Regional integration, a painstakingly slow process across most of Africa, has started to gain momentum in east Africa, removing some obstacles for investors.

Fifteen years since the re-establishment of the East African Community (EAC), a short drive out of Kenyan capital Nairobi’s main airport will testify to the already fairly deep economic integration within the region. Lining the roads, billboards advertise banks, airlines, telecommunications firms and retailers operating across east Africa. Many people have travelled from a neighbouring country to work, reflecting the increasingly free movement of labour.

The EAC is hailed by many analysts as the most successful of sub-Saharan Africa’s regional blocs, despite its often slow progress towards further economic and political integration. “The EAC has come a long way and is one of the better functioning regional economic communities in Africa,” says Hannah Waddilove of Oxford Analytica, a risk analysis firm.

Strength in numbers

Formed in 1999 after the collapse of its predecessor in the 1970s, the EAC comprises Burundi, Kenya, Rwanda, Tanzania and Uganda – countries that individually are too small to attract much attention from foreign investors but which together form a unit that will be increasingly hard to ignore. The region’s combined gross domestic product (GDP) is about $110bn, while its population of 145 million is not far short of that of Nigeria, the continent’s most populous country.

The scale of the regional economy has boosted its growth. East Africa has been one of the continent’s fastest expanding areas over the past decade. Real GDP growth is set to increase from 6% in 2013 to 6.4% this year, according to the UN. Moreover, in a continent dogged by low levels of intra-regional trade, the five EAC member states have made huge strides in recent years. Figures from the EAC Secretariat show that internal trade increased to $5.5bn in 2012 from $4.5bn in 2011.

Recognising the improvements, leaders are pushing on with their agenda. “The promise of economic development and prosperity hinges on our integration,” Kenya's president, Uhuru Kenyatta, said last year.

One market

Many of the gains so far have come thanks to the establishment of a customs union in 2005, which imposed a common external tariff, and the signing of a common market protocol in 2009. Aimed to establish the free movement of labour, capital, goods and services within the region, the protocol is widely viewed as the EAC’s most significant achievement, despite being implemented patchily.

Slowly but surely, countries are removing onerous regulations and improving their physical linkages. Kenya, Rwanda and Uganda, for instance, are making it easier for people to move across borders by launching passport-free travel for their citizens and a single tourist visa for visitors. They are also waiving work permit fees for each other's populations.

To promote the free movement of capital, member states have launched a project to integrate their payment and settlement systems. At the same time, local capital markets are being tied more closely together. “A great deal of work has been done to harmonise regulatory frameworks”, says Evans Osano, a Kenya-based financial specialist with the World Bank.

The result has been an increase in the number of cross-listings on EAC stock exchanges, allowing companies to boost their regional profile and finance their expansion. Last October, supermarket group Uchumi became the third Kenyan company to list on the Rwanda stock exchange. And Umeme, a Ugandan power distributor, trades on Nairobi’s bourse.

Investors are diversifying throughout the region, too. In February, Rwanda followed Uganda and Kenya by launching its first cross-border treasury bond in its capital, Kigali, allowing equal access to all investors from the bloc.

The logical conclusion, says Mr Osano, will be a marketplace with a single entry and exit point for investors. “Issuers will be able to access a big pool of investors cheaper and quicker. Investors will have access to more opportunities in different markets. Small markets will never bring in a lot of international money because there is no liquidity, but a bigger regional market can attract international investment.”

On the road

Physical links are also improving, though the slow pace of change can be frustrating for businesses. A handful of one-stop border posts are reducing the amount of time it takes traders to cross between countries, easing one of the more onerous aspects of working across borders. Last year a plan was hatched to open up to 15 of these crossings. “Hold-ups in transferring goods across borders are very costly across the continent and improving that is an area where the most significant economic gains will be made in the short term,” says Mark Bohlund, senior economist at risk consultancy IHS Global Insight.

Countries have come together to carry out major joint infrastructure projects, including a $13.5bn railway linking Mombasa port in Kenya with landlocked Uganda and Rwanda; a network of new roads; and two oil pipelines running from the interior to coastal Kenya. Improvements are planned, meanwhile, for the ports at Mombasa and Dar es Salaam, Tanzania’s commercial capital.

As such links improve, local companies are taking the opportunity to expand in neighbouring countries. “Banking services have been able to establish throughout the region and we are seeing the spread of regionally based retailers,” says Paul Brenton, the World Bank’s head of trade practice for Africa.

