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East Economic Outlook 2019

Macroeconomic developments and prospects

Political of Economic Outlook 2019 The opinions expressed and arguments employed herein do not necessarily reflect the official views of the African Development Bank, its Boards of Directors, or the countries they represent. This document, as well as any data and maps included, are without prejudice to the status of or over any territory, to the delimitation of international frontiers and boundaries, and to the name of any territory, city, or area.

Cover design by the African Development Bank based on images from Shutterstock.com

© African Development Bank 2019

ISBN 978-9938-882-97-1 (print) ISBN 978-9938-882-97-1 (electronic)

You may copy, download, or print this material for your own use, and you may include excerpts from this publication in your own documents, presentations, blogs, websites, and teaching materials, as long as the African Development Bank is suitably acknowledged as the source and copyright owner. CONTENTS

Acknowledgments v

Executive summary 1

Part 1 Macroeconomic developments and prospects 5 Economic performance and outlook 5 Macroeconomic stability and outlook 8 Domestic resource mobilization 12 Poverty, inequality, unemployment, and structural change 13 Emerging policy issues 17

Part 2 of regional integration 19 Progress in regional integration 19 Political economy of regional integration 24 Infographic: Moving Across East Africa 28 Intervention strategies and policies to strengthen regional integration 33

Notes 35

References 36

Annexes 39

Statistical annex 45

Boxes 1 The diversity of East Africa 6 2 Progress toward the African Continental Free Area in East Africa 18 3 An empirical analysis of the ’s readiness for monetary union 22 4 The Ethio- Peace Agreement and its imperative for regional integration 26 5 Informal cross-border trade in and 27

Figures 1 GDP growth, by , 2008–20 6 2 GDP growth in East Africa, by country, 2014–20 7

iii 3 Overlapping membership in regional economic communities in East Africa 20 4 Revealed of selected African countries and African trading partners in manufactured goods, 2010–13 32

Tables 1 Inflation in East Africa, by country, 2017–20 9 2 Fiscal balance, including grants, in East Africa, by country 10 3 External current account balance, including grants, in East Africa, by country 11 4 External debt stock and debt indicators in East Africa, by country, 2018 12 5 Domestic resource mobilization and financial sector development in East Africa, by country, 2016 and 2017 13 6 Poverty and inequality in East Africa, by country, various years 14 7 Structural change, growth, and unemployment, various years 16 8 Macroeconomic convergence criteria in the Common Market for Eastern and and the East African Community, by country 21 9 Intraregional trade in East Africa, 2012–17 23 10 African Regional Integration Index ranks among Common Market for Eastern and Southern Africa members, by country, 2016 24 11 Actual intra-Africa trade as a share of potential intra-Africa trade in Common Market for Eastern and Southern Africa members, by country, 1993–2010 25 12 Exports and imports in East Africa, by country, 2014–17 (exports) and 2017 (imports) 29 A1.1 Real GDP growth rate in East Africa, by country, 2008–20 39 A2.1 External debt accumulation in East Africa, by country, 2008–18 40 A3.1 Unemployment rates in East Africa, by country, 2010–18 40

Statistical tables 1 Basic indicators, 2018 45 2 Real GDP growth, 2010–20 46 3 Demand composition and growth rate, 2017–20 47 4 Public finances, 2017–20 48 5 Monetary indicators 49 6 indicators 50 7 Intraregional trade, 2017 51 8 Demographic indicators, 2018 52 9 Poverty and income distribution indicators 53 10 Access to services 54 11 Health indicators 55 12 Major diseases 56 13 Education indicators 57 14 Labor indicators, 2018 58

iv Contents ACKNOWLEDGMENTS

The East Africa Economic Outlook 2019 was Patrick Kanyimbo, Principal Regional Inte- prepared in the Vice Presidency for - gration Officer for East Africa. Alemayehu nomic Governance and Knowledge Man- Geda (University of Ethiopia) contributed agement, under the supervision and general a background note to the report. External direction of Célestin Monga, Vice President consultant Esther Katende-Magezi provided and Chief Economist, with support from Eric the background note for the infographic on Kehinde Ogunleye, Amah Marie-Aude Ezanin people and goods moving across East Africa. Koffi, Tricia Baidoo, and Vivianus Ngong. Augustin Fosu (University of Ghana) and The preparation of the outlook was led Peter Montiel (Williams College) served as and coordinated by Ferdinand Bakoup, peer reviewers. Acting Director, Country Economics Depart- The cover of the report is based on a gen- ment, with a core team consisting of Abra- eral design by Laetitia Yattien-Amiguet and ham Mwenda and Marcellin Ndong-Ntah, Justin Kabasele of the Bank’s External Rela- Lead Economists for East Africa. tions and Communications. Editing, transla- The data appearing in the report were tion, and layout support was provided by a compiled by the Statistics Department, led team from Communications Development by Charles Lufumpa, Director, and Louis Incorporated, led by Bruce Ross-Larson and Kouakou, Manager, Economic and Social including Joe Brinley, Joe Caponio, Meta Statistics Division. Their team included de Coquereaumont, Mike Crumplar, Peter Anouar Chaouch, Mbiya H. Kadisha, Souma- Redvers-Lee, Christopher Trott, and Elaine ila Karambiri, Stephane Regis Hauhouot, Sla- Wilson, with design support from Debra heddine Saidi, Kokil Beejaye, Adidi Ivie, and Naylor and translation support from Jean- Guy Desire Lakpa. Paul Dailly and a team at JPD Systems. Contributions were received from Tilahun Temesgen, Chief Regional Economist, and

v

EXECUTIVE SUMMARY

his report analyzes economic growth, its drivers, and its implications for social development T (including) poverty, employment, and inequality as well as progress in regional integration in East Africa.

In 2018, real GDP in East Africa grew by an 2018, and is projected to drop to 3.7 percent estimated 5.7 percent, slightly less than the in 2019 and 3.5 percent in 2020. But cur- 5.9 percent in 2017 and the highest among rent account deficits remain high, and two African . Economic growth is pro- patterns are emerging. First, since almost all jected to remain strong, at 5.9 percent in 2019 countries depend on primary commodities and 6.1 percent in 2020. The countries with for exports, falling global commodity prices the highest economic growth are Ethiopia, have negatively affected their terms of trade. , , , and . In Second, the region’s high growth has been both Ethiopia and Rwanda, real GDP growth achieved through high investment, which is has been driven by industry and services. The above domestic savings. The internal invest- service sector has also been the main driver ment–savings gap is strongly associated of growth in Tanzania and Kenya, followed by with the persistent current account deficit (or the agricultural sector, the main growth driver external gap). from the supply side. On the demand side, As in 2017, East Africa’s strong growth has consumption has been the main driver of eco- not been matched by commensurate and nomic growth across East Africa. substantial reduction in poverty and inequal- The region continues to face various ity. So in 2018, the region is still characterized downside risks that could undermine eco- by high poverty, inequality, and unemploy- nomic growth and development prospects. ment. Poverty pervades all countries in the Major risks are ’s vulnerability to region and is extremely high in and the vagaries of , heavy reliance on pri- Rwanda and very low in , , mary commodity exports, and­—­in oil-import- and . ing countries­—­rising oil prices. Another key Structural transformation remained mark- risk is persistent current account deficits and edly absent in the region. The service sector related increases in external indebtedness. dominates the composition of GDP in the Finally, state fragility­—­with its adverse impli- region, averaging 59.0 percent, followed by cations for security and economic progress­ the agricultural sector, averaging 25.7 per- —­is a risk for Burundi, , , cent. Industry, which includes construction, and, to some degree, Ethiopia. is very small, averaging 15 percent. Similarly, Notwithstanding the variation across the average share of manufactured exports­ countries, the region’s fiscal deficit remained —­about 14.6 percent­—­also indicates the low, at an estimated 4.1 percent of GDP in region’s lack of structural transformation.

1 Countries in East Africa are members of three on the African Regional Integration Index, while important regional economic communities (RECs): Eritrea, Ethiopia, Sudan, and Djibouti had the the Common Market for Eastern and Southern lowest. Africa (COMESA), the Intergovernmental Author- There are numerous drivers of­—­and hence ity on Development (IGAD), and the East African opportunities for­—­regional integration in East Community (EAC). Progress in regional integra- Africa, including considerable unexploited poten- tion in East Africa varies widely across these three tial in trade, underexploited cross-border transport RECs. The EAC is approaching the highest stage, corridors between landlocked and coastal member having ratified the protocol for a monetary union, countries, endorsement by 44 African countries of but IGAD is farther behind. COMESA is also work- the agreement to establish the CFTA, the necessity ing toward a monetary union by 2025, but prog- of regional peace and security that emanates from ress in the prerequisite macroeconomic conver- the large number of fragile states in the region, the gence criteria is lagging. recent discovery of natural resources, and substan- In East Africa, the Continental Area tial informal cross-border trade. (CFTA), launched in in March 2018, is the East Africa is latest regional integration initiative. The tripartite Considerable unexploited potential in trade. free trade area involving COMESA, EAC, and the Except for Djibouti, which heavily with Ethi- showing signs Southern African Development Community was an opia, intraregional trade is far below its potential­ of only partial important impetus for the CFTA, especially in East —­less than 12 percent for all countries except for convergence among and Southern Africa. These initiatives are believed Comoros, half the value for Central and West Afri- to be advancing regional integration in East Africa. can countries. key macroeconomic Notwithstanding the progress in regional inte- variables used to gration, intraregional trade in East Africa trade Five landlocked countries. The physical location assess readiness for is low, accounting for 8.3 percent of total trade of the landlocked countries and the existence of in 2017, less than the continental average of the other countries in the region with coastal land the EAC monetary 14.5 percent and roughly unchanged over the mass offer opportunities to enhance regional inte- union. EAC countries past five years. The figure is nearly halved (to gration. Similarly, for small island states Comoros need to strengthen 6.9 percent) if Djibouti, with its heavy trade with and Seychelles, geographic isolation, poor links to Ethiopia, and Uganda, with its heavy trade with the mainland, vulnerability to climate change, and their efforts and Sudan and South Sudan, are excluded. Intra-EAC small domestic markets drive regional integration. further cooperate if and intra-IGAD trade fares better. Intra-EAC trade they wish to achieve is the highest among all RECs in Africa, above Multiple fragile states, particularly in IGAD. Both their objective 20 percent of exports and significantly higher than -made factors such as conflict and natural the continental average. factors such as climate change could be causes of establishing a East Africa remains susceptible to asymmetric of fragility and its consequences, including migra- monetary union shocks and is showing signs of only partial con- tion and lack of peace and security. On the posi- vergence among key macroeconomic variables tive side, the recent peace accord between Eritrea used to assess readiness for the EAC monetary and Ethiopia has already increased cross-border union. This suggests that EAC countries are not trade and Ethiopia’s use of Eritrean ports, both of ready for monetary union and need to further which could advance regional integration. align and coordinate their monetary policies. It may be better to fully implement the common The recent discovery of natural resources and market and protocol, further har- the need to ensure their optimal exploitation. monize policies, and increase intraregional trade Natural gas and oil discoveries in Ethiopia, Kenya, before adopting a common currency. Adopting a Tanzania, and Uganda, existing oil exploitation in common currency before reaching a greater level South Sudan, Ethiopia’s large hydroelectric power of convergence may be damaging.1 potential and its work toward exporting power to At the country level, Kenya, Uganda, and Sey- Djibouti and Kenya—and pipeline development chelles had the highest performance in the region for gas and fuel import—and export in Djibouti,

