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Pulling apart? Taking stock of East African Community

FINANCIAL STANDARD
By Frankline Sunday | March 15th 2016

On January 9, 2005, the world watched as the then US Secretary of State Colin Powell presided over the signing of a peace deal.

The pact was between Sudan’s Vice President Ali Osman Taha and the late John Garang, the leader of the Sudanese People’s Liberation Movement (SPLA), and the location was State House, Nairobi.

It was a moment of triumph for Kenya that had for more than three years hosted peace talks and deal-signing ceremonies for Sudan in Nairobi and Machakos.

The latest document paved the way for a referendum, and later, the creation of Africa’s newest state.

Apart from putting an end to four decades of bloody conflict, the deal was also expected to open up South Sudan to the ‘outside world’.

Kenyan companies were among those tapped to benefit from the opportunity to provide goods and services to jump-start the new economy.

Two weeks ago, South Sudan got admitted into the East African Community (EAC), increasing the regional bloc’s population to 162 million people. The country’s admission also means fewer restrictions for Kenyan exports.

But Kenyan companies that got into South Sudan earlier, positioning themselves for its EAC entry, are already finding themselves having to evaluate their investment strategy in the troubled nation.

Kenya’s largest lender by assets, Kenya Commercial Bank, earlier this month revealed it had booked a Sh6.1 billion foreign exchange loss in South Sudan in its last financial year.

The loss was attributed to an 85 per cent devaluation of the Sudanese pound, following months of civil strife and falling international crude oil prices.

KCB has since seen its balance sheet in South Sudan shrink drastically, with its loan book reducing from Sh16.3 billion in 2014 to Sh5.3 billion. Its assets have also reduced from Sh12.2 billion in 2014 to Sh4.3 billion.

Shutting down

The announcement from the lender came weeks after regional brewer East African Breweries announced it was shutting down its Sudan depot after posting a Sh1 billion exchange rate loss.

Similar tales of losses have come from other financial institutions, including CfC Bank and Equity Bank. For Equity Bank, on top of forex losses, it saw 200 of its employees in South Sudan take to the streets to push for better pay.

Hot on the heels of these events, Uganda appears to have backtracked on a Sh400 billion pipeline deal it had agreed on with Kenya in August last year.

A statement from Tanzania’s presidential press earlier this month said Uganda had agreed to transport oil through Tanga rather than Lokichar in Turkana County.

This move, in addition to denying Kenya a lucrative infrastructure opportunity, threatens to undermine the country’s own multi-billion-shilling efforts to open up its Northern Corridor.

These issues have seen many in the country question the value of Kenya’s investment in the 16-year-old regional economic bloc. But it is not the first time the country, or other East African nations, are debating EAC’s value.

Political scientist Bheki Mngomezulu writes that the bloc’s collapse in 1977 was a result of several factors, key among them nationalism as newly independent countries pursued their own economic and political interests.

The demise of the EAC was further hastened by the 1971 coup in Uganda that saw the then president Milton Obote overthrown and his counterparts Julius Nyerere and Jomo Kenyatta refusing to work with the new dictator, Idi Amin.

The parochialism and mistrust that ensued as each leader tried to advance his national interests inevitably stalled the integration process. As a result, in 1977, the EAC was dissolved and its assets divvied up between the three members states.

Today, the revamped East African Community marks its 16th year with twice as many member states. But, like 39 years ago, significant political and economic policy weaknesses are again threatening to stall integration.

Big brother

Kenya — for years considered the ‘big brother’ in the trading bloc and the villain in the previous acrimonious divorce — has seen its influence wane as its neighbours’ economies slowly catch up.

Data from the Kenya National Bureau of Statistics (KNBS) shows the country’s total exports to the EAC rose by 25 per cent from Sh101 billion in 2010 to Sh125 billion in 2014. However, relative to Africa and the rest of the world, Kenya’s share of trade with East Africa has shrunk from 10 per cent to 7 per cent over this period.

Further, the country’s national interests in the recent past appear to have lacked the support of other member states.

In 2014, the EAC missed a key deadline to sign Economic Partnership Agreements (EPAs) with the European Union. The agreement gives the region’s products duty-free export access to European markets.

Kenya’s position in the negotiations was particularly precarious since it is the only EAC member state classified as a developing country. For the EPAs to be valid, the entire region needed to agree to them, but special concessions would remain in place for least developing countries. Kenya, therefore, stood to lose the most if export subsidies were withdrawn.

But according to Kwame Owino, the head of the Institute of Economic Affairs (IEA), the marginal drop in Kenya’s share of trade in the region should not be construed to mean the country is being short changed, or its influence is waning.

“The marginal ground we’ve lost in manufacturing has been gained in strengthening our services and infrastructure offering to the region. At the same time, we are the largest investor in the EAC region, which still remains our biggest market for manufacturing,” he said.

In the past half decade, several multinational companies, including Microsoft, Visa, Coca-Cola, General Motors and Google have set regional headquarters in Nairobi, building skills and exporting talent to East Africa.

Kenya further hosts at least three key infrastructure projects, including the second container terminal in Mombasa, Lapsset (Lamu Port-South Sudan-Ethiopia Transport Corridor) and the standard gauge railway, with regional significance.

Ultimately, however, the success of the integration process depends on the goodwill of the citizens and how their interests are catered to in the entire process.

“I think last year and this year are crucial for the EAC. This is because of the violence that broke out in Burundi and the contested elections in Uganda last month,” said Mr Owino.

“The foreign policy stance adopted by EAC member states has been found to be wanting, and the citizens in respective countries are reading the signs.”

Reading the signs

Despite Ugandan President Yoweri Museveni claiming election victory last month after a poll found to be flawed, and with his main political rival still under house arrest, no EAC leader has spoken out against this.

Similar silences have been met from the EAC on key issues affecting the development and well-being of citizens in member countries, including corruption in Kenya and political intolerance in Burundi, Rwanda, Uganda and South Sudan.

“I think we have deferred the prospects of a political union for at least a generation after observing how the EAC has handled these issues in the past few months. As a Kenyan citizen, I would not vote for an EAC federal union when it comes to a referendum,” said Owino.

When it comes to establishing a common currency, one of the key objectives of the integration, the region’s ambitions also appear currently untenable.

At the 16th EAC Summit two weeks ago, outgoing secretariat boss Richard Sezibera assured leaders the move towards a monetary union is on the horizon, with key legislation headed to the East African Legislative Assembly (EALA) and member states’ assemblies.

Henry Rotich, Kenya’s Treasury Cabinet Secretary, however, said Kenya remains cautious to undue exposure of its economy to regional crises.

“The significant progress towards a regional monetary union necessitates careful sequencing of reforms ... these efforts will take time, and it is better to put all the building blocks in place,” he said in the 2015-16 Budget Policy Statement.

Owino shares the same sentiments, adding that the differentiation across member state economies and different fiscal and monetary regimes makes the process of harmonisation complex.

“I do not think that a monetary union is possible at this time because the financial systems and currencies of member countries have evolved in different ways, and the respective central banks have different motivations.”

According to University of Nairobi political scientist Joshua Kivuva, one way to avoid bumps and deadlocks in the journey to integration is to remove some of the executive powers at the top.

“One of the reasons for the failure of the defunct EAC was the over-concentration of decision making in the leadership of partner states, and this has not changed significantly,” he said.

“Integration is essentially a political process that is both driven, and seriously challenged by political interests. While political support is necessary for the success of any integration mechanism, its absence spells doom for integration.”

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