Apr 24

Demystifying the East African Community (Part-III)

In the third and final article in this 3-part-series, i shall break down some of the key impacts that the re-switching-on of the East African Community will occur in a simple Q & A format.

You will notice that we have taken a little while in wrapping up this series on Demystifying the East African Community. If you are just joining us, kindly start at Part-I and Part-II

Q&A for the final article

EAC flags

The East African Community (EAC), comprising Kenya, Tanzania, Uganda, Rwanda and Burundi, last year launched a common market and is targeting 2015 for adopting a single currency.

How do I benefit currently from the existing situation of the EAC as a small/medium business owner?

As it is currently, the EAC is more like a word out of an Ambassador’s mouth or a Politician’s discussion at a cocktail. It is seen to be more of a possibility than an actual realistic option.

In any growing economy, it is vital for one who is a business man to have access to markets for his/her products. As far as the eye can see, it will be helpful for you as a small businessman in terms of harmonised taxes for all products you sell, and not being charged differently as well as double-taxation occurring on you both by URA and also by KRA.

I would believe that as it is currently, the benefit to a small business would be an improvement in competition from the access to new markets and as such any small business owner thinking more towards the long-term goals of possibly growing his/her business across his current market towards a bigger market. On the flip side however, the EAC currently may not add much value to a small business owner. The people who buy his/her products/ services are pre-determined and do not really change their service providers regularly. The EAC in its current form is mainly used in its single individual capacities by the small business owners.

What about for a bigger business owner?

This could be where there is some form of value addition.

For a bigger business (think Sekanyolya, Quality Supermarket, MTN and even Roofings), the current state of the EAC is also a singular individual capacity market. Because of their own internal capacity, they have grown to serve bigger markets and this is not due to the EAC.

How come Kenyan companies have expanded beyond their own single capacity market?

As an economy, Kenya is a much larger place to do business.

Kenya’s economy is market-based, with a few state-owned infrastructure enterprises, and maintains a liberalised external trade system. The country is generally perceived as Eastern and central Africa’s hub for Financial, Communication and Transportation services. Their GDP beats over 10 other economies in East, Central and Southern Africa. They are a serious people (if I may mean that they mean business in all forms of business) to engage in business with, and above all, their politics is mature enough to avoid civil strife that has befallen many other economies in the region. So when one opens a business in Kenya, he/she is bound to grow and with that growth comes decent expansion and if done right, the enabling infrastructure in the form of financial services and government support to promote business will coincide with one finding it easy to raise finances and political support to expand into another economy, (think KCB, Nakumatt, Uchumi and others)

EAC

What does this mean for security issues especially in terms of term-limits for their excellency’s, peace and security within entire Great lakes region?

As a brain-child of former socialists in the late 1960s, their original concerns were revolving around having fair access to services for all East Africans and all targeting political cohesion, it would be imperative to address the security issues of all the countries concerned as a whole.

Looking forward, it would be prudent to admit after 2011, with Uganda’s increased spending on the military, the most militarized of the countries in the discussion is Uganda as the current leader President Museveni is General and former guerrilla who does not take any security issues lightly. After the bombing of the US Embassies in Nairobi and Dar es Salaam, it became imperative for the three countries of the EAC to focus on safety issues for themselves. It will thus become important for the different armies and police units to always converge and share common challenges on implementation and progress updates for all of land, air and marine security.

The common factors of change of leadership through elections will however not be seen to destabilise the chosen direction for the amalgamation of ideas set forth by each individual security as evidenced by the joint handling of the recent approval of the combined number of soldiers sent to Southern Sudan in the Intergovernmental Authority on Development (IGAD) sanctioned end to bitter fighting.

Whatever way you look at it, the general consensus to avoid any war within the EAC is currently and for all future purposes a KEY issue in allowing the region to grow into a formidable economically supreme area for both trade and peace.

Together with the focus on social development, efforts will then intensify under co-operation in political affairs. Important instruments relating to the development of improved and harmonized governance structures and systems encompassing a wide array of constitutional issues have been developed. These include the issues of rule of law, human rights, anti-corruption, transparency, accountability, election observation and monitoring, and protection of human rights, foreign policy co-ordination, defence and regional peace and security matters

The question then of regional integration I feel will not be lost, but political integration might not occur in the real world as easily as it has occurred on paper.

Is there a fear of being out-classed by Kenyans especially in terms of HR and business efficiency?

It is believed that due to the huge number of upper class foreigners in the Kenyan economy as a group of settlers who came into the Kenyan Highlands and with their upper-class improvement based methodologies raised the bar for simple services and products. The local Kenyans picked up on this and used the opportunity to learn from the white-settlers and eventually became more serious than other Africans in other economies.