2 Executive summary Ethiopia, and South Sudan are important drivers of Second, policymakers need to focus on imple- and opportunities for further regional integration. mentation of regional integration initiatives, which have mostly been incommensurate with signed Informal cross-border trade. Estimated to be as commitments. high as 50 percent of formal trade in Africa, informal Third is to approach regional integration from cross-border trade is a diverse source of livelihood multiple dimensions to bring about synergy in for millions of people. High and nontariff bar- trade, infrastructure, productive engagement, riers, excessive regulation, ease of infrastructure in and policy and regulatory coordination as well as border towns, and distortion in the official market sociocultural issues. or sectors are usually mentioned as major factors Fourth, since increased intra-Africa trade is a behind informal cross-border trade. So address- major policy instrument for advancing regional ing trade costs, harassment and corruption, infra- integration, it is imperative to capitalize on the structure deficiency, excessive regulation, and high political goodwill associated with the CFTA. excessive requirements at border customs posts The agreement establishing the CFTA also came and formalizing the informal sector are important with an implementation action plan that tackles policy directions to support informal cross-border constraints on intra-Africa trade by holistically The major trade and enhance regional integration. addressing trade policy, trade facilitation, produc- Despite these drivers and opportunities, prog- tive capacity creation, trade-related infrastructure challenges of ress in regional integration has been limited. What provision, , trade information, and regional integration are the major challenges of regional integration in factor market integration in East Africa East Africa? Lack of complementarity in trading, Fifth, the lesson from East on the policy low competitive position of countries to supply direction of structural transformation and process are lack of goods in the region (which is related to lack of integration is instructive: deliberate and conscious complementarity structural transformation, low productivity, and state action­—­in the form of unilateral tariff reduc- in trading, low a wide infrastructure gap), institutional capac- tions, the establishment of export processing ity weakness to advance regional integration, zones and duty drawback arrangements, and entry competitive position and failure to address political issues related to into sectoral trade agreements (especially in infor- of countries to regional integration. mation and communication technology and in the supply goods in the Several policy directions aimed at boosting context of value chain creation)­—­are the foundation region, institutional regional integration in East Africa emerge from for success. East African policymakers may draw this analysis. First is structural transformation­—­ an important lesson from this experience and tune capacity weakness with its implications for employment and poverty their own country policies along this line. These pol- to advance regional reduction. The terms of trade deterioration and icies also require building the capacity of regional integration, and vulnerability of country growth to such external and national institutions tasked with these issues. sector shocks is due essentially to trade in primary East Africa has considerable potential to benefit failure to address commodities, which has hindered structural trans- from regional integration and to advance intra-Af- political issues formation. Related to the lack of structural trans- rica trade to promote sustainable economic related to regional formation is the external sector’s dependence growth and development in member countries. on global commodity prices. When global com- But realizing this potential­—­and hence the effort integration modity prices fall, growth declines and current to advance regional integration­—­is challenged account deficits and external debt increase. The by the lack of complementarities of exports and changing composition of East Africa’s debt toward imports as well as the relative competitive position (and its export-import bank) and the growth of potential export suppliers. The result of weak of borrowing from Eurobonds are also making infrastructure, productivity, and trade facilitation, East Africa’s debt not only very burdensome, but this calls for addressing export supply constraints, also expensive. Sustained and inclusive growth export competitiveness, and export diversifica- accompanied by substantial job creation, poverty tion, which in turn calls for policies that go beyond reduction, and healthy external balance is impos- liberalization to actual realization of the potential sible without addressing this structural problem. for trade expansion and process integration.

Executive summary 3

PART

MACROECONOMIC 1 DEVELOPMENTS AND PROSPECTS

ECONOMIC PERFORMANCE AND OUTLOOK

East Africa comprises 13 countries that are diverse in many aspects (box 1). In 2018, real GDP in the region grew by an estimated 5.7 percent, slightly less than the 5.9 percent in 2017 and the highest among African regions (figure 1). Economic growth is projected to remain strong, at 5.9 percent in 2019 and 6.1 percent in 2020. The regional average masks substantial variation across countries. Estimated GDP growth in 2018 ranged from –3.8 percent (contraction) in South Sudan to 7.2 percent in Rwanda and 7.7 percent in Ethiopia.

GDP growth and its drivers 3.6 percent in Seychelles to 5.3 percent in The countries with the highest economic Uganda. Growth is expected to improve mar- growth are Ethiopia, Rwanda, Tanza- ginally in 2019 in almost all these countries, nia, Kenya, and Djibouti (figure 2; see also except Seychelles, where the growth rate table A1.1 in annex 1). In both Ethiopia and is projected to decline by 0.3 percentage Rwanda, real GDP growth has been driven point, and Sudan, where the growth rate is by industry and services. The service sector projected to decline by 0.5 percentage point. has also been the main driver of growth in The main drivers of growth also vary across Tanzania and Kenya, followed by the agricul- countries. Despite estimated growth in 2018 tural sector, the main growth driver from the being less than the 5.3 percent in 2017, the supply side. main drivers of growth in Seychelles remain In countries with low growth, such as the traditional and fisheries sectors. South Sudan (–3.8 percent), Burundi (1.4 per- In Sudan, the main driver is the mining sector, cent), Comoros (2.8 percent), and Somalia despite its small contribution to GDP; the (2.9 percent), the main factor is lack of peace sector is projected to grow by 7 percent in and stability, which has disrupted economic 2019–20. In Eritrea, investment in the mining activity. In South Sudan, internal conflict dis- sector and the government’s agricultural rupted oil production, and agricultural pro- development programs are the primary con- duction declined because of poor weather tributors to growth. conditions and violent conflict in many areas. In Burundi, political instability disrupted eco- Decomposition of GDP growth by nomic activity. And in Somalia, the continuing sector insecurity problem, poor infrastructure, cli- In the majority of East African countries, real mate change, and low institutional capacity GDP growth from the supply side is driven have limited economic growth. primarily by growth in services, followed by In the rest of East Africa, economic industry, where the contribution of the con- growth rates have been high, ranging from struction sector is considerable.

5 FIGURE 1 GDP growth, by region, 2008–20 BOX 1 The diversity of East Africa

Percent East Africa comprises a diverse set of coun- tries. Populations range from less than 1 mil-

West Africa in Djibouti to more than 100 million in Ethi-

East Africa opia, the ’s second most populous country. The structure of the economy varies from South Sudan, where oil accounts for 99 percent of exports, and Somalia, where Africa manufactured exports account for about 1 percent of total merchandise exports, to Kenya, where manufactured goods account for 37 percent of total merchandise exports Southern Africa and the financial sector functions well. In 2018, eight East African countries had an economic vulnerability index1 higher 2008–10 2011–13 2014–16 2017 2018 2019 2020 than the threshold for classification as a (estimated) (projected) (projected) least developed country. Five countries­—­ Source: African Development Bank statistics. Burundi, Comoros, Eritrea, Seychelles, and South Sudan­—­had a value above the aver- age for least developed countries. The most Among the fastest growing countries in the vulnerable countries have different eco- region­—­Ethiopia, Rwanda, and Tanzania, which nomic and social characteristics­—­some are all saw growth above 6 percent in 2018­—­growth small island states, others landlocked­—­but on the supply side is driven largely by growth generally depend on a few export products in industry and services. In Ethiopia, industry and suffer from instability in export earn- (especially construction) grew by 18.7 percent in ings. And most are extremely vulnerable to 2016/17, and services grew by 10.3 percent. In natural disasters, with large fluctuations in Rwanda, industry grew by 8.3 percent, and ser- agricultural production and a high reliance vices grew by 7.6 percent. Services is also the on the agricultural sector. main driver of growth in Tanzania. The service sector’s contribution to growth was highest in Note Kenya, at 71 percent, while agriculture accounted 1. The economic vulnerability index is based on for 15 percent and industry for 14 percent. eight indicators that cover exposure to external Among slower growing countries­—­Djibouti, shocks, distance to the world market, sectoral Eritrea, Seychelles, Sudan, and Uganda, which share of the primary sector, instability of export all saw growth of 3–5 percent in 2018­—­growth earnings, and geographic distribution of the pop- on the supply side is also driven primarily by ulation, among other things. growth in services. In Djibouti, services (espe- Source: UNECA 2019. cially the port facilities, which serve Ethiopia’s increasing cargo) accounted for 77 percent of growth in 2018, followed by industry, which In countries with the least growth­—­South accounted for 19 percent. In Seychelles, services Sudan and Burundi­—­state fragility in general and and manufacturing (particularly tourism, trade, conflict and insecurity in particular were the main and food manufacturing) were also the main driv- causes of poor performance. The conflict in South ers of growth. And in Sudan, mining and agricul- Sudan disrupted oil production, which accounts ture are the leading contributors to growth from for more than 70 percent of GDP, and agricultural the supply side. activities, which account for 10 percent to GDP.