Kenya, the EAC’s biggest economy, is positioned to benefit most. Some of its lenders, such as Equity Bank, Kenya Commercial Bank (KCB) and Co-operative Bank, have spread across borders – including into countries outside the bloc – as have retailers such as Uchumi. Co-operative Bank recently followed Equity Bank and KCB by getting a South Sudanese licence, and plans to enter Uganda, Rwanda and Ethiopia. “The drive towards greater regional integration makes cross-border banking easier,” says a spokesperson for the lender. “Banks that remain focused on single territories will most likely lose their competitiveness and market position.”

Companies from elsewhere are also becoming more international, even if on a smaller scale. Rwanda’s Bank of Kigali, for one, recently opened a representative office in Nairobi.

East African Community

Miles to run

But there are still major failings in the coming together of countries. Analysts point out that trade integration tends to exclude the agriculture sector, which is vital for poverty reduction, and too many farmers are still isolated from markets. “The enormous potential benefits that would accrue from better linking areas of excess food production in east Africa to rising demand in large cities have yet to be realised, in large part due to the continuing presence of barriers to trade in staples as well as crop inputs,” says Mr Brenton.

There is a long way to go to create a proper single market. According to the EAC’s East African Common Market Scorecard 2014, at least 10 regulatory restrictions inhibit the movement of capital and 51 non-tariff barriers – which range from bureaucracy at border crossings to levies imposed on certain importers at ports – curtail trade.

Improvements usually happen “with significant exemptions”, according to Oxford Analytica’s Ms Waddilove. “This is the message of regional integration in the EAC: it has made significant progress, but unevenly and in line with its different members' operating environments and discrete perceived interests.”

Mr Brenton points to “an enormous task ahead at the level of legislative and regulatory actions”. He highlights challenges, including integrating IT immigration systems, and says that efficiency must be improved at important ports such as Mombasa and Dar es Salaam in order to boost trade and create jobs.

The EAC report recommends the total removal of tariffs and other measures affecting intra-regional trade, though that will be easier said than done. Too often, more time is spent debating changes than implementing them, and initiatives are habitually hampered by domestic interests.

The outlier

Tanzania, in particular, appears to be holding the bloc back as it nurses its own national concerns. The region’s second biggest economy, it is frequently the main perpetrator in upholding non-tariff barriers, particularly in areas of service trade and capital controls, the EAC scorecard points out. The country, which is also a member of a neighbouring regional bloc called the Southern African Development Community, has made halting progress on free movement of labour and has said that it will not yet abolish work permit fees. Burundi, the smallest and poorest EAC member, has been similarly slow to enforce changes, though less because of political decisions than institutional weaknesses.

Tanzania has some justifications for its concern. One cause of the collapse of the regional community in the 1970s was that Kenya was too big relative to its neighbours and captured most of the gains of integration for itself. Today, despite significant growth, Tanzania’s government is still cautious about the potential dominance of Kenyan companies in its smaller economy. It also worries about Ugandan and Kenyan workers taking vital jobs in its service and tourism sectors.

“Successive Tanzanian governments have baulked at the idea of free movement of labour and goods, which is a technocratic way of expressing fear that if it loosens restrictions, Kenyan individuals and businesses will flood its market and make its own entities uncompetitive,” explains Oxford Analytica’s Ms Waddilove. “Despite much rhetorical commitment to integration with its neighbours, this stance is very unlikely to change.”

While Tanzania dallies, Kenya, Uganda and Rwanda have come together to push ahead on important initiatives, including a single customs union being phased in across the three countries this year. At a recent EAC meeting, Tanzanian president Jakaya Kikwete was reportedly excluded from some meetings by leaders of the so-called ‘coalition of the willing’.

“As regional infrastructure plans have become more ambitious and the desirability of closer economic ties has grown, Tanzania has become isolated,” says Ms Waddilove.

Plans or pipe dreams?

Despite those problems, the organisation is pushing on with new aspects of the integration agenda, mostly spearheaded by the three faster moving countries.

Last year, EAC heads of state approved a deal to usher in monetary union over the next decade. Of the benefits, Mr Kenyatta said at the announcement: “Businesses will find more freedom to trade and invest more widely, and foreign investors will find additional, irresistible reasons to pitch tent in our region.”

