Measuring Financial Barriers Among East African Community Countries
IMF Working Papers, August 1, 2010
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Bibliographic details
- Authors: Yi David Wang
- Published: August 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455205240.001
Research objective and methodology
- Objective: Quantify existing financial barriers among East African Community (EAC) member countries based on analysis of each member country’s foreign exchange market.
- Primary methodological contribution: Generation of an aggregate measure of financial barriers for the three relatively more advanced members (Kenya, Uganda, and Tanzania) using forward foreign exchange and interbank interest rate data.
- Key data and concepts employed: forward foreign exchange, interbank interest rates, interest rate parity, spot market.
Main empirical findings
- The paper generates an aggregate measure of financial barriers for Kenya, Uganda, and Tanzania using forward foreign exchange and interbank interest rate data.
- Empirical results, corroborated by other evidence such as:
- levels of development of the financial markets, and
- restrictions on capital flows,
indicate the following ranking of financial openness within the EAC:
- Kenya is the EAC’s most financially open country.
- Uganda is the next most financially open.
- Tanzania is the least financially open of the three.
- Conclusion drawn: The fact that the three countries exhibit different degrees of financial openness suggests that financial integration in the EAC region has a way to go.
Policy implications and interpretation
- Differences in measured financial openness across Kenya, Uganda, and Tanzania imply incomplete financial integration in the EAC.
- Policy relevance centers on:
- identifying and addressing market frictions revealed by forward FX and interbank rate deviations from interest rate parity,
- considering legal or regulatory restrictions on capital flows that corroborate measured barriers,
- prioritizing sequencing and reforms to deepen financial market development to support regional integration.