6 Macroeconomic developments and prospects FIGURE 2 GDP growth in East Africa, by country, 2014–20

Percent

The prospects of Burundi Comoros Djibouti Eritrea Ethiopia Kenya Rwanda Seychelles Somalia South Sudan Tanzania Uganda East sustained economic Sudan Africa growth in the region Source: African Development Bank statistics. remain positive, with growth projected Major sources and drivers of growth Opportunities and risks to economic at 5.9 percent on the demand side prospects in 2019 and On the demand side, consumption is the main The prospects of sustained economic growth in driver of economic growth in East Africa, partic- the region remain positive, with growth projected 6.1 percent in 2020 ularly in the fastest growing (Ethiopia, at 5.9 percent in 2019 and 6.1 percent in 2020. Kenya, Rwanda, and Tanzania). In Ethiopia, pri- In Ethiopia, infrastructure investment, continued vate consumption, was the main driver of growth expansion in industry and services, sustained from the demand side, followed by investment. agricultural recovery, planned partial privatization, In Kenya, private final consumption expenditure the new prime minister’s democratization reform accounted for about 84 percent of growth during (which is bringing about political stability), the 2011–18. In Tanzania, private consumption’s con- peace agreement with Eritrea (see box 4 later in tribution to growth from the demand side was the chapter), and the crackdown on corruption will about 64 percent in 2018, followed by private continue to drive high economic growth in 2019 investment (17 percent), and government con- and 2020. In addition, the ongoing program to sumption (12 percent). develop industrial parks, continuing foreign direct Even in countries with the least growth (South investment inflows, and the government’s pro- Sudan, Burundi, and Comoros), private con- ductivity-enhancing investments in agriculture are sumption is the driving force behind GDP growth opportunities for continued economic growth. (as well as its contraction) from the demand side. In Kenya, growth is projected to be 6.0 percent In South Sudan, real GDP contraction in 2017 in 2019 and 6.1 percent in 2020, driven by growth was partly the result of a decline in household in agriculture due to good weather conditions, consumption. Higher public spending due to an completion of ongoing infrastructure projects, and increase in salaries in 2017 largely contributed continued macroeconomic stability. In Sudan, to 56 percent growth in public consumption. benefits from the ongoing implementation of mac- Increased public expenditure is expected to con- roeconomic stabilization and structural reforms, tinue driving economic growth on the demand strong rebounds of growth in manufacturing and side in 2018. handcrafts, and the permanent revocation of US

Macroeconomic developments and prospects 7 sanctions (which is expected to normalize Sudan’s issue is not forthcoming. Debt stress (especially relations with creditors and signals positive eco- China debt exposures), with its adverse implica- nomic outlook for the country) are opportunities tions for the current account balance, could also for increased economic growth. threaten Djibouti, Eritrea, Somalia, South Sudan, In Rwanda, the “Made in Rwanda” campaign Sudan, and Tanzania. Rwanda’s present value of and policy is expected to narrow the current debt–to-export ratio, which stands at 7.2 percent, account deficit, consolidate private sector domes- is expected to increase sharply to 17.3 percent tic activities, create jobs, and boost economic in 2023, when the country’s Eurobonds are due, growth. In Seychelles, vibrant tourism arrival pro- indicating a downside risk on the horizon. Sey- jections and expanding private sector credit are chelles also faces balance of payment–related expected to sustain economic growth. And in risks that need careful management. Eritrea, the normalization of relations with Ethiopia Finally, “state fragility” with its adverse impli- and the related peace and economic cooperation cations for security and economic progress, is initiative with Djibouti and Somalia bring positive another risk factor for countries such as Burundi, prospects for growth. South Sudan, Somalia, and, to some degree, Ethi- A key risk factor East Africa continues to face various downside opia. In Somalia and South Sudan, for instance, risks that could undermine economic growth and the security situation, institutional capacity defi- confronting East development prospects. In Ethiopia, the vulnera- ciency and governance are expected to pose a Africa is persistent bility of rainfed agriculture to vagaries of nature, major downside risk in the coming two years. current account heavy reliance on agricultural commodity exports, and weak export performance and the resulting deficits and related foreign exchange crunch are key downside risks. MACROECONOMIC STABILITY increases in external Political instability also remains a threat in the next AND OUTLOOK indebtedness two years before the first election after the new prime minister’s political reforms. A stable macroeconomic environment is one of In Rwanda, South Sudan, Sudan, Tanzania, the major enabling environments for growth and and Uganda, which depend heavily on rainfed structural transformation.2 Because growth and agriculture and primary commodities for exports, structural transformation are needed to sub- downside risks relate to the climate and global stantially reduce poverty,3 East African countries commodity prices. In oil-importing countries, pay attention to macroeconomic stability. And downside risks emanate from rising oil prices. because macroeconomic instability can lead Kenya’s downside risks also include slow credit to political and social instability,4 it captures the uptake by the private sector, lack of fiscal and attention of policymakers and politicians. Inflation, monetary policy coordination, and failure to raise an important indicator of macroeconomic stability, external resources to finance fiscal deficit. In remained in the double digits in 2018, increasing Sudan, the combined effects of uncertainty due to by 0.5 percentage point from 14.0 percent in 2017. high inflation and the import rationalization policy But if South Sudan’s exceptionally high 104.1 per- are downside risks in the next two years. cent is excluded, the region’s average inflation rate Another key risk factor confronting East Africa drops to an estimated 12.8 percent in 2018, and is persistent current account deficits and related is projected to decrease slightly to 10.9 percent in increases in external indebtedness. In Ethiopia, 2019 and 10.2 percent in 2020 (table 1). total debt is 60 percent of GDP (divided equally between domestic and external). Much of the Inflation and macroeconomic stability external debt is owed to China and has expen- A combination of factors are behind South Sudan’s sive terms. A rising fiscal deficit and indebtedness high inflation rate: rapid currency depreciation, are also risk factors for Kenya and led the gov- high dependence on imported consumer and ernment to pursue stringent fiscal consolidation capital goods, increased monetization of the high measures in 2018. This could be a downside risk fiscal deficit, GDP contraction due to disruption in for the country if the political will to address the oil production, and a general lack of peace and

8 Macroeconomic developments and prospects TABLE 1 Inflation in East Africa, by country, 2017–20 (%)

2018 2019 2020 2017 (estimated) (projected) (projected) Burundi 16.1 12.7 22.1 23.1 Comoros 1.0 2.0 2.0 2.0 Djibouti 0.6 0.8 2.4 2.7 Eritrea 9.0 9.0 9.0 9.0 Ethiopia 7.2 13.0 9.3 8.5 Kenya 8.0 4.8 5.5 5.4 Rwanda 8.2 0.9 4.1 4.0 Seychelles 2.9 4.4 3.6 3.1 Somalia 2.9 5.1 4.7 4.6 South Sudan 187.9 104.1 108.2 91.4 Sudan 32.6 43.4 35.0 33.1 The region’s Tanzania 5.3 4.8 5.2 5.1 Uganda 5.6 3.2 4.3 4.8 overall exchange East Africa 14.0 14.5 12.5 11.4 rate stability and Excluding South Sudan 11.3 12.8 10.9 10.2 low inflation are

Source: African Development Bank statistics. generally the result of monetary and fiscal policies security. Inflation also remained high in Burundi and low inflation are generally the result of mone- and Ethiopia and extremely high (43.4 percent in tary and fiscal policies that aim for price stability that aim for price 2018) in Sudan. (including the exchange rate) and high growth. In stability and Burundi’s expansionary monetary policy, which Kenya, the central bank continued to pursue that high growth began with the 2015 sociopolitical crisis and aimed stance to ensure price and exchange rate stability to facilitate the refinancing of commercial banks in and stimulate growth when needed. The central order to support productive investments in 2016 bank loosened its monetary policy stance recently and 2017, continues to place pressure on inflation. by reducing the interest rate to 9.5 percent in Inflation was estimated at 12.7 percent at the end March 2018 and to 9 percent in July 2018 to stimu- of 2018 and is projected to sharply increase by late the economy. It also introduced various mone- 22.1 percent in 2019 and 23.1 percent 2020. tary policy instruments to manage system liquidity, In Ethiopia, inflation pressure came from sig- including foreign exchange sales to reduce pres- nificant public spending, the 15 percent currency sure on the and minimize exchange rate devaluation, shortage of foreign currency, and passthrough to inflation. Thus, despite the interest limited food supply. In Sudan, inflation increased rate decline in 2018, inflation remained low, and by more than 10 percentage points from 2017 to the shilling’s exchange rate with major currencies 2018 and is projected to remain high, at 35.0 per- remained stable. A similar macroeconomic policy cent in 2019 and 33.1 percent in 2020, driven stance has resulted in a stable exchange rate in mainly by the weakening of the currency and mon- Ethiopia, Rwanda, Seychelles, and Tanzania. etization of the deficit. The situation differs in postconflict (Eritrea) Rising inflation is generally associated with cur- and conflict-ridden and unstable (Somalia, South rency depreciation and exchange rate instability. Sudan, and Sudan) countries. In Eritrea, the offi- So another important aspect of macroeconomic cial exchange rate of the nakfa remains fixed at stability in East Africa relates to exchange rate con- 15.075 per US dollar, but on the parallel market, ditions. The region’s overall exchange rate stability the exchange rate fluctuated between 20 and 24

Macroeconomic developments and prospects 9 nakfa per US dollar.5 In Somalia, the shilling has the regional average. But in 9 of the region’s 13 stabilized at 23,606 per US dollar since the end countries, the fiscal deficit is below 5 percent of of 2017, but counterfeit currency remains a major GDP, thanks to modest increases in public spend- challenge for the central bank in the financial ing and better revenue generation. This general sector in general and the exchange rate market picture is projected to prevail in 2019 and 2020. in particular. In South Sudan, the 30 percent The high fiscal deficits in Burundi, Djibouti and increase in the monetary base in 2018, driven by Eritrea in 2018 are the result of several factors. monetization of the fiscal deficit, and the high infla- Weak economic activity, weak tax collection, and tion that followed, led to a substantial depreciation a less attractive business environment. of the , from 117 per US The region’s current account deficit was an dollar in June 2017 to 140 in June 2018 in the offi- estimated 4.9 percent of GDP in 2018, largely cial market and to 316 in May 2018 in the parallel unchanged from 2017, and is projected to improve market. In Sudan, the Sudanese pound contin- slightly in 2019 and 2020 (table 3). The current ued to weaken in 2018, and the country’s multiple account balance ranges from a deficit of 18.2 per- exchange rates have yet to be unified. cent of GDP in Seychelles and 17.8 percent in The region’s fiscal Djibouti to a deficit of 2.4 percent in Sudan and a Fiscal and current account balances surplus of 0.3 percent in Eritrea. deficit remained The region’s fiscal deficit remained low, at an esti- The highest current account deficits­—­more low, at an estimated mated 4.1 percent of GDP in 2018 (table 2), com- than twice the region’s average and thus in the 4.1 percent of GDP parable to the average for all of Africa. Although double digits­—­are in Burundi, Djibouti, Seychelles, the deficit was up in 2018 from 2017, it is pro- and South Sudan. The main factors behind the in 2018, comparable jected to drop to 3.7 percent of GDP in 2019 and high deficit varies across these countries. Lower to the average 3.5 percent in 2020. The aggregate figure hides exports growth than imports growth for food and for all of Africa some high country values­—­Burundi, Djibouti, and capital goods in Djibouti. External shocks, includ- Eritrea each have a fiscal deficit more than twice ing rising fuel prices, a decline in the number

TABLE 2 Fiscal balance, including grants, in East Africa, by country (% of GDP)

2018 2019 2020 2017 (estimated) (projected) (projected) Burundi –6.5 –8.8 –8.8 –10.3 Comoros 0.4 – 3.1 –5.4 –5.8 Djibouti –15.3 –15.5 –16.0 –15.4 Eritrea –13.8 –12.6 –12.4 –14.4 Ethiopia –3.3 –3.0 –2.9 –2.9 Kenya –8.9 –6.7 –5.7 –4.9 Rwanda –4.8 –4.3 –4.4 –3.6 Seychelles 0.0 –0.3 –0.4 – 0.1 Somalia ...... 0.1 0.1 South Sudan 5.8 –1.5 –1.4 –2.8 Sudan –1.9 –2.2 –1.6 –1.2 Tanzania –1.2 –3.9 –3.3 –3.5 Uganda –3.9 –4.7 –4.4 –4.3 East Africa –3.8 – 4.1 –3.7 –3.5

... is not available. Source: African Development Bank statistics.

