Kenya increasing integration of East African states to enhance growth

Originally created in 1967, the EAC only took off at the turn of the century. It was moribund for two decades after collapsing in 1977. But since its revival in 2000, the body, which consists of Burundi, Kenya, Rwanda, Tanzania and Uganda, has taken great strides towards closer regional integration. Nairobi hopes that the regional body can bolster trade and foreign direct investment (FDI) and support economic growth.

Regional Growth

The member states have committed to this process in the firm belief that it will enhance trade and economic growth, and the early signs for growth and development are positive. The community, which has a combined population of 140m and GDP of over $100bn, has been growing rapidly. Between 2003 and 2013, real GDP growth averaged 6%, according to the IMF. Furthermore, although beginning from a low base, intra-EAC trade was the fastest growing in Africa in 2014, according to Richard Sezibera, secretary-general of the EAC.

The process of deepening integration began in 2005 with the announcement of a Customs union protocol, establishing a common external tariff and mandating the gradual removal of internal tariffs. This was followed in 2010 by the common market protocol allowing for the free movement of people, goods, labour, services and capital within the bloc.

Towards A Single Currency

The latest development is the 2013 Monetary Union protocol, which sets out the terms for the introduction of a single currency by 2024. The IMF has stated that greater integration is “expected to help sustain strong economic growth and improve economic efficiency. A larger regional market will lead to economies of scale, lower transaction costs, increased competition, and greater attractiveness as a destination for FDI.” The first step towards this goal has already been taken. In May 2014 the East African Payment System (EAPS) was launched. The new system will facilitate real-time cross-border payments between member states. Initially, the EAPS was operational between Kenya, Tanzania and Uganda, linking the Tanzania Interbank Settlement System, the Kenya Electronic Payment and Settlement System, and the Uganda National Interbank Settlement. Lucy Kinunda, director of national payment systems at the Tanzanian central bank, told the local press, “We see the enthusiasm among commercial banks and traders building up as it facilitates intra-regional trade by reducing costs and risks in money transfers across border.”

While there is much expectation for the single currency and the political and economic integration it will bring, the main challenge will be the process of macroeconomic convergence. There has been substantial variation in inflation and economic growth rates within the EAC. For Kenya, there will also be a challenge in meeting the macroeconomic criteria laid out in the Monetary Union Protocol. In the decade to the end of 2013, Kenya only achieved the inflation target of below 8% in 2010 and 2013. The country fares better on the ratio of public debt to GDP, maintaining a ratio below the target level of 50% every year between 2008 and 2013. The member states have almost a decade to meet the convergence criteria.

Beyond The EAC

In a notable move for the bloc, the EAC finalised a comprehensive Economic Partnership Agreement (EPA) with the EU in October 2014. The EPA will open a long-term perspective for free and unlimited access to the EU market for EAC products. Furthermore, in June 2015 African leaders signed the Tripartite Free Trade Agreement (TFTA), which looks to unite the EAC, the Southern African Development Community, and the Common Market for Eastern and Southern Africa (COMESA) into one unified region.

The TFTA, which is based on the pillars of market integration, infrastructure expansion and industrial development, is an important step towards the goal of economic integration across the continent envisaged in the 1994 Abuja Treaty on the Establishment of an African Economic Community, signed under the auspices of the Organisation of African Unity. While there is great potential for the TFTA to deepen economic ties across the continent, the scope of the undertaking is likely to delay the most meaningful benefits of the TFTA for Kenya and the rest of Africa. While all 26 member states have signed an in-principle agreement, the regulatory regimes governing the three participating regional economic communities and the different member states will need to be harmonised, which could push the effective start date of the TFTA beyond the anticipated deadline of 2017.

Trade Patterns

While intra-continental trade accounts for around 40% and 60% of total trade in the Americas and Europe, respectively, it stands at just 12% for Africa. The EAC has seen greater progress in this regard than other African regions. While intra-regional trade in the Economic Community of West African States or the Arab Maghreb Union in West and North Africa, respectively, accounts for one-tenth of overall trade volumes, the EAC averages around 30%. Similarly, Kenya tends to outperform the regional average, with more than 45% of its exports bound for other African countries in 2014, according to the Kenya National Bureau of Statistics. However, receipts from its African counterparts accounted for just 9% of Kenyan imports, compared to 61% from Asia, with India the primary source country since 2010. With Africa’s share of global trade at around 3%, according is crucial to improving export revenues and creating jobs, as well as helping to buffer markets from external macroeconomic pressures, such as the current economic slowdown in Asia and the anticipated tightening of credit markets in the US and Europe.

Kenya Gains

Kenya’s trade balance is expected to see substantial gains from the agreement. According to a recent analysis by the Ugandan Ministry of EAC Affairs, Kenya is expected to be one of only five countries in the bloc to see exports increase by more than $100m following full implementation of the TFTA. Moreover, with 41% of Kenya’s exports destined for TFTA member states in 2011, compared to the 13% share of imports from TFTA participants, Kenya enters the bloc from a position of relative strength.

In particular, Kenya’s industrial and manufacturing sector is likely to be reignited by greater access to the TFTA market. Manufacturing is one of the priority sectors identified by the government as a key engine for future growth in its Vision 2030 development plan. The TFTA gives Kenyan exporters preferential access to six new markets not already covered by the EAC or COMESA, namely Angola, Botswana, Lesotho, Mozambique, Namibia and South Africa. “The TFTA and the Continental Free Trade Area agreements provide an opportunity for Kenya to become a manufacturing hub for Africa,” Phyllis Wakiaga, CEO of the Kenya Association of Manufacturers, said in July 2015.