13 June 2012

East Africa: Economic Woes in EAC Calls for Responsible Spending

Most economies across East Africa Community (EAC) are officially looking, ready for the recovery road. The positive outlook presented by national ministries of finance across the region, however, mask huge fiscal holes created by long period of economic hardships these countries have gone through.

Each EAC Partner States have its own problems, caused by different problems at different times. However, there are those big economic problems, which are common across the region. Irrespective of their causes, the size of the problems is nonetheless a mountain to climb for each country.

There are loads of issues across the region that calls for immediate fix. There are also those that will require sufficient time (data and resources) to fix. And of course, there are those that cannot be fixed in medium term nor can be fixed at all.

As business community waits for the reading of national budgets for the FY 2012/13 I would like to highlight challenges in the context of available capability to fix them. Highlighted issues are more regional in nature and as such would require a regional approach to manage them.

This is so given that already substantial work has been completed in regard to policy frameworks at EAC level; especially in areas of coordination; cooperation and consultations, which can provide a meaningful start for regional policy actions.

This article, however, is limited to those areas which are more likely to have far reaching impact on trade and investment in EAC and as such calls for coordinated policy actions.

While the media have endeavored to highlight the current economic problems manifested in reported revenue collection shortfalls across the region; hiked lending interest rates; rising inflation levels; worsening trade balance (export earnings not enough to pay for import receipts); consistent energy shortfalls that has led to rationing and blackouts; all indicate one thing in common. And this commonality of issue makes it a regional issue. Like one regional leader once said "if it walks like a duck; quacks like a duck; then most likely it is duck" And indeed, with the synonymous economic problems, almost happening at the same time; the problems are more as a result of continued trade imbalance and chronic fiscal deficits across EAC Partner States!

Trade imbalance in our EAC case represents a situation where our imports exceed exports to worrisome levels; and consistently so! If the value of our export receipts cannot cover the import needs, then you wonder who pays.

Fiscal deficit in our regional case represent a situation where the budget of national governments plan (and actually spend) spend more than is collected! You can call it living beyond your means. Then you as well wonder who finances this deficit. Financing the deficit of aside, who cares about the impact of this spending especially on business?

Since these two problems are prevalent in each EAC Partner State, they symbolically represent what I would call a regional problem. The problems are regional in the sense that each EAC Partner States have been confronted with it for quite some time. The instruments applied to manage the problems are more less the same; albeit with little impact. The capability of individual Partner State to juggle with the problem is too inadequate. The business consequences of chronic trade imbalance and fiscal deficits continue to make our region very uncompetitive.

These two problems (trade and fiscal deficits) are predominantly the major sources of un-ending currency depreciations (loss of value of national currencies against the dollar) and high cost of business financing/business loans.

All these have had consequential brunt on cost of doing business in the region and consequently on employment. The constant claim of limited resources aside, the efficient use of the said limited resources requires Partner States to re-engineer national governments spending both in terms of composition and posture (attitude).

With the dawn of continued shortage of food supply in the region (absurdly we have plenty rains and comparatively good soils, mind you!) and ever increasing reliance on imported fuel (marked by price instabilities) plus shortage of electricity, there are no other indicators left to show that we need to act together to confront the enormous economic beasts of our time.

The striking fuel shortage that recently hit the region like the notorious locust "invasion" carried with it a new meaning for the region. Fuel shortage, which has spared no country in EAC, started with Kenya then Uganda, Rwanda, Tanzania and then Burundi. Never mind, the cycle gets back and forth, un-interruptedly!

The timing of this shortage has a hidden meaning. Not that there are few bulk importers in the region, who may connive to play games, but the scarcity of dollar reserves could have tempted this negative act of conspiring to hoard. Anyhow, the most telling was the speed at which the shortage hit the region. Even telling more was the openness or is it the vulnerability of our economies?

Whatever the case, the total fuel reserves (stockpiles) held by the EAC Partner States as well as private industry (for the purpose of providing economic and national security during an emergency or crisis) is estimated to cover about 30 days consumption. This is well below the standard of 90 days of prior year's net oil imports/consumption. This is too risky for emerging and vulnerable economies like ours.

In a related trend, the price of local currencies came second on the shooting range. The dollar rate has increased to a record level across all countries of EAC. The blend of foreign currency appreciation (shortage of foreign currency as a result of high demand, mind you!) and fuel price increments is tormenting the local production and distribution - as reflected in escalating prices of local commodities. The recent reports from Ministries of Finance and central banks indicate an increase in general price indices. While the depreciation of local currencies exerts significant pressure on foreign currency reserves, reduced export value worsens the situation.

Before Partner States had settled the itching economic problems mentioned above than the teachers and physicians (Doctors/Nurses) came up knocking for a pay increase. The scale of the doctors and teachers demonstration against poor pay is slowly but picking up the momentum. However, it is important to note that this, by default, is an indicative sign of a policy issue that needs consultations and fixing at the earliest time possible.

Given the nature and scale of recent economic problems, EAC Partner States need to consider increasing their cooperation in managing the economic problems. Economic problems are indicatively showing that they need a regional approach than are currently handled at national level.

Partner States need to increase the level and degree of cooperation and coordination on fiscal and monetary policies so as to mitigate potential risks in macroeconomic imbalances.

Each deficit level in one Partner State is inherently a burden to the other. As a result of increased trade within themselves (EAC), some problems in one country adversely creep into the life of the others.

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