10 Macroeconomic developments and prospects TABLE 3 External current account balance, including grants, in East Africa, by country (% of GDP)

2018 2019 2020 2017 (estimated) (projected) (projected) Burundi –11.6 –10.4 –9.2 –11.2 Comoros –4.3 –6.0 –7.7 –7.4 Djibouti –17.5 –17.8 –16.3 –16.9 Eritrea 0.7 0.3 –1.1 –2.1 Ethiopia – 8.1 –6.0 –5.9 –5.8 Kenya –6.7 –5.8 –5.2 –5.3 Rwanda –6.8 –8.4 –9.2 –8.3 Seychelles –20.5 –18.2 –17.6 –17.0 Somalia –6.7 –7.2 –6.5 –6.3 South Sudan 1.7 –12.7 –10.1 –0.3 Since almost all Sudan –2.5 –2.4 –2.2 –1.9 Tanzania –3.3 –3.7 –3.4 –3.3 countries depend Uganda –4.3 –4.9 –4.9 –5.4 on primary East Africa –5.0 –4.9 –4.6 –4.6 commodities for

Source: African Development Bank statistics. exports, falling global commodity prices have of tourists, and stagnation in its exports in Sey- through high investment, which is above domes- chelles. The disruption in oil production and trade tic savings. The internal investment–savings gap, negatively affected (the result of political instability) in South Sudan. where investment is characterized by significant their terms of trade, Five countries have a current account deficit of import content as well as a demand for imports resulting in the 5–10 percent: Comoros, Ethiopia, Kenya, Rwanda, that is generally inelastic, is strongly associated persistent current and Somalia. In these countries, the deficit is gen- with the persistent current account deficit (or erally the result of excess imports over exports, external gap). The resulting current account deficit account deficits which is strongly associated with the internal deficit is invariably financed by a combination of external (investment being much larger than domestic sav- finance, which leads to indebtedness, and mone- ings), particularly in Ethiopia and Somalia. In Ethi- tization, which leads to inflationary pressure. The opia, this is aggravated by a decline in commodity rising external debt in the region (see table A2.1 prices and shortfalls in the services account. The in annex 2) is in turn leading to further increases pattern is similar in Kenya and Somalia. in the current account deficit through debt ser- Two patterns have emerged in the region’s vicing costs. In 2018, debt service in Ethiopia continued current account deficits. First, since was $1.2 billion, or nearly a third of total exports almost all countries depend on primary commod- ($3 billion), aggravating the current account deficit ities for exports, falling global commodity prices and forcing the country to reschedule its debt. have negatively affected their terms of trade, In absolute terms, debt stock is largest in resulting in the persistent current account deficits. Sudan (55.4 billion), Kenya (42.7 billion), and The terms of trade for Africa as a whole deterio- Ethiopia ($25.6 billion; table 4). Debt stock as a rated from 193 in 2012 to 157.1 in 2016 and 168.7 share of GDP is above 30 percent in all East Afri- in 2017, primarily because of falling primary com- can countries except in Burundi, Comoros, and modity prices. Eritrea and is highest in Sudan (166.6 percent). Second, the drive for rapid economic growth The region’s debt comprises bilateral, multilateral, and the resulting high growth have been achieved and private flows. On average, 65.6 percent of

Macroeconomic developments and prospects 11 TABLE 4 External debt stock and debt indicators in East Africa, by country, 2018

Debt-to-GDP Debt-to-exports Debt service– Total debt stock ratio ratio to-exports ratio ($ billions) (%) (%) (%) Burundi 0.5 14.9 294.7 21.1 Comoros 0.2 26.5 146.4 8.8 Djibouti 2.2 102.9 374.8 19.2 Eritrea 1.3 20.1 201.8 6.8 Ethiopia 25.6 30.5 385.4 29.7 Kenya 42.7 47.6 352.7 70.7 Rwanda 4.0 41.4 176.1 5.4 Seychelles 1.6 99.6 93.5 4.5 Sudan 55.4 166.6 1,133.9 4.4 Tanzania 19.2 34.6 187.2 12.8 Domestic resource Uganda 12.5 45.0 239.9 17.1 mobilization is a East Africa 165.2 52.5 370.3 27.4 major challenge Note: Data for Somalia and South Sudan are not available. in East Africa Source: African Development Bank statistics and International Monetary Fund World Economic Outlook database.

external debt is obtained on concessional terms access to African countries. But its credit terms and in foreign currency, with 58.6 percent in US are expensive, especially compared with those of dollars in 2016. The risk of debt stress is low in multilateral loans.9 This is an emerging policy con- Kenya, Rwanda, Tanzania, and Uganda and high cern for African countries in general and to coun- in the region’s remaining countries.6 Based on tries in East Africa in particular. the World Bank’s Country Policy and Institutional Assessments, the debt policy indicator index is 1.5–2.5 on a scale of 1 (worst performance) to DOMESTIC RESOURCE 6 (best performance) for Burundi, Comoros, Dji- MOBILIZATION bouti, and Sudan and 4.5 for Kenya, Tanzania, and Uganda.7 Domestic resource mobilization is a major chal- The debt-to-exports ratio is above 100 percent lenge in East Africa.10 Countries with tax revenues for all East African countries except Seychelles. below 15 percent of GDP have difficulty funding And in Burundi, Ethiopia, and Kenya, debt service basic state functions. From 1998 to 2008, tax-to- is putting tremendous pressure on limited foreign GDP ratios in the EAC ranged from 12 percent to exchange earnings (see table 4). Many of these 22 percent, compared with 36 percent in Organ- countries have already benefited from the Heav- isation for Economic Co-operation and Develop- ily Indebted Poor Country Debt Relief Initiative ment countries and 25.4 percent in and the Multilateral Debt Relief Initiatives. Since (table 5). Tax revenue in fragile states is generally 2010, African indebtedness has doubled, and below 15 percent.11 East Africa has multiple frag- in some cases tripled.8 And debt is increasingly ile states, so domestic resource mobilization is dominated by bilateral flows coming from Brazil, far below what is needed to spur investment and , Russia, South Africa, and particularly China. growth. The low domestic saving and high nec- Credit form China is increasingly important in the essary investment are leading to persistent fiscal region because of the Chinese government’s deficits and growing indebtedness. In Ethiopia, policy of “going global” and because of its easy investment as share of GDP was about 40 percent

12 Macroeconomic developments and prospects TABLE 5 Domestic resource mobilization and financial sector development in East Africa, by country, 2016 and 2017

Domestic Domestic Gross credit in credit to domestic banking the private saving (% M2 sector sector of GDP) Tax-to-GDP Country Year (% of GDP) (% of GDP) (% of GDP) (%) ratio Burundi 2016 23.7 35.0 16.7 –8.8 ... 2017 24.7 32.8 13.8 ...... Comoros 2016 45.7 31.3 26.5 ...... 2017 45.1 30.2 27.3 ...... Djibouti 2016 96.9 34.6 30.2 11.6 ... 2017 113.0 35.0 31.7 10.3 ... Ethiopia 2016 4.0 ... 22.4 ...... 2017 3.5 ... 24.1 ...... Kenya 2016 38.4 42.6 32.7 7.6 15.8 It is imperative to 2017 38.9 42.6 31.0 5.4 ... implement policies Rwanda 2016 20.8 18.9 21.0 7.7 14.8 that enhance 2017 ... 19.0 20.9 8.9 ... domestic resource South Sudan 2016 31.7 1.0 13.4 2.0 10.5 2017 ... 1.0 ...... mobilization, Sudan 2016 20.3 22.5 8.9 20.0 ... including improved 2017 ...... 20.9 ... tax administration, Tanzania 2016 22.2 20.2 14.4 23.9 ... financial sector 2017 ...... Uganda 2016 22.9 23.4 15.6 15.5 13.5 development, and 2017 23.4 23.2 15.0 16.5 ... financial innovation

­...­ is not available. Note: Data for Eritrea, Seychelles, and Somalia are not available. Source: World Bank 2018b.

in 2017, while domestic saving as share of GDP debt stock of $283 billion.13 Thus, policies that was about 22 percent (though experts estimate curb capital flight and possibly reverse what is that it is closer to 10–15 percent). This wide gap already left could contribute to domestic resource is financed through debt, leading to a debt-to- mobilization. GDP ratio of close to 60 percent, divided equally between external and domestic. It is imperative to implement policies that POVERTY, INEQUALITY, enhance domestic resource mobilization, includ- UNEMPLOYMENT, AND ing improved tax administration, financial sector STRUCTURAL CHANGE development, and financial innovation. In addi- tion, illicit financial flows from Africa could be as As in 2017, East Africa’s strong growth has not much as $50 billion a year, more than double been matched by commensurate and significant official development assistance.12 Over 1970– reduction in poverty and inequality.14 As a result, 2010, African lost an estimated $1.3 trillion in the in 2018 the region remains characterized by high form of capital flight, many times the continent’s poverty, inequality, and unemployment.

Macroeconomic developments and prospects 13 Trends in poverty and inequality hide considerable variation across countries. Poverty pervades all East African countries, though Inequality is highest in South Sudan, Comoros, the region’s average (33.3 percent at $1.90 a day and Djibouti and lower in Burundi, Tanzania, and and 55.3 percent at $3.10 a day) is lower than the Sudan. Inequality should be a major concern for Sub-­Saharan Africa average (42.1 percent and policymakers because it adversely affects poverty 66.3 percent; table 6). Poverty is lowest in Sey- reduction and causes a lack of social cohesion chelles, Sudan, and Comoros and highest, above that could lead to conflict.16 60 percent at $1.90 a day, in Burundi and Rwanda. It is striking that poverty and inequality are so Poverty is more pronounced at $3.10 a day, rang- high despite efforts to address them. In Ethio- ing from about 40 percent in Comoros and Sudan pia, the government committed 60 percent of its to an extremely challenging 89 percent in Burundi. 2018 budget to poverty-targeted sectors such as The situation is also reflected in the United Nations education, health, agriculture, water, and roads. Development Programme’s Human Development Tanzania and Sudan had a similar focus on rais- Index values, which range from 0.400 (on a scale of ing agricultural productivity and pursuing growth 0, low, to 1, high) in Burundi and 0.420 in Eritrea to led by agro-industrialization. The persistent pov- 0.550 in Kenya, with Seychelles (0.780) an outlier.15 erty and inequality call for further research and East Africa faces a severe inequality prob- re-examination of the policies pursued. In coun- lem. On average, 48.4 percent of income goes to tries such as Somalia and South Sudan that have the richest 20 percent of income earners in the faced peace and security challenges and need region, and 30 percent goes to the richest 10 per- policy direction most, spending has focused on cent. By contrast, only 6 percent of income goes defense and security, the priorities for these coun- to the poorest 20 percent, and only 2.3 percent tries, rather than on agriculture and related pover- goes to the poorest 10 percent. But averages ty-reducing sectors.

