Diplomacy

Closer than Ever

East African Community fiscal union

The EAC just signed two bills that bring a monetary union closer to reality.

A teller counts Kenya shilling notes on a money counting machine inside the cashier’s booth at a forex exchange bureau in Kenya’s capital Nairobi

In another important step toward the ultimate goal of achieving a monetary union within the East African Community (EAC), the Council of Ministers this week ratified two bills that will further integrate the disparate economies.

With a focus on establishing a common currency by 2024, the governments of Burundi, Kenya, Tanzania, South Sudan, Uganda, and Rwanda have approved a bill that will allow for the establishment of the East African Monetary Institute (EAMI). This transitional legal body would be able to initiate the required changes for creating a new common currency.

In theory it would eventually be replaced by a new East African Central Bank.

An additional document approved by the community’s Council of Ministers this week will see the establishment of the East African Statistics Bureau, a body that will be tasked with standardizing information and therefore facilitating the convergence of the six economies into a single market.

The bills come somewhat later than expected; the timeline set out in the 10-year monetary union establishment plan previously drafted by the member states in 2013 foresaw the establishment of the EAMI by 2015.

This ratification came two months after the government lawyers from the East African Community partner states, who together form the EAC Sectoral Council on Legal and Judicial Affairs, gave the go-ahead to the draft legislation that has just now been approved by the respective governments.

The late-February meeting was the first held by the Sectoral Council in three years, and was a necessary step for the advancement of the legislation.

The integration of EAC member states is considered of paramount importance to economic development in the region. Since 2000, when the Republic of Kenya, the United Republic of Tanzania, and the Republic of Uganda agreed on the formation of the EAC, which was later joined by Burundi, South Sudan, and Rwanda, the partners have established a customs union that has helped streamline border clearances, simplify work permit issuance, and ensure the recognition of professional agreements by member countries.

There has also been a broader harmonization of monetary and fiscal strategies among member states. Since 2010, the EAC has established a common market which has allowed for the free movement of people, work, and capital. According to the IMF, progressive integration in the area has increased regional trade by 40% over the past five years.

The EAC

With a total population of over 150 million people and a combined GDP of around USD146 billion estimated for 2016, the EAC’s road toward full integration is still some years away. Efforts to pool financial systems and establish common accounting and reporting practices have stalled many times in the past, at times at considerable cost to the countries involved.

In particular, delays in harmonizing fiscal and taxation systems within the common market have encouraged tax competition to attract foreign investment. This alone has cost millions in tax holidays and fiscal benefits for companies establishing themselves in the EAC. As the implementation of its plans for integration stalls, the consequences of these competitive practices will become more apparent.

As part of its 2050 vision, the member states project that GDP per capita will rise to USD3,000 by 2030 and USD10,000 by 2050, from USD790 in 2014. The percentage of the population living under the poverty line is also expected to drop from the current level of 40% to 0.9% by 2050.

These are ambitious goals that will require decisive governmental action to achieve; crucially, politicians will need to foster a sense of community among member nations to rise above internal political disputes.

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