"The East African Community after 10 Years: Deepening EAC Integration"

Closing Conference Remarks By Ms. Antoinette Sayeh, Director of African Department, International Monetary Fund
Arusha, Tanzania
February 28, 2012

Good afternoon.

Honorable ministers, central bank governors, Secretary General of the EAC, the Canadian high commissioner, distinguished invitees, ladies and gentlemen. I was very pleased to participate in this important event on extending EAC integration in its second decade.

I want to again thank CIDA for their generous support. The contributions of the many presenters, discussants, and participants also deserve our thanks.

High level conferences provide excellent opportunities to address tough policy challenges and this conference was no exception. Over the past two days, we touched on a number of the most important issues facing the EAC as it seeks to further strengthen integration in its second decade.

  • A first issue was how to ensure strong, broad-based growth in EAC countries. Apart from the important ingredient of sound macroeconomic management, this raised questions of how to effectively implement the EAC customs union and common market to promote regional investment and trade;
  • A second theme was how to promote closer integration of the EAC’s financial markets. E-banking has been an area of success, but the more traditional banking and capital markets remain segmented;
  • A third theme was budget management. We noted, in particular, the lessons from the Euro Zone on the fiscal requirements for effective monetary union;
  • And last, we discussed the question of how to harmonize monetary and exchange rate policies during the transition to monetary union.

What are my take-aways from the conference?

On the question of growth and its key drivers, we know that macroeconomic fundamentals matter a great deal; low inflation, fiscal discipline, a competitive economic system, to name a few. But so do structural reforms such as a better business environment and better quality of fiscal and monetary institutions . In fact, achievements of the EAC’s first decade are in large part due to getting these fundamentals right. These macroeconomic gains need to be preserved and further consolidated.

That said, I think there was general agreement that the remaining exceptions to the customs union should be tackled and that the common market should be implemented in a decisive manner. Closer integration of trade and investment was frequently described as offering “win-win” outcomes.

There was also agreement that stronger regional financial integration was needed, in parallel with moves to make the financial system more inclusive. The absence, so far, of close financial integration across the EAC increases the cost of doing business and limits the scope for a full common market. The rapid growth of M-pesa or E-banking is one regional success story. But more is needed to foster the growth of regional financial markets and ensure that they are soundly supervised.

On budget policies, there was clear recognition that the planned move toward monetary union needs to be preceded by steps to ensure sound national budgets and debt management. This raises important questions of how to subject national budget policies to what Professor Collier described as “supra-national” discipline. As members of a common currency area, national governments would need to be subject to binding limits on fiscal deficits and public borrowing. The Euro zone is moving to strengthen this discipline under stronger regional institutions, but does not provide an off-the-peg model that can be adopted by the EAC. Similarly, the federal arrangements adopted by the US are far removed from situation today in the EAC. This is an area where further thought is clearly needed, and where EAC member governments need to consult among themselves and with their populations to develop an EAC model. This model would need to provide strong central discipline while also recognizing important national differences, such as between resource rich and other EAC countries. This is not a straightforward task, and needs to be done carefully if monetary union is to be a success. While Professor Collier suggested that this was perhaps a task for the next generation, others are clearly keener to make early progress, stressing that “careful does not need to be slow”.

On monetary and exchange rate policy harmonization, I saw clear interest in setting out a clear work plan and timetable. The challenge here will be to align this work program with that on fiscal integration. For effective monetary union, progress on harmonizing financial policies should not be de-linked from fiscal harmonization. Again, this brings us back to the need for decisions within the community on what pace of reform can be achieved.

In concluding, let me say that the IMF will continue to provide the technical and analytical support that the EAC and its member countries needs in these areas. We cannot (and should not) provide a standardized model for regional integration. But we are eager to discuss your priorities and engage with you on how these can be achieved, drawing on international experience. We would like to help you get to where you would like to be tomorrow.



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