TABLE 6 Poverty and inequality in East Africa, by country, various years

Poverty Inequality Share of income going to each population Population Population segment living on less living on less (%) than 2011 PPP than 2011 PPP Reference $1.90 a day $3.10 a day Reference Richest Richest Poorest Poorest year (%) (%) year 10% 20% 10% 20% Burundi 2006 71.7 89.2 2013 31.0 46.3 2.8 6.9 Comoros 2013 18.1 38.1 2014 33.7 50.4 1.6 4.5 Djibouti 2013 22.5 44.6 2013 34.1 50.0 1.7 4.9 Ethiopia 2010 33.6 71.3 2015 31.4 46.7 2.6 6.6 Kenya 2005 33.6 58.9 2015 31.6 47.5 2.4 6.2 Rwanda 2013 60.4 80.6 2012 37.9 52.2 2.4 6.0 Seychelles 2014 1.1 2.5 2013 39.9 53.0 1.9 5.4 South Sudan 2009 42.7 63.5 2010 33.2 50.6 1.3 3.9 Sudan 2009 14.9 38.9 2009 26.7 42.4 2.6 6.8 Tanzania ...... 2011 31.0 45.8 3.1 7.4 Uganda 2012 34.6 65.0 2016 34.2 49.8 2.5 6.1 Average 33.3 55.3 30.0 48.4 2.3 6.0

­...­ is not available. Note: Data for Eritrea and Somalia are not available. Source: World Bank 2017.

14 Macroeconomic developments and prospects Unemployment, structural change, with structural transformation in East Asia and and poverty reduction without structural transformation in Africa. Despite The impressive growth of East Asian economies Sub-­Saharan Africa’s impressive growth since such as China, the Republic of Korea, and Taiwan 2002, 47 percent of the population still lives on over the past four decades shows that high and less than $1.25 a day. Between 1981 and 2008, inclusive growth underpinned by structural trans- the poverty rate declined by only 4 percent- formation can greatly reduce poverty. The limited age points. In contrast, East Asia’s poverty rate change in , despite impressive dropped dramatically, from 77 percent in 1981 to nontransformational and noninclusive economic 14 percent in 2008, or 63 percentage points.24 growth since the turn of the century, supports this Changing the sectoral composition of growth conclusion.17 was also important in reducing poverty in Asia. This report advocates for structural transfor- But to promote growth of the appropriate sector, mation policies in line with much research over policymakers must carefully study the country sit- the past few years. Africa’s impressive growth uation. Where poverty is high in the rural sector between 2000 and 2009 was the result of rapid and structural transformation possibilities are low, growth in exports of hard commodities and cap- agricultural growth remains important for some East Africa’s ital inflows. Most of the extra income generated time. Otherwise, growth in the secondary sector was absorbed by middle-class consumption.18 may be more inclusive. Both approaches require economic structure In 38 of 49 countries, imports grew more than active policies to abate inequality and ensure and growth patterns exports after this growth episode. Only agricul- a flexible labor market with high labor absorp- are characterized by ture grew slowly, and most countries experienced tion.25 India has also seen structural transforma- deindustrialization. This growth pattern did not tion reduce poverty, but the country’s experience low industrialization­ create enough decent jobs for young people. It shows that structural transformation needs to be —­including lack also established a vulnerable economic structure accompanied by distributional policies and that of economic in which the entire economy depends on a single increasing the share of industry is reduces poverty or small number of commodity exports.19 The pat- while increasing the share of services and agricul- diversification, tern results from low industrialization and value ture is poverty neutral.26 product adding economic activity.20 Thus, inclusive and Services dominate the composition of GDP differentiation, and transformative development strategies are essen- in East Africa, at 59.0 percent in 2016, followed sophistication—­ ­ tial for translating Africa’s recent growth momen- by agriculture, at 25.7 percent (table 7). Industry, tum into decent jobs and poverty reduction. which includes construction, accounts for only and insufficient Industrialization is often taken as a sure way 15.3 percent of GDP, below the Sub-­Saharan job creation of breaking the commodity boom and bust cycle Africa average of 27.7 percent. East Africa’s eco- and ending dependence on primary commodity nomic structure and growth patterns are charac- exports.21 In Africa, the process entails a relative terized by low industrialization­—­including lack of decline in low-productivity agriculture and low economic diversification, product differentiation, value added extractive activities and a relative and sophistication­—­and insufficient job creation. increase in manufacturing and high-productivity Similarly, manufacturing value added grew by just services.22 African economies’ inability to accel- 1.7 percent over 2000–16, which was less than erate this diversification and structural transfor- GDP growth, reducing the manufacturing sector’s mation, and hence to benefit from the technol- share in GDP. Average manufacturing value added ogy-driven dynamism of , has kept in GDP was just 8.1 percent, far below the Sub-­ them vulnerable to external shocks and resulted Saharan Africa average of 10.3 percent in 2016.27 in limited poverty reduction. This is why structural The average share of manufactured exports in total transformation is advocated as policy direction for merchandise trade, 14.6 percent, also shows the job creation and poverty reduction in a sustainable region’s lack of structural transformation. Notwith- manner.23 standing this poor performance on average, some This policy direction is also motivated by the countries­—­Ethiopia, Kenya, Tanzania, and Uganda­ contrasting poverty reduction outcome of growth —­have made progress in industrialization recently.

Macroeconomic developments and prospects 15 TABLE 7 Structural change, growth, and unemployment, various years

Sectoral share of GDP, 2016 (%) Unemployment, 2017 Manufactured exports International Labour (% of total Organization model- Total Youth merchandise based estimate (% ages 15 (% ages trade) Agriculture Industry Services (% of population) and older) 15–24) Burundi 12.8 (2017) 36.5 15.1 48.4 1.6 22.4 49.0 Comoros 21.7 (2013) 33.6 10.8 55.7 4.3 58.8 87.9 Djibouti ... 2.2 15.5 82.3 5.8 44.4 66.5 Ethiopia 12.5 (2015) 34.1 22.9 43.0 6.4 21.8 36.0 Kenya 36.8 (2013) 31.5 17.5 51.0 5.2 42.1 30.5 Rwanda 12.2 (2016) 31.0 15.8 53.3 11.5 15.0 74.8 Seychelles 8.2 (2016) 2.0 11.4 86.7 3.7 35.6 25.9a Somalia 1.3 (2009) ...... 6.0 56.6 50.8 Sudan 0.5 (2012) ...... 11.5 59.4 80.3 Tanzania 25.0 (2016) 30.5 26.4 67.3 12.7 18.5 50.1 Uganda 25.0 (2016) 30.1 20.0 43.5 2.2 30.8 30.6 Average 14.6 25.7 15.3 59.0 6.4 36.9 48.2

­...­ is not available. a. Based on national estimates. Note: Data for Eritrea and South Sudan are not available. Source: Based on World Bank 2018b.

One implication of the lack of structural trans- The slow progress in reducing unemployment formation in East Africa is high unemployment, (see table A3.1 in annex 3) has implications for despite strong growth. Unemployment averages poverty and inequality, and governments in East 36.9 percent and ranges from 15.0 percent in Africa are taking policy initiatives and actions to Rwanda to 59.4 percent in Comoros (see table 7). address the challenge. Ethiopia is tackling lack of Youth unemployment, at 48.2 percent, is a major structural transformation with its five-year Growth problem. African economies’ failure to transform and Structural Transformation Plan II. In Kenya, structurally from low-productivity agriculture to the government created a Vision 2030 policy higher productivity nonagricultural sectors com- framework to address the slow progress in pov- bined with high fertility and low infant mortality has erty reduction due to lack of structural change. limited change in the structure of employment. And in Rwanda the National Strategy for Trans- The lack of formal wage jobs is forcing young formation launched in 2017 aims to bring about people to search for innovative employment in structural transformation through the “Made in agriculture and informal household businesses.28 Rwanda” campaign. Because the informal economy will remain import- Poverty in Africa is still spatial­—­and highly prev- ant for employing young people, policymakers alent in rural areas. Inclusive growth has encoun- must raise its productivity, support it, and eventu- tered specific sectoral challenges­—­including ally formalize it.29 Policies will vary from country to poor rural infrastructure, failure to modernize rural country. But Ethiopia shows that providing credit livelihoods, and little job diversification.30 This using micro­finance institutions, providing working underscores the importance of looking at the space, relaxing some regulations, and offering tax spatial dimensions of structural transformation, incentives can provide the necessary support. particularly in East Africa, and pursuing spatial

16 Macroeconomic developments and prospects targeting­—­strategically directing and prioritizing countries’ growth to such external sector shocks investments and interventions to leverage the has resulted in an economic structure that has advantages of spatial areas such as urban cen- hindered structural transformation.34 Thus, sus- ters for industrial development. In short, when a tained and inclusive growth that is accompanied policy for structural transformation is envisaged, by significant job creation and poverty reduction is it is imperative to recognize the spatial dimen- impossible without addressing Africa’s fundamen- sions of what to produce and where to produce tal structural problems through appropriate strat- it. Strategies should be tailored to the specific egies.35 This is an emerging and vital policy issue spatial needs of targeted sectors and firms, which in East Africa too. may have a regional dimension.31 Policies target- A related emerging policy issue is persistent ing spatial investments should thus consider both current account deficits and growing external national and regional economic . indebtedness, which are related partly to declining global commodity prices. The changing compo- sition of East Africa’s debt toward China and its EMERGING POLICY ISSUES export-import bank as well as the growth of bor- rowing from Eurobonds are making East Africa’s Structural Structural transformation­—­with its implications debt not only very burdensome, but also more for employment and poverty reduction­—­is the expensive as global financial conditions tighten. transformation—­ ­ main policy issue emerging in East Africa. This The debt burden requires proper debt manage- with its implications is because structural transformation is related to ment in the short run and structural transformation for employment and terms of trade deterioration, vulnerability of coun- to reduce commodity dependence in the medium tries to external shocks and indebtedness, and to long run. poverty reduction­ low-quality growth­—­growth that is vulnerable Low-quality growth is also another emerging —­is the main policy to global primary commodity prices, that is not policy issue. It is imperative to diagnose the nature issue emerging accompanied by structural transformation, and of the region’s growth in order to identify the right that has limited effect on employment and poverty. strategies, policies, and programs to improve its in East Africa All East African countries export mainly pri- quality­—­that is, to ensure that it is accompanied mary commodities and import manufactured by structural transformation that is inclusive and goods. The terms of trade of primary commodi- reduces poverty. ties with respect to manufactured goods in Africa The finally emerging policy issue is regional was deteriorating for more than a century before integration. The prospects for regional integra- improving between 2003 and 2013, when global tion have looked bright for the past few years, as commodity prices started to improve.32 The terms suggested by the signing of the agreement estab- of trade challenge is attributed largely to Africa’s lishing the CFTA by almost all East African coun- primary commodity dependence, based in histor- tries as well as by IGAD member countries’ active ical reasons.33 That dependence has re-appeared involvement in peace and security (box 2). But in the recent economic engagement with China, regional integration is challenged by implementa- India, and other emerging economies. The terms tion incommensurate with signed commitments. of trade deterioration and vulnerability of African This topic is addressed in more detail in part 2.

