turn improves the welfare of the general population through sustained, durable, and inclusive growth.

Economic success in the East African Community

As the EAC has improved macroeconomic management as part of the integration process, these efforts have delivered steady growth in real per capita incomes, which have remained above that for the rest of sub-Saharan Africa in recent years. The EAC is also the second-fastest growing economic bloc after the Association of South East Asian Nations. Other reasons for the region’s success relate to progress made in financial inclusion in part through e-banking and ease of doing business. The region has attracted some $24 billion in foreign direct investment since 2000. More recently, several countries have become first-time issuers of sovereign bonds, with Kenya’s 2014 debut the largest in sub-Saharan Africa, at $2 billion. Coordination in monetary policy entered a new phase when central banks, in response to the 2011 food and fuel shocks, synchronized a tightening of monetary policy to tame inflation, which has since fallen to single digits

Regional integration: Progress so far

While progress towards regional integration has been significant, the agenda is far from finished: Much needs to be done to fully reap the benefits of regional integration and establish a single market that caters to a population of 148 million. Since 2014, there have been improvements in the turnaround in the movement of cargo from the port in Mombasa (Kenya) to Kampala (Uganda) from 18 to four days and from Mombasa to Kigali (Rwanda) from 21 days to six days. Kenya, Uganda, and Rwanda have introduced a single tourist visa, and markets are starting to emerge for the movement of professionals within the region through a framework for mutual recognition of professional standards.

The EAC has made steady progress toward the implementation of a common external tariff comprising three bands of 0 percent, 10 percent, and 25 percent, depending on the type of good; rules of origin and standards; gradual elimination of internal tariffs; and harmonized customs documentation. However, non-tariff barriers remain among members. To eliminate them, the EAC has instituted a scorecard to monitor progress through peer-to-peer review which assesses annually, the pace with which these barriers are being removed. Allowing the free movement of capital across borders would greatly facilitate the efficient functioning of capital markets, including the ability to link up regional stock exchanges. There are already promising signs that non-tariff barriers are being addressed, as a number of EAC banks and insurance companies are now operating across national borders, which is fostering greater financial integration. As cross-border activities increase, national central banks will need to adopt a consolidated approach to banking supervision in order to avoid difficulties in a bank’s operations in one country spilling over to other countries in the region.  

Looking ahead, the unfinished agenda includes the establishment of institutions to guide the convergence process ahead of the monetary union. In particular, the East African Monetary Institute will be set up as a precursor to the eventual establishment of an East African Central Bank. Others institutions such as the East African Compliance and Enforcement Commission that will guide the convergence process during the transition period; the East African Statistics Bureau that will harmonize statistics, and the East African Financial Services Commission that will supervise financial services are expected to be established. As financial integration strengthens, a single supervisory authority with clear roles, adequate resources, and powers is critical in addressing risks that could arise. This authority should be empowered to intervene, resolve, or restructure weak banks and to avert systemic risks to the union.

What lessons can the East African Community learn from other monetary unions?

Finally, in addition to implementing this ambitious agenda, African policymakers must reflect upon the accomplishments and shortfalls of other monetary unions in order to successful implement their own. What are the remaining gaps and lessons to learn from other monetary unions during the recent financial crisis? Clearly the experience of the eurozone highlighted that imbalances in one country within the union can spill over to the other members including to their banking sectors. Some imbalances arose from weak reporting of the true fiscal deficit and/or implicit and explicit guarantees to banks and state-owned enterprises that materialized when the crisis struck. Thus, fostering greater fiscal integration will require larger fiscal cushions to respond to country-specific shocks, better risk sharing, oversight, and statistical accuracy. Although political federation, which is the ultimate goal of the EAC, is a long way off, a stronger fiscal union requires some political tradeoffs involving the ceding of some national sovereignty over budgets.

Authors

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Paulo Drummond

Deputy Division Chief and Mission Chief for Rwanda, International Monetary Fund

O

Oral Williams

Deputy Division Chief and Mission Chief for Malawi, International Monetary Fund

The agenda ahead is ambitious, necessitating the careful sequencing of reforms, close coordination among EAC members, and a strong and rigorous process to achieve the economic convergence needed to make monetary union a reality. These efforts will take time, and it is better to put all the building blocks in place. The international community will continue to support the authorities’ efforts, including through the provision of ongoing IMF technical assistance and policy advice.


Note:

This blog reflects the views of the authors only and does not reflect the views of the Africa Growth Initiative.

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