But in the context of limited existing harmonisation, not everyone is so confident. Kenya, Rwanda and Uganda already present their budgets simultaneously every June, but all five member states will be required to harmonise monetary and fiscal policies and establish a single central bank before they can create a common currency.

Razia Khan, head of African research at Standard Chartered, says a great deal more economic convergence is required before east Africa adopts the single currency. The EAC economies vary widely, meaning that they are not uniformly affected by external shocks. Devising a monetary policy suitable for all of them will be hard. “That’s a big problem, a problem that would probably be lessened if they achieved a stronger degree of economic convergence – became more of a single trading bloc – well before any talk of the establishment of the single currency,” says Ms Khan.

Even the head of the International Monetary Fund (IMF), Christine Lagarde, has warned of the risks of rushing, saying that a lot of work is required to remove non-tariff barriers and harmonise tax regimes. “It is a very exciting and ambitious project,” she said last year, “but one where, as Aristotle would put it, ‘Hasten slowly. Don’t rush'.”

Eurozone lesson

The eurozone crisis provides a lesson for the EAC about the risks of monetary union, though Paolo Mauro, head of the EAC division of the IMF, says that work is being done to mitigate those potential problems. “Policy-makers are aware of what has happened in Europe and are also looking at lessons from other monetary unions in the Caribbean and in west Africa,” he says. “The objective is to do all of the preparation work as well as possible to minimise the risks.”

He points to efforts to improve the transparency of fiscal accounts, develop comparable monetary statistics and limit banking risks.

But these are big tasks and most observers see the 10-year timeline as overly ambitious. “It’s not clear that those economies will be able to achieve the necessary degree of convergence in the stipulated time frame in a way that would make monetary union possible,” says Ms Khan. “It’s one thing to sign up to the protocols, but quite another to make it meaningful in terms of implementation.”

The result? “I think this is something that will take decades rather than years,” says IHS’s Mr Bohlund.

The story will be similar for a planned political federation, the final building block in the EAC integration process. Still in its very early stages, the idea is that the five partner countries will have one federal government with supremacy over the states. Again, Kenya, Uganda and Rwanda are pushing ahead to form the guiding principles for federation, but the work that would have to be done first is almost overwhelming. An east African legislative assembly already exists, but other prerequisites include not only implementing the common market protocol in full, but building a series of federal institutions and harmonising defence and foreign policies.

“It is difficult to see all leaders wanting to give up a certain amount of sovereignty in order to make the [political] regionalisation project work,” says Ms Khan. “When has economics ever trumped political considerations in the region?”

Two-tier EAC

For those plans to become more than pipedreams, member countries face the challenge of first creating a fully functioning common market. In the near-term, as Tanzania drags its feet, and Burundi tries to build its institutional capacity, that will prove difficult.

Where does that leave the EAC? Despite the Tanzanian push-back there is little reason to think the bloc will disintegrate in the way that its predecessor did. “Uganda and Rwanda have good reason to keep Tanzania involved, not least to maintain alternative routes to the Indian Ocean,” says Ms Waddilove.

A more likely result will be what IHS’s Mr Bohlund calls a “two-speed union” in which Kenya, Rwanda and Uganda will “move forward alone, while Burundi and Tanzania will implement policies later on, when they have the institutional capacity and feel ready”.

It is possible that new countries will be added to the bloc, among them South Sudan and Somalia, which officials are vetting for accession despite poor security situations in both. Kenya has been particularly keen to admit oil-rich South Sudan, which is a major market for its exports, but the nation’s membership was put on hold last year when the technical team cited poor market economy structures and weak institutions. Since then the world’s newest country has been afflicted with the added woe of civil war.

Membership for these vastly under-developed and politically insecure nations could further contribute to an internal divide. “South Sudan is lacking in institutional capacity and if they accede that will contribute to more of a two-track EAC evolving, with Uganda, Rwanda and Kenya leading the way, and Tanzania, Burundi and South Sudan lagging,” says Mr Bohlund.

It is Kenya, with its bigger companies, better trained workforce and more sophisticated markets, which stands to reap the greatest gains from integration, and it will push the agenda forward. The process is not perfect, but if momentum can be built on, the implications for the region as a whole are significant.

As countries break down barriers and become better linked, they position themselves to be able to compete on the global stage with the larger African economies of South Africa and Nigeria. Rule by rule and road by road, east Africa is becoming an easier place to operate. Investors will not be able to ignore the region for much longer.


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