Macroeconomic developments and prospects 17 BOX 2 Progress toward the African Continental Free Trade Area in East Africa

The signing of the agreement establishing the African Continental Free Trade Area (CFTA) in March 2018 in Kigali by 44 countries represented a milestone toward a unified African market. The CFTA’s elimination of tariffs and nontariff barriers offers East Africa improved development prospects. But only half the 22 ratifications needed by March 2019 for the CFTA to go into force have been made so far. The delay in implementation will hold back the CFTA’s expected complimentary benefits of promoting regional integration in East Africa. Establishing a continental market compliments regional integration efforts. For example, exports from the East African Community face much higher tariffs in other parts of Africa than outside the continent. So the CFTA’s elimination of tariffs and nontariff barriers will improve development pros- pects for East Africa, allowing the region’s firms to tap into rapidly growing markets elsewhere in Africa. The CFTA is not only about trade, but also about creating access and free movement of people, goods, and services. Liberalizing intra-Africa services trade could bring great benefits for East Africa. Tourism is one area of growing Intra-Africa trade in services. With intra-Africa migration on the rise, the Agreement on Free Movement of Persons, which was signed by only half of member states, is particularly important. A more open continental labor market would go far in addressing the skill shortages that constrain growth in strategic sectors. If the CFTA is fully realized, the value of East Africa’s exports to the rest of the continent would increase by 31 percent, with processed food and manufacturing products the main beneficia- ries. In East Africa, only a quarter of agricultural trade is processed, compared with two-thirds of intra-Africa exports. Greater exports to the rest of Africa from East Africa could boost demand for processed foods. The welfare gains from reduced costs for goods and services due to the CFTA would total $1.4 billion for East Africa. All this will be achieved at a very small fiscal cost to the region, with tariff revenue reduced an average of just 4 percent, or less than 1 percent of total government revenue. Crucial next step are to develop national and regional CFTA implementation strategies that complement broader trade and industrialization policies and to identify key opportunities and con- straints in order to take full advantage of the continental market. Thus, regional economic commu- nities in the region­—­particularly the East African Community, the Intergovernmental Authority on Development, and the Commission­—­need to take the lead in reaching this objective.

Source: UNECA 2019.

18 Macroeconomic developments and prospects PART

POLITICAL ECONOMY 2 OF REGIONAL INTEGRATION

ountries in East Africa are members of three important RECs: COMESA, the EAC, and C IGAD. All East African countries except Somalia and Tanzania are members of COMESA; Seychelles is also a member of the Southern African Development Community, as is Tanzania; Burundi, Kenya, Rwanda, Tanzania, and Uganda are also members of the EAC; and Djibouti, Eritrea, Ethiopia, Kenya, Rwanda, South Sudan, Sudan, and Uganda are also members of IGAD, as is Somalia (figure 3). This overlapping membership is motivated primarily by regional political alignment and economic interests and does not seem to cause major problems in regional integration development because the RECs tend to focus on the special needs of parts of the region. The EAC aims to push the regional integration agenda to its highest stage, while IGAD focuses on conflict and conflict resolution. Geographic diversity is a basic challenge in finding a common regional agenda, and it factored into the formation of RECs such as IGAD. “But, these ‘push factors’ are largely offset by long-running tensions and conflicts stemming from colonial experiences.”36 In short, the choice to set up a REC could also be motivated by domestic politics, and so REC institutional designs reflect both desired goals and intended constraints.37 Domestic politics could be influenced by the consequences of these choices. Given the importance of RECs in East Africa, a focus on the three RECs, cognizant of their historical formation, offers a general picture of regional integration there.

PROGRESS IN REGIONAL country performance in advancing regional INTEGRATION integration.

Progress in regional integration in East Africa Progress toward monetary union varies widely across the three RECs. The in the Common Market for Eastern EAC is approaching the highest stage of and Southern Africa and the East regional integration, followed by COMESA African Community and IGAD. This section discusses progress East Africa has made considerable prog- in regional integration in East Africa start- ress in regional integration over the past few ing with the more advanced RECs that are years. The EAC is leading this progress, fol- moving toward a monetary union. It then lowed by COMESA and IGAD. The EAC’s rat- covers progress toward a free trade area, a ification of the protocol for monetary union is customs union, and enhanced intraregional one indicator of this progress­—­and is import- trade. It concludes by summarizing overall ant because macroeconomic convergence

19 FIGURE 3 Overlapping membership in regional economic communities in East Africa

EAC

Tanzania SADC Seychelles

Burundi Rwanda

COMESA Djibouti The EAC is leading Kenya Eritrea Uganda Ethiopia progress in regional Comoros South Sudan integration in East Sudan IGAD Africa, followed by COMESA and IGAD

Somalia

Source: East Africa Economic Outlook team.

is a prerequisite for such advanced economic The EAC journey to a monetary union began integration. with the establishment of the East African Mon- Countries are progressing well toward the etary Union in 2015, which provided a roadmap COMESA macroeconomic convergence criteria. to achieve a single currency region within 10 Of the 10 COMESA members with data, 5 are on years (by 2024). A memorandum of understand- target for the fiscal balance criterion, and 4 are on ing for currency convertibility has since been target for the external reserves criterion (table 8). signed, and fiscal, monetary, and exchange rate But only 3 countries are on target for the inflation policies are being harmonized. The EAC is also criterion and the current account balance criterion, streamlining financial sector operations, including and only 2 are on target for the growth criterion. stock market trading practices and regulations. EAC members have also made excellent prog- To facilitate this, the EAC passed a bill in 2017 ress toward that REC’s macroeconomic conver- to establish the East African Monetary Institute, gence criteria. All members have met the crite- drawing on lessons from the Mone- rion for debt-to-GDP ratio, which is 50 percent or tary Union, where such an institution has been less, except in Kenya, where it is 50–54 percent. crucial.38 Finally, the EAC is moving beyond eco- Tanzania and Uganda are the only countries that nomic integration to a political . At the have met the fiscal criterion, and Kenya, Tanzania, 18th EAC Summit in 2017, political and Uganda are the only countries that have met was adopted as a transitional model or interme- the reserves criterion. See box 3 for an empiri- diate step toward that goal.39 Notwithstanding cal analysis of the EAC’s readiness for monetary this progress, the EAC has been cautioned not to union. rush the process.40

20 Political economy of regional integration TABLE 8 Macroeconomic convergence criteria in the Common Market for Eastern and Southern Africa and the East African Community, by country

External reserves Overall fiscal (months of Current account balance imports of balance (excluding Annual average goods and Growth of (excluding Domestic grants) inflation nonfactor real GDP grants) investment rate Country (% of GDP) (%) services) (%) (% of GDP) (%) Criterion 5 percent 5 percent 4 months 7 percent Sustainable 20 percent or lowera or lowerb or morec or higher level or higher Burundi –11.3 18.0 2.8 0.0 –12.4 7.0 Comoros –15.5 2.0 6.7 2.8 –4.6 21.7 Djibouti –1.6 3.5 3.8 7.0 –21.0 ... Eritrea –14.0 9.0 4.3 3.3 0.7 7.2 Ethiopia –3.3 8.1 1.9 8.5 –8.3 37.2 Kenya –8.9 8.0 5.3 5.0 – 6.1 21.4 Rwanda –6.4 7.1 3.9 6.2 –10.2 24.6 Seychelles –2.6 2.8 3.7 4.1 –15.6 32.2 Sudan –2.4 26.9 1.7 3.7 –1.9 ... Tanzaniad – 3.1 6.0 4.3 7.1 ...... Uganda –4.8 5.8 4.8 4.4 –5.6 25.4

­...­ is not available. a. For the EAC, the criterion is 3 percent or lower. b. For the EAC, the criteria are 8 percent for headline inflation and 5 percent for core inflation. c. For the EAC, the criterion is 4.5 months or more. d. Not a member of COMESA. Based on Nord (2016) and African Development Bank statistics. Note: The green highlighting indicates countries that are also members of the EAC. Data for South Sudan are not available. Source: COMSTAT Data Hub, Macro-Economic Convergence Achievements (http://comstat.comesa.int/kfioiqd/macro-economic-­ convergence-achievements); EAC criteria are from EAC (2018) and Nord (2016).

COMESA also aspires to be a monetary union 50 percent by 2045.43 It builds on several previous by 2025. But progress in macroeconomic conver- initiatives that are still pillars of the drive toward gence criteria is not proceeding well. While some the continent’s integration: the Program for Infra- member countries, particularly those in the EAC, structure Development in Africa, the Action Plan have made good strides toward the convergence for Boosting Intra-African Trade (which aims to criteria, most are far behind, particularly on the boost intra-Africa trade to 25 percent by 2025), debt and current account balance criteria. The and Accelerated Industrial Development for debt-to-GDP ratio is above the target of 50 per- Africa.44 The tripartite free trade area involving cent in Sudan (166.6 percent), Djibouti (102.9 per- COMESA, EAC, and the Southern African Devel- cent), and Seychelles (99.6 percent; see table 4).41 opment Community was an important impetus for Progress on financial integration is also hindered the CFTA, especially in East and Southern Africa. by various regulatory constraints.42 It covers 26 countries and 530 million people Finally, the CFTA, launched in Kigali in March (57 percent of Africa’s population) and has an esti- 2018, is the latest regional integration initia- mated GDP of $630 billion (53 percent of the con- tive in East Africa. It aims to raise intra-Africa to tinent’s total). These initiatives are believed to be trade from the current average of 14 percent to advancing regional integration in East Africa.

Political economy of regional integration 21 BOX 3 An empirical analysis of the East African Community’s readiness for monetary union

This analysis used three empirical approaches to assess the East African Community’s (EAC) readiness for monetary union. The first approach was an autoregressive model using ordinary least squares that regressed GDP on in its past value (the first and second lag) for each of the five EAC countries. Taking the residuals from these regression equations as indicators of real output disturbance yielded a cor- relation matrix that showed the existence or absence of shock synchronization. The underlying real output disturbances were generally negatively correlated, which shows nonsynchronization of shocks, except between Kenya and Tanzania and between Tanzania and Uganda, though the coefficient was very small for the latter. So the correlations did not support the assumption that the EAC is an optimum currency area or ready for monetary union. The second approach estimated a multivariate vector-autoregressive model of the log of real GDP and inflation in EAC countries, using the identification scheme of Blanchard and Quah (1989) to separate supply and demand shocks. Permanent shocks were interpreted as aggregate supply shocks, and transitory shocks as aggregate demand shocks. Demand shock correlations were small and mostly positive but not statistically significant, while supply shock correlations between Kenya and the rest of countries, between Burundi and Rwanda, and between Rwanda and Tanza- nia were small, positive, and statistically significant. Significant supply shocks pose greater prob- lems for a monetary union because demand shocks can be expected to become more similar with a monetary union, while supply shocks cannot. The implication is that all EAC countries should not form a monetary union at this point. The third approach was a multivariate co-integration analysis to test for long-run convergence in inflation rates and exchange rates across EAC members, a prerequisite for monetary union. Because convergence implies co-movement of specific variables over time, the co-integration approach helps assess the feasibility of a monetary union. The analysis showed partial conver- gence among inflation rates, including positive effects observed on all countries from a shock to Kenyan inflation and transitory effects on all countries from shocks to Burundian and Rwandan inflation. Kenyan inflation was weakly exogenous, suggesting that it is not pushed by any shock other than its own. But Tanzania and Uganda seem to affect each other. The partial convergence of inflation rates overall implies that EAC countries need to better align and coordinate their monetary policies to foster further convergence before entering a monetary union. Only Tanzania and Uganda were positively affected by a shock to the Kenyan exchange rate. The response of exchange rates in Burundi and Rwanda remains very weak due to limited flexibility in the countries’ exchange rates. The results of these analyses suggest that the EAC should fully implement the common market and customs union protocol, further harmonize policies, and increase intraregional trade before adopting a common currency. Adopting a common currency before achieving greater conver- gence could damage EAC countries.

