Speech

"The East African Community: The Next Decade" Opening Presentation at the East African Community Conference by Mr. Naoyuki Shinohara, Deputy Managing Director, International Monetary Fund

February 27, 2012

Good morning.

Chairperson of SCFEA, honorable ministers, central bank governors, Secretary General of the EAC, distinguished invitees, ladies and gentlemen, I am delighted to join this conference.

I would like to thank Dr. Sezibera for his kind introduction. I would also like to thank the EAC for their help in organizing this conference. And a sincere thanks to the Canadian International Development Agency for generous funding for this event.

This is my first visit to the East Africa Community. I look forward to learning much in the next two days—about the region, its achievements, and its challenges. In addition to the conference sessions, I will attend meetings with the country authorities and with representatives from civil society organizations, think tanks, and the private sector. I look forward to hearing your views.

The East African Community is now in its second decade. The EAC has achieved a lot during this time. The community has grown from three to five countries, and other applications have been received—which attests to its attractiveness. One reason is the strong macroeconomic track record of existing members. Since 2005, average per capita income growth in EAC countries was 3.7 percent, compared to 3.2 percent for sub-Saharan Africa as a whole. Inflation has been generally well-contained, averaging in the single digits in the last decade, after averaging more than 20 percent in the 1980s and 1990s. That said, of course, some countries have recently experienced higher inflation because of food and energy price shocks. Foreign direct investment in the five EAC countries has also been strong, more than doubling to $1.7 billion over the past decade. Poverty remains too high, but is generally trending down across the community.

Challenges remain, of course; and I will come to these in a few minutes. But first let me comment on the economic outlook. The IMF recently published updated projections that take into account developments in the Euro zone. These projections include mixed news for sub-Saharan Africa.

On the positive side, Sub-Saharan Africa is projected to see continuing strong growth. In the baseline forecast, sub-Saharan African economies are projected to keep growing at rates close to last year’s 5 percent. A number of countries will benefit from sharply rising mineral exports this year. Indeed, Africa is projected to be one of the world’s strongest-growing regions in the next few years. Only developing Asia, led by China and India, is projected to grow consistently faster with 7 to 8 percent. Strong growth in Africa reflects several factors. Macroeconomic fundamentals in the region have improved. Commodity exports to fast-growing Asian and other emerging market economies remain strong. These have become a major engine of exports for the region, accounting for two thirds of export growth. A growing African middle class is creating new internal markets for goods and services. In some of the highest growing economies of the region, there is mounting evidence that the fruits of growth are benefiting all segments of the population, albeit to different extents, and that access to publicly provided services has expanded rapidly. And the private sector is investing in new technologies in areas such as banking and communications to boost productivity

But there are also concerns: global prospects have weakened and downside risks have risen sharply. The global recovery is threatened notably by strains in the euro area. The euro area is projected to enter a mild recession in 2012 with the growth of -0.5 percent, driven by high sovereign borrowing costs, slowing bank credit, and tighter fiscal policies such as tax increase and expenditure cuts. With only a weak euro area recovery projected for 2013, advanced economy growth is projected to remain in the 1 to 2 percent range in 2012-13. This is down from more than 3 percent in 2010. And the risks remain significantly on the downside.

This global backdrop has policy implications for East African countries.

• First of all, falling global price pressures may help with disinflation in the region; but negative external price shocks cannot be ruled out. With weaker global demand, food price inflation is projected to slow. Absent domestic shocks, this will help support tighter monetary and fiscal policies in delivering lower inflation in East African economies. But oil prices are risky again recently partly because of the Iranian situation. There is also the risk of weakening other commodity markets. These may also lead to widening trade deficits.
• Second, the outlook for external commercial financing may also be challenging for some countries. Emerging markets saw strong portfolio capital inflows in 2010 and early-2011. These inflows had diminished since mid-2011, but picked up again since the end of last year. Capital flows has now become very sensitive to risks. In the face of such high volatility, budgets should be prudent about likely access to external commercial financing. Over the medium-term, fiscal austerity in Europe may also lead to declining donor funding for the EAC region.
• Third, weaker global demand will also put a premium on competitiveness. Reflecting the projected mild recession and slow recovery in the euro area, there will be limited market growth in advanced economies in a few years to come. And even fast-growing Asian markets are likely to expand more slowly because of the global slowdown. This implies a difficult business outlook for exporters, and makes it ever more important to take steps to strengthen domestic business climates and competitiveness.

With these words on the global economic context, I would like to turn back to the aspects of regional integration that I hope we can discuss today and tomorrow.

One question is the optimal pace of integration. The EAC now includes countries with a combined population of more than 130 million, and further expansion of the community to new members is a real possibility. The challenge is how to balance the prospective benefits of a larger common market against the greater complexity that comes with a more diverse membership.

With a diverse membership, a challenge is to ensure that all countries benefit from regional integration. This is partly a question of productivity growth. Countries benefiting from rapid productivity growth and improving living standards will be more ready to tackle the adjustment challenges involved with membership in a common market. In this connection, analysis by IMF staff shows a gap between the countries experiencing rapid productivity growth, such as Tanzania, for example, and slower growing countries. This is worrisome, as a widening income gap is opening up between some of the EAC countries. One issue here may be the importance of national reforms to strengthen business climates and foster productivity as a supplement to the regional integration effort. A session is devoted to this topic later in the conference.

A second question is how to better implement the customs union and common market. These are ambitious reforms, and there seems to be a long way to go. Important non-tariff trade barriers remain between EAC member countries. Without a truly integrated market, the community is not likely to see the full benefits of improved productivity, competitiveness, and welfare. I am encouraged, here, that Dr. Sezibera has identified removal of non-tariff barriers as a major work priority for the EAC in 2012.

A final critical question relates to the appropriate pace for moving beyond a common market to monetary union. Certainly, good progress in implementing the customs union and common market will strengthen prospects for successful monetary union. But the latter will also depend crucially on achieving convergence in fiscal, debt, and financial policies. These issues of policy harmonization ahead of monetary union will also be discussed in several sessions at this conference.

Thank you very much and I look forward to these discussions at the following sessions.