The average Kenyan has been taught the importance of work in the fulfilment of ones goals and ambitions and as such always seeks to add value and make situations better. They may be brash and otherwise a bit too direct, but have been known to be effective and at the same time efficient.

Ugandans on the other hand are not quite the same. I know for a fact that one of the leading growing businessmen in Uganda regularly employs Kenyans to work for him. This has led to the growth of his companies in terms of reputation and the bottom line. This company dabbles in petroleum, tyres, service stations and the popular eatery named Java’s.

How will a single East African currency boost trade in the region? / What will be the benefits of a single East African currency?

In the deeper forms of macroeconomics, there is a term known as Optimal Currency Area (OCA) and it denotes a geographic area in which a single currency would create the greatest economic benefit. The arguments for and against this vary, but that is not the issue here. If you look at the EAC, to fully enjoy the benefits of an OCA, the region should fully integrate and become a Monetary Union.

Very briefly, a Monetary Union entails having two or more groups (usually countries) share a common currency in order to keep the value of their currency at a certain level. One of the main goals of forming a currency union is to synchronize and manage each country’s monetary policy. Furthermore, once a single currency is established, it should be bolstered by a risk-sharing system, such as an automatic fiscal transfer mechanism to redistribute resources to member states that have been negatively affected by economic shocks.

Looking at East African economies and their vulnerability to large shocks, EAC countries have recognized the importance of real and nominal convergence as essential perquisites for moving toward a single currency. In 2007, EAC states adopted a comprehensive set of macroeconomic targets, defining objectives for inflation, reserve accumulation, exchange rates, growth, current account balances, national savings, bank supervision,

The East Africa Monetary Union (EAMU) will be characterized by a regional central bank, a single currency which will replace the Partner States’ currencies, an integrated banking and financial systems with harmonized laws, regulations and procedures, an integrated payment system and removal of capital controls at national level.

It is expected that the EAMU would contribute to achieving the following: harmonious, balanced and sustainable development of economic activities; sustainable and non-inflationary economic growth; intra-regional economic and financial integration; and an efficient allocation of resources.

The major benefits of a monetary union are

  • The reduction of transaction costs, economies due to the pooling of international reserves,
  • Elimination of exchange rate risk and region-wide price harmonization.
  • Capital flows to less-developed regions promote economic growth leading to a harmonization of per capita incomes.

In terms of the benefits of the single-currency

  • Mobility of capital can facilitate payments between regions, channel resources to their most profitable uses, and ease the burden of adjustment to shocks by allowing structural changes to be spread out in time. However, increased capital mobility that accompanies the creation of a common currency zone is a two-edged sword.
  • By making more financing available, it may exacerbate perverse incentives to run fiscal deficits, to take excessive risks, or to invest in speculative bubbles. The euro zone experienced this unfavourable effect of increased capital mobility in the years leading up to the 2008 crash.

Nevertheless, the creation of a central bank and the elimination of national currencies are not sufficient. Countries must ensure that they are sufficiently prepared for dealing with the greater macroeconomic discipline demanded by a monetary union.

On the flipside however, the negative side of a monetary union could be

  • The loss of sovereignty over monetary and exchange rate policy, especially in the case of shocks that may make the same monetary policy inappropriate for all member countries of a monetary union.
  • Indeed, in a monetary union, member countries lose direct control over instruments of monetary and exchange rate policy that may be useful in dealing with country-specific macroeconomic shocks. This freedom is gone once the monetary union has been formed.

A new currency will be attractive if it is more stable, in terms of better maintaining its’ purchasing power, than the currencies it replaces. This may result from an institutional framework in the monetary union that achieves more discipline over fiscal policies and thus insulates the regional central bank from pressures to provide monetary financing.

Key things that need to be in place for the successful currency union are:

  • Labour mobility across the region. This includes physical ability to travel (visas, workers’ rights, etc.), lack of cultural barriers to free movement (such as different languages) and institutional arrangements (such as the ability to have pensions transferred throughout the region)
  • Openness with capital mobility and price and wage flexibility across the region. This is so that the market forces of supply and demand automatically distribute money and goods to where they are needed. In practice this does not work perfectly as there is no true wage flexibility.
  • A risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected by the first two characteristics. This usually takes the form of taxation redistribution to less developed areas of a country/region. This policy, though theoretically accepted, is politically difficult to implement as the better-off regions rarely give up their revenue easily.
  • Participant countries have similar business cycles. When one country experiences a boom or recession, other countries in the union are likely to follow. This allows the shared central bank to promote growth in downturns and to contain inflation in booms.

Explain the COW and what it means for other economies?

Initially set up as a regional idea between TUSKER-B countries (Tanzania, Uganda, South Sudan, Kenya, Ethiopia, Rwanda and Burundi), re-booting the East African Community was/is always going to be a political thing first and foremost. This then means that the EAC would benefit all its intended beneficiaries if the initial partner states sat together and came up with some decent chart with a so-called way-forward.