Source: UNECA 2018a.

Progress toward free trade areas, COMESA launched its customs union in June 2009, customs unions, and greater with an implementation framework of three years. intraregional trade The EAC ratified a customs union in 2005 and Though East African countries have not yet operationalized it in 2014, reducing documenta- achieved a monetary union, they have made prog- tion requirements and enabling real-time exchange ress toward free trade areas and customs unions. of information.45 In the Central Corridor, the time

22 Political economy of regional integration needed to clear imported goods from the Dar es continental average of 16.6 percent and reflects a Salaam port has dropped from more than 22 days decline over the past five years. The figure is lower to 7 in Burundi and to 5 in Kigali, and in the North- (to 13.9 percent), if Djibouti, with its heavy trade ern Corridor, the time needed to clear imported with Ethiopia, and Uganda, with its heavy trade goods from the port has dropped from with Sudan and South Sudan, are excluded. Trade 21 days to 7 days in , to 6 days in Kigali, among COMESA members remains low, around and to 4 days in . The internal tariff reduc- the regional average. But intra-EAC and intra-IGAD tion program reduced all EAC internal tariffs to zero trade fares better. Intra-EAC trade is the highest in January 2005, and the Elimination of Non-Tar- among all RECs in East Africa, above 20 percent iff Barriers Act of 2017 is being operationalized. In of total exports and significantly higher than the addition, the common market protocol to advance continental average, though the rate has been regional integration through the free movement of stagnant over the past decade and remains below goods, persons, labor, capital, and services, as the region’s goal of 25 percent by 2025.48 This well as through the rights of establishment and res- underscores the need to examine the major factors idence in the EAC, was signed in November 2009 impeding regional integration. 46 and went into force in July 2010. Across East Intraregional trade is generally constrained by Overall progress toward regional tariff and nontariff barriers as well as lack of com- integration in East Africa African countries, plementarity of trade among REC members.47 So Among eight RECs, the EAC has the highest intraregional exports progress in addressing these constraints in general scores overall on the Africa Regional Integration accounted for an and removing tariff and nontariff barriers in partic- Index; IGAD ranks sixth and COMESA seventh. ular would imply growth in intraregional trade. But The EAC scores particularly high in trade integra- average of only across East African countries, intraregional exports tion and productive integration. IGAD scores high 17.3 percent of total accounted for an average of only 17.3 percent of in regional infrastructure.49 As in other regions, the exports in 2017, total exports in 2017 (table 9), which is close to the average East African REC scores differ most for which is close to the continental average TABLE 9 Intraregional trade in East Africa, 2012–17 (% of total exports) of 16.6 percent

Country 2012 2013 2014 2015 2016 2017 and reflects a Burundi 8.9 8.3 9.5 10.2 9.8 6.6 decline over the Comoros 0.3 0.1 0.4 0.1 0.1 0.1 past five years Djibouti 39.3 34.9 38.1 38.3 39.4 38.8 Eritrea 1.1 1.1 1.2 1.3 1.0 0.7 Ethiopia 16.1 25.6 21.9 21.2 20.7 21.0 Kenya 33.9 25.8 27.1 28.6 29.9 25.1 Rwanda 36.8 41.3 29.3 13.8 15.2 14.3 Seychelles 0.5 0.4 0.1 0.4 0.1 0.0 Somalia 0.1 0.5 0.0 0.2 0.3 0.6 Sudan 2.6 2.2 2.3 1.7 2.0 1.9 Tunisia 9.7 7.9 10.1 15.8 10.6 9.8 Uganda 41.0 42.2 45.9 47.4 37.1 40.2 East Africa 18.9 16.5 18.2 20.4 18.7 17.3 Africa 13.5 14.5 15.5 17.8 17.6 16.6

Note: South Sudan had no exports to East African countries, but its imports from other East African countries are included as intraregional trade in those countries’ totals. Source: UNCTADstat (https://unctadstat.unctad.org).

Political economy of regional integration 23 free movement of people. And although regional three East African RECs.51 It uses five lenses to integration in East Africa is above average for identify the main drivers and opportunities as well Africa, it still lags behind developing regions out- as challenges of regional integration in East Africa: side Africa, such as East Asia, where intraregional the interactions between foundational or structural trade is above 35 percent of total trade.50 factors; the relationship between formal and infor- At the country level, Kenya, Uganda, and Sey- mal institutions; actors, agency, and incentives; chelles had the highest performance in the region governance characteristics in particular sectors on the African Regional Integration Index, while and subsectors; and external drivers.52 Eritrea, Ethiopia, Sudan, and Djibouti had the lowest (table 10). Except Seychelles, even the top Main drivers and opportunities of performers, perform poorly in regional infrastruc- regional integration ture and macroeconomic and financial integration. There are numerous major drivers of­—­and hence opportunities for­—­regional integration in East Africa, including considerable unexploited poten- POLITICAL ECONOMY OF tial in trade, underexploited cross-border transport REGIONAL INTEGRATION corridors between landlocked and coastal member countries, endorsement by 44 African countries of This section is based on a comprehensive political the agreement to establish the CFTA, the necessity economy approach to regional integration in the of regional peace and security that emanates from

TABLE 10 African Regional Integration Index ranks among Common Market for Eastern and Southern Africa members, by country, 2016

Financial and Trade Regional Production Free movement macroeconomic Country Overall integration infrastructure integration of persons integration 1 1 8 3 4 12 Uganda 2 5 15 2 2 6 Kenya 3 4 13 6 4 10 Egypt 4 2 7 1 18 11 Seychelles 5 17 2 10 1 1 6 11 14 12 3 4 7 12 4 4 10 8 8 7 10 15 6 9 Rwanda 9 9 16 9 8 5 Congo, Dem. Rep. 10 3 9 14 14 13 eSwatini 11 15 1 7 7 19 Comoros 12 14 6 17 10 2 Burundi 13 13 12 8 13 14 10 10 11 11 9 17 Libya 15 6 3 19 19 3 Djibouti 16 19 17 5 12 3 Sudan 17 8 5 18 17 16 Eritrea 18 16 19 13 15 15 Ethiopia 19 18 18 16 16 18

Source: UNECA, AU, and African Development Bank 2016.

24 Political economy of regional integration the large number of fragile states in the region, the recent discovery of natural resources, and substan- TABLE 11 Actual intra-Africa trade as tial informal cross-border trade. a share of potential intra-Africa trade Except for Djibouti, which trades heavily in Common Market for Eastern and with Ethiopia, intraregional trade is far below its Southern Africa members, by country, potential­—­less than 12 percent for all countries 1993–2010 (%) except for Comoros, half the value for Central and West African countries (table 11).53 This untapped Actual intra-Africa trade (% of potential intra- potential could be taken as a driver of and an Country Africa trade) opportunity for regional integration in East Africa. Burundi 11.8 Econometric studies also show that being Comoros 28.9 landlocked adversely affects bilateral trade in Ethiopia 4.1 54 East Africa. This is mainly because landlocked Kenya 7.7 countries incur higher logistics costs to access the Rwanda 2.4 sea, which adversely affects their competitiveness Seychelles 2.9 and hence their level of exports and imports as Sudan 3.4 The recent discovery well as their economic growth. Of the 13 coun- Uganda 0.5 tries in East Africa, 5 (Burundi, Ethiopia, Rwanda, of natural resources South Sudan, and Uganda) are landlocked. Their Note: See annex 4 for details on the gravity model is a driver of and physical location and the existence of the other used to calculate potential trade. Data for Djibouti, opportunity for countries in the region with coastal land mass Eritrea, and South Sudan are not available. offer opportunities to enhance their economic Source: Geda and Seid 2015. regional integration competitiveness through efficient cross-border in East Africa transport corridors that offer secure and efficient access to seaports and neighboring markets. This Development Bank definition (based on Country is thus another major driver of and opportunity Policy and Institutional Assessment ratings) also for regional integration. Similarly, for small island excludes Ethiopia, Kenya, Rwanda, and Ugan- states Comoros and Seychelles, geographic iso- da.57 Both human-made factors such as con- lation, poor links to the mainland, vulnerability to flict and natural factors such as climate change climate change, and small domestic markets drive could be causes of fragility and its conse- regional integration.55 quences, including migration and lack of peace The endorsement of the agreement to establish and security. This calls for a collective action and the CFTA in March 2018 in Kigali by 44 countries could be an important driver of regional integra- is a major opportunity to accelerate intraregional tion, particularly in IGAD.58 Regional integration trade in East Africa. If successfully implemented, could be advanced for scaling up peace build- the CFTA will promote greater intraregional trade ing in the region. For instance, the recent peace by eliminating both tariffs and nontariff barriers to accord between Eritrea and Ethiopia has already trade (see box 2). increased cross-border trade and Ethiopia’s use All East African countries except Djibouti, Sey- of Eritrean ports, both of which could advance chelles, and Tanzania are fragile states based regional integration (box 4). on the Organisation for Economic Co-operation Another driver of and opportunity for regional and Development definition (“a state that has integration in East Africa is the recent discovery weak capacity to carry out basic governance of natural resources. Natural gas and oil discov- functions, that denies people entitlement to eries in Ethiopia, Kenya, Tanzania, and Uganda, basic services, that lacks the ability to develop existing oil exploitation in South Sudan, Ethiopia’s mutually constructive relation with societies, …. large hydroelectric power potential and its work and that exhibits lack of capacity, political com- toward exporting power to Djibouti and Kenya, mitment, and legitimacy to govern its population and pipeline development for gas and fuel import and territory”56). The World Bank and African and export in Djibouti, Ethiopia, and South Sudan

Political economy of regional integration 25 BOX 4 The Ethio-Eritrea Peace Agreement and its imperative for regional integration

