Tread with care in EAC integration bid

Trucks at the Kenya-Uganda border. FILE PHOTO | NMG 

By SCOTT BELLOWS
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Summary

• Historical East African Community attempts failed in large part due to Kenya’s economic dominance such that our products would flood and dwarf other regional markets.
• The latest iteration of regional integration includes a wider mix of nations including Kenya, Tanzania, Uganda, Burundi, Rwanda, and South Sudan.
• EAC from its headquarters in Arusha announced this week that plans were on track to roll out a single currency by 2024.

Integrate, integrate and integrate! Since our independence in 1963, the East African region has periodically beat the drum proclaiming the need for greater integration among the countries.

Historical East African Community attempts failed in large part due to Kenya’s economic dominance such that our products would flood and dwarf other regional markets.

The latest iteration of regional integration includes a wider mix of nations including Kenya, Tanzania, Uganda, Burundi, Rwanda, and South Sudan.

The East African Community from its headquarters in Arusha announced this week that plans were on track to roll out a single currency by 2024.

A monetary unified currency union exists as one of the East African Community’s four pillars, with the other pillars as a customs union, common market, and political federation.

The customs union and common market concept for a free-trade zone could be especially useful to Kenya but not all the unnecessary sub-areas lumped together under it including health harmonisation, etc.

Cross-border integration is not necessarily helpful. In a monetary union, are we ready to lose our sovereignty? Are Kenyans ready to give up our shilling? Are we ready to abandon our fiscal policy and wait on Uganda and Burundi to decide our tax rates? Do we want to lose our monetary policy decision power and wait for South Sudan and Tanzania to decide our interest rates? A resounding answer rings clear: No.

The Central Bank of Kenya, one of the most effective central banks in the developing world, would be replaced by an East Africa Central Bank. Also, tax harmonisation policies would take away Kenya’s ability to control our fiscal policy.

Even within the European Union and the Euro currency zone, the different countries can still set their independent tax rates.

So why must we have this hyper-aggressive integration here in East Africa?

The East African Community even intends to unify insurance and microfinance regulations. Why? Kenya might benefit since Rwanda’s microfinance laws are more progressive than ours and then our insurance regulations are more arbitrarily restrictive than other countries. But it seems nonsensical to unify many sectors even unrelated to the needs of a currency union itself.

Some sectors may benefit from more co-operation and harmonisation, such as Lake Victoria fishing or cross-border transportation. But these stand separate and should be dealt with and communicated separately than a currency union.

If Brexit has taught us one thing: sovereignty matters. A big complaint among citizens of countries in currency unions is the loss of sovereignty.

The UK was not even in the eurozone currency union but still felt that its integration with the continent was too much.

Across the world, when integrating across cultures, economies, and languages, a myriad of problems emerges.

We would be locked into a set currency union with much weaker economies with much less democratic national institutions. It will force countries into fiscal responsibility by holding treaties limiting the proportions each nation can borrow.

However, we would want to battle our economic recessions by loosening our fiscal policy. Each country exists in different stages in their economic cycles.

Kenya relies more on the service sector and horticulture, Rwanda and Uganda more on coffee, Tanzania on mining, and South Sudan relies overwhelmingly on oil.

So, an economic slump in Burundi will likely not coincide with an economic slump here in Kenya. But we would all be forced to abide under the current East African Community plans to the same fiscal and monetary policy. Nations need similarity and government discipline to integrate.

By comparison, note how in the past ten years how the weaker less disciplined economies of Europe damaged other eurozone economies.

The same issue would likely happen to us. As the dominant and most diversified economy in the region, Kenya would play the role in East Africa that Germany plays in Europe.

debt crisis

Since Greece’s sovereign debt crisis began in earnest in 2010, Germany spent billions of euros to prop up the Greek government so it did not default on its national debt and therefore threaten the euro. Are we willing to pay billions of shillings to the Ugandan government, as an example, if it violates the East African Community rules and overborrows?

Inasmuch, do we trust the other five regional countries to follow government borrowing rules? If many of our neighbouring regional nations ignore even their constitutions over the transfer of power, how can we then trust them not to overborrow that would sink an East African regional currency and thus harm our Kenyan economy?

The risks seem too high and the benefits too low. But many commentators point to the fact that West Africa and Central Africa each retain long-standing currency unions in existence for decades. But France forced these unions following colonialism’s official demise and still controls much of the currency and the required foreign currency reserves.

In short, integration is not necessarily a good outcome with our neighbours in the region. Let us integrate some common policies that directly affect cross-border issues, but we should keep our national sovereignty and maintain healthy competition with other countries in East Africa.