In the on-going meetings as previously agreed, Tanzania were not present and justified this by saying that their trading partners were more in the SADC region (SADC is an 15-member state intra-governmental agency whose goal is to further socio-economic cooperation and integration as well as political and security cooperation among its members). The choice to avoid joining the re-boot of the EAC by H.E Kikwete was shot down by the Tanzanian parliament as a result of the rising intra-trade with other TUSKER-B countries.

So, since Tanzania delayed getting to the meeting, the countries that made it were/ are referred to as the ‘coalition of the willing’. While the EAC Treaty provides for some members moving forward with integration as others catch up, Tanzania sees the trilateral ‘coalition’ as a threat to the broader regional integration.

What the CoW means for other nations is that if Tanzania is hesitant to join in the re-boot, then the other economies can step up to the plate and not necessarily take over from Tanzania, but join in and enjoy the other erstwhile existing benefits including the single customs area as well as the single tourism VISA and hence be seen to be part of the incoming East African Federation.

How will a more integrated East Africa affect foreign investment in the region?

Although EAC member states are at different stages of regulatory reforms, the possibility of getting closer to the best performers in the region is not lost. The five EAC economies could benefit from sharing good practices in business regulation and linking reform initiatives on a regional basis. Rwanda is among the places where it takes the least time to start a business. Kenya has some of the most business-friendly regulations for dealing with construction permits. Ugandan courts resolve insolvency relatively efficiently. If each country were to adopt best practices of the region for each area, East Africa would rank 19 on the ease of doing business, comparable to Germany.

Economies making on-going efforts, often over decades, tend to perform well across all ten areas of business regulation. In many other economies, by contrast, the degree to which regulations and institutions are business-friendly varies fairly widely across different areas of regulation.

Investment in one region would thus (though over a considerable longer period of time) have a generic positive effect in that the chosen regulatory areas would improve as a unit and thus give the EAC a better stance when competing in the global trade village.

July 2010 marked the launch of the EAC Common Market. Can people, labour, capital and goods and services currently move freely across the region? What level of integration has been achieved?

The regional integration process is at a high pitch at the moment as reflected by the encouraging progress of the East African Customs Union and the establishment in 2010 of the Common Market.

The negotiations for the East African Monetary Union, which commenced in 2011, and fast tracking the process towards East African Federation all underscore the serious determination of the East African leadership and citizens to construct a powerful and sustainable East African economic and political bloc.

EAC Map as ifThese are the steps so far:

Customs Union (launched 2005; fully operational as at January 2010)

Common market (Protocol in 2009, launched July 2010)

Monetary Union (negotiations on-going)

Political Federation (foundational processes on-going)

The EAC has set 2015 as the year for adopting a single currency;
Do you think this is achievable?

With the current level of seriousness shown from the current Heads of State, I believe in my own personal opinion that progress is being shown. For it however to be on target, I feel is a political statement. The regular flights, emails and phone calls between the respective Central Bank Governors notwithstanding as well as the never-ending meetings between H.E Museveni, Kagame and Kenyatta with H.E Salva Kirr always in tow, the 2015 date is a dream.

The necessary criterion to be matched is still a difficult (achievable though) item and if not done correctly, we would have Kenya bailing out Burundi and South Sudan in the same quarter.

What is your conclusion then about this EAC thing?

In conclusion then

The EAC must endeavour to connect geographically and economically.

What does connectivity mean for EAC?

It means trading among ourselves, leading to a boom in intra~regional trade.

Will it be enough?

The point is that regional integration should go with global market integration and the beauty is that the two go together.

If Rwanda can export (more easily) to Kenya, then it can export (more easily) to the rest of the world – it is a “win-win” situation. I want to make the point that global integration and regional integration go together; they are not substitutes. Let me come up with a list of actions for better connectivity. For me, one investment that you have to make in terms of connectivity, I would say, is the ports. You have two ports in East Africa which are among the worst performers in the world.

Secondly, physical infrastructure, such as railways and roads, but also soft infrastructure, such as better border posts should be harmonised.

Thirdly, labour mobility should and will be made harmonious. The current situation is that the higher skilled ones are not the ones moving, but rather the lesser skilled individuals.

So in the end, this connectivity will have a major impact.

EAC has land-locked countries and them using the connectedness well will enhance a rise in economies activities for all concerned.

Edmund KamugishaEdmund is the Engagement Director at BLEGSCOPE®, and has over 9 years of management consultancy experience notably in MSMEs, FMCG companies and in the service industryYou can follow him on twitter: @edmokmg

1 comment

  1. Right away I am going away to do my breakfast, once having my
    breakfast coming over again to read more news.

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