14 March 2017

East Africa: EAC Scorecard Highlights Barriers to Trade

East African Community partner states have maintained restrictions on free movement of capital, according to the EAC Common Market Scorecard 2016.

The 2016 scorecard, which was launched on Monday, focuses on the implementation of free movement of goods, capital and services, and identifies the barriers to intra-EAC trade.

The greatest restriction across the EAC is capital controls, which affects other transactions under the Common Market Protocol. The controls hamper foreign direct investment and thus the region's ability to fully participate in global value chains.

The scorecard states that only three of the 20 capital operations -- foreign sale by residents of shares or other securities of a participating nature, external borrowing by residents, and repatriation of proceeds from sale of assets -- are free in all the partner states. Tanzania, with 10 restrictions, and Burundi, with eight, are the most difficult countries in the region in which to move capital.

Inward direct investment is restricted in Tanzania by the Investment Promotion Act, which requires, among other things, that foreign investors invest at least $300,000 -- the threshold for local investors is $100,000 -- and the Insurance Act, which provides that for registration as an insurer one has to be a local company, deemed to be resident, have a third of the controlling interest held by citizens, and a third of the members of the board be Tanzanians.

The scorecard has mixed results: Partner states have undertaken a number of reforms in each of the areas covered - capital, services and goods -- but some barriers remain.

Although no EAC member state restricts repatriation of the proceeds from asset sales within the region, only Burundi does not impose restrictions on inward direct investment. This means that there is discriminatory treatment for non EAC investors and restriction of market access in select sectors.

All except Burundi do not impose restrictions on outward direct investment, so domestic firms can expand their operations in these countries.

With respect to the freedom of movement of capital, members have undertaken a number of reforms for sale of issue of derivative products locally and sale or issue of derivative products abroad by residents and additional reform harmonising the withholding tax rate for interest payments on government securities.

"These reforms are a plus for securities operations since the derivatives markets offer opportunities for hedging among others, while the reform regarding the withholding tax on government securities like in Uganda makes the market more attractive to non-resident investors," says the scorecard.

While these reforms are positive developments, 18 of the 20 capital markets operations continue to be restricted in at least one partner state. Kenya has 19 of 20 unrestricted operations, while Burundi only allows 12 of the 20 operations; Tanzania restricts 10 of the 20 operations.

The CMS report indicates that Kenya and Tanzania have the fewest tariff equivalent charges. However, Kenya's use of non tariff barriers (NTBs) increased from 10 to 23, and Tanzania's more than tripled, from seven to 24.

"No country improved in terms of NTBs, pointing to a significant impediment to regional integration," says the scorecard.

With respect to the free movement of goods, partner states have implemented the EAC tariff schedule, eliminating tariffs on each other's goods, and have adopted the revised EAC rules of origin. As in 2014, partner states continued to apply tariff equivalent measures like subjecting intra-regional trade to NTBs and use of sanitary and phytosanitary standards as technical barriers to trade.

The lack of recognition of EAC rules of origin certificates among members also continued to be a significant barrier to trade even though they committed, under the Common Market protocol, to liberalise 20 capital market operations. At the end of December 2015, only three of these 20 operations were free in all partner states.

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