Regional Integration in Eastern and Southern Africa: The Cross-Border Initiative and its Fiscal Implications


WP/95/23-EA
Regional Integration in Eastern and Southern Africa:
The Cross-Border Initiative and its Fiscal Implications
by Ferdinand Bakoup, Abdelrahmi Bessaha, and Luca Errico

Attempts at regional integration in independent Africa can be traced
back to the early 1960s. Recently, efforts at building or strengthening
regional integration were renewed, reflecting not only a growing regionalism
in the world economy in general, but also a strong commitment by
policymakers to reverse the trend of poor growth performance through the
design and implementation of regional arrangements and robust adjustment
programs. New initiatives are being undertaken in West and central Africa.
Similarly, countries in east and southern Africa have recently launched the
Cross-Border Initiative (CBI) for promoting trade, investments, and payments
in eastern and southern Africa.

The move to economic regional integration, if pursued in a spirit of
mutual benefit, stimulates trade by freeing it from restrictions and
barriers, promotes growth through economies of scale, improves the
institutional environment, strengthens the external discipline that sustains
appropriate policies, and allows for timely responses to changing
circumstances. The move to integration also entails temporary costs,
although these can be minimized and/or absorbed if trade liberalization is
supported by adequate macroeconomic, structural, and social policies. One
such cost would be the reduction in government revenue from customs duties
following regional integration. A sound fiscal policy response, including
tax system reforms, could help ensure that short-term pressures on revenue
are addressed adequately.

The main objectives of this paper are (1) to assess the gains that
Burundi, Kenya, Tanzania, and Uganda could achieve by participating in the
current regional integration process; (2) to analyze the fiscal implications
of the tariff reform for these countries, within the framework of the CBI,
by providing quantitative estimates of government revenue losses that would
stem from changes in tariffs--through elimination (for intraregional trade)
and reduction (for extraregional trade)--as well as estimates of the
additional fiscal efforts needed to maintain the same overall fiscal policy
stance despite the move to regional integration; and (3) to suggest possible
fiscal policy responses for the short term, such as adjusting sales tax
rates, and for the medium term. The latter include improving the management
of fiscal exemptions and tax smuggling, adopting a value-added tax (VAT),
and increasing indirect taxes under the destination principle to make up for
revenue forgone and to comply with the tax harmonization process induced by
the regional integration.