Eritrea and Ethiopia signed a landmark peace and cooper- Eritrea, and rehabilitation of disabled people is estimated to ation agreement in 2018 that is expected to boost regional be more than $6 billion­—­twice the country’s annual exports. security and cooperation. The agreement ended the military The lesson from this overview and the cost of conflict confrontation between the countries and aims to support is the resolution never to repeat it and to work for durable postconflict socioeconomic reconstruction and develop- peace, which requires addressing the root causes of the con- ment. Following the agreement, telecommunication, trade, flict and devising amicable solutions to the economic coexis- transport services, and diplomatic relations between the two tence problem. Regional integration is a key policy direction countries were restored. Eritrea also re-established relations that Eritrea and Ethiopia could pursue for this purpose. with Djibouti and Somalia. Access to Eritrea’s ports will diver- Following the peace deal, free movement of people and sify Ethiopia’s access routes to the sea and ease conges- cross-border trade are expanding rapidly. But emerging tion at Djibouti’s ports, which handle more than 80 percent challenges in border towns and the theory and experience of Ethiopia’s trade. Feedback from Ethiopian Airlines reveals of regional integration in Africa suggest that the free move- that the airline is saving up to $10 million a month in fees ment of labor and goods will raise the cost of living in Ethi- that were previously paid to contiguous countries to use their opian border towns as people form Eritrea move to them. airspace. This could derail the peace process and thus needs to be Eritrea and Ethiopia had signed cooperation agreements handled in a delicate and sustainable manner. In theory, free following Eritrea’s independence in 1993, after which 80 per- movement of capital and labor is the last stage of a union, cent of Ethiopia’s trade passed through Eritrean ports (which the precondition of which includes macroeconomic conver- were “free ports” for Ethiopia). Ethiopia was also a market for gence. The challenge is that the free movement of people about 80 percent of Eritrea’s exports, and the two countries and goods is already happening and needs the attention of used the Ethiopian currency, the birr. They also shared the oil policymakers to make it rule based. refinery at port. But obstacles to the implementation The geopolitics in the area includes the presence of Saudi of the agreements, among other things, led to conflict. Mac- Arabia and the in the ports of Djibouti, roeconomic policy was difficult to coordinate between the Eritrea, and and the presence of Iran and Turkey two countries before the conflict. The countries adopted dif- in Sudan. Geopolitics also need to be brought in the negotia- ferent development strategies: Eritrea was outward oriented, tion with Eritrea and the IGAD members to ensure the welfare while Ethiopia was inward looking. Their de facto monetary and security of the region’s population. In addition, the Chi- union strained macroeconomic and fiscal policy coordina- nese interest in Djibouti’s ports as part of its Belt and Road tion, which was apparent just before the onset of the war. Initiative also needs to be considered in a regional strategy. When Eritrea issued its currency, the nakfa, in November China owns more than 82 percent of Djibouti’s debt and 1997, the Ethiopian government took the position that eco- offered over a billion dollar loan in 2016, which is equivalent nomic relations with Eritrea should be identical to those with to 75 percent of Djibouti’s GDP. If Djibouti fails to pay its debt, other neighboring countries such as Kenya, using the US it might hand over its ports (or a significant share of them) to dollar as the medium of exchange. This became another China, as did last year, which would have strate- major issue in the outbreak of the conflict. gic implications for Ethiopia and the region at large. On top Thus the real cause of the war goes beyond politics and of this, major Western countries have also established naval border conflict. Analysts agree that the economic issues bases in Djibouti, with implications for the region. These geo- stated above were at the heart of the conflict that cost more political issues need to be at the center of regional integration than 70,000 human lives. The total measurable cost of the discussions among IGAD members to ensure the collective war for Ethiopia alone, including reconstruction of damaged advantage of countries in the region. and destroyed social and physical infrastructure, resettle- ment of internally displaced persons and deportees from Source: Geda and Befekadu 2005

26 Political economy of regional integration are important drivers of and opportunities for fur- requirements at border customs posts and for- ther regional integration. malizing the informal sector are important policy Finally, informal cross-border trade is a driver directions to support informal cross-border trade of and an opportunity for regional integration. and enhance regional integration. Estimated to be as high as 50 percent of formal In addition to these drivers of and opportuni- trade in Africa,59 informal cross-border trade is a ties for regional integration in East Africa, the Afri- diverse source of livelihood for millions of people can Development Bank has highlighted several (box 5). High tariff and nontariff barriers, exces- reasons for increased cross-border trade in the sive regulation, ease of infrastructure in border region (see also annex 5):60 towns, and distortion in the official market or sec- • The EAC in general. Despite its many chal- tors are usually mentioned as major factors behind lenges, the EAC as a customs union and a informal cross-border trade. So addressing trade common market area is delivering on its mis- costs, harassment and corruption, infrastructure sion. It is now possible for traders to move from deficiency, excessive regulation, and excessive one country to another without major problems

Addressing trade BOX 5 Informal cross-border trade in Ethiopia and Uganda costs, harassment Ethiopia and corruption, The pastoral village economy around the border of Ethiopia and Kenya, though heavily reliant on infrastructure livestock rearing with limited economic diversification, is a fairly open system, increasingly exposed to the pressures of change in the external environment. Pastoralists produce a tradable commod- deficiency, ity (livestock) of complex composition with promising international and domestic market demand. excessive regulation, In one village, Borana, an average of 77.2 percent of village production ( and meat) is exported and excessive to other countries through formal and informal channels, and about 71 percent of the total value of live animal exports are traded through informal channels. For the fairly “borderless” mobile pastoral requirements at community, using the formal or informal channel is a matter of absolute convenience and com- border customs parative economic attractiveness rather than one of legality or legitimacy. The estimated value of posts and imported commodity demand is 23 percent of the gross annual value of village production, and formalizing the an estimated 78 percent of consumer goods and basic productive input inflows from outside the region take place through informal channels. The observed large percentage shares of informal informal sector cross-border flows shows that the peripheral pastoral economy is more integrated into the cross- are important border Kenyan markets than into the central Ethiopian market. policy directions to

Uganda support informal The intra-Africa used in most reports are based on officially recorded trade data and fail cross-border trade to capture significant unrecorded intra-Africa trade that is common across the continent—usually and enhance referred to as informal cross-border trade. Informal cross-border trade in Uganda was about $800 million in 2009, or about 51 percent of formal exports, and declined dramatically to about $528 regional integration million in 2010, or about 33 percent of formal exports.1 Informal cross-border trade is characterized by diversification of tradable commodities. The level and diversity of informal cross-border trade are similar across the continent.2

Notes 1. UBOS and BOU 2011. 2. See, among others, Geda and Seid (2015) and USAID (2013). Source: Berhanu 2015; UBOS and BOU 2011; USAID 2013.Source: Berhanu 2015; UBOS and BOU 2011; USAID 2013.

Political economy of regional integration 27 Moving Across EAST AFRICA

To learn about border crossing and processes for people and goods, the African Develop- ment Bank fielded a mission that traveled by road from Kampala to and by air from Arusha to and back to Kampala.

• One-stop border posts reduce the transit time for consignments and harmonize regulations and procedures. • Lower customs duties are reducing business costs and increasing regional competitiveness. • Exchanging currencies is very easy at border crossings, through formal and informal money changers. • Cargo yards have customs and security personnel and are generally well lit and well paved, with convenience facilities that are clean and uncongested. • Poor internet connections can sometimes force traders, truckers, and agents to wait during outages. ERITREA • Electronic cargo tracking reduces costs for importers, and weigh-in motion bridges reduces transit times for trucks.

Busia—Busiest border post in the EAC, with Ugan- SUDAN 1 DJIBOUTI da’s exports valued at about $220 million in 2017 • Djibouti Cargo scanners save waiting time • All clearing is by autho- rized agents at their source • About 300 trucks are cleared each day • If documentation is accurate, the network is OK, and customs officials are present and working, the border SOUTH SUDAN crossing takes 2–5 hours • Single file exit lane increases ETHIOPIA waiting time • Instead, entry lanes should differentiate cars, tankers, and cargo trucks, since transit time is short SOMALIA • Car passengers take less than 5 minutes to pass through immigration • Officers at eight police checkpoints on the UGANDA KENYA Busia– road are friendly, courteous, well equipped, 1 and apparently not harassing travelers or truckers • Much Busia of that road is in poor condition and prone to accidents. Kampala Namanga—Majority of trucks are heading for or RWANDA Kigali 2 2 Namanga SEYCHELLES coming from the Central Corridor through Arusha to and then to Dar es Salaam • No cargo scanner, BujumburBujumbura a Arusha so trucks have to be physically searched by onsite inspec- BURUNDI Victoria 3 tors • Having different Kenyan and Tanzanian customs systems delays the clearing of goods • On the Namanga Dar es Salaam TANZANIA side, when one network connection is down, the officials switch to another, a good practice to apply elsewhere. COMOROS 3 Dar es Salaam—The Tanzania Port Authority has a-one stop center for customs and immigration Moroni and works with a private Hong Kong company for cargo clearing • The port is part of the Central Corridor that serves Uganda through Mutukula (2–3 day crossing time), Rwanda through Rusomo (1 day), Burundi through Kobero (1–3 day), and Democratic Republic of Congo through Goma (3–5 day) • Average dwell time in 2017 was 5–7 days for containers.

28 Political economy of regional integration and to move goods across borders without Main challenges of regional much difficulty when they comply with trading integration processes requirements. Despite the numerous drivers and opportunities, • The EAC Customs Union. The EAC Customs progress in regional integration has been limited. Union has eliminated import duties for goods What are the major challenges of regional inte- originating within the REC, making it cheaper gration in East Africa? Lack of complementarity to import goods from the EAC than from other in trading, low competitive position of countries countries. to supply goods in the region (which is related • Improved border post infrastructure. The EAC to lack of structural transformation, low produc- has developed secure cargo yards, one-stop tivity, and a wide infrastructure gap), institutional border posts, high-quality roads, well-lit prop- capacity weakness to advance regional integra- erties, and clean convenience facilities, which tion, and failure to address political issues related have increased cross-border trade. to regional integration. • Sufficient customs officials. Revenue officials are The complementarity problem arises because now adequately distributed across major towns of limited product differentiation in trade between within the EAC. This means that traders no longer countries in the region (table 12). East African coun- have to first travel to their destination country to tries do not produce enough of what their neigh- get merchandise valued; it can now be done in bors want to import because they are all produc- the country in which goods are purchased. ers and exporters of primary commodities and

TABLE 12 Exports and imports in East Africa, by country, 2014–17 (exports) and 2017 (imports)

Number of products Manufactured accounting for more exports, 2014–17 (% Top exports, 2004–17 than 75% of exports, of total merchandise Major imports, 2017 Country (% of total exports) 2014–17 exports) (% of total imports) Burundi , (48%) 5 13.8 Oil and mineral fuels (9%) Gems, precious metals (12.4%) Pharmaceuticals (21%) Milling products, malt, starches Motor vehicles and parts (11%) (4.6%) Electrical and industrial Beverages, spirits (4.6%) machinery (15%) Tobacco, manufactured substitutes (4.3%) Comoros Essential oils (26.0%) 5 8.9 Other furniture (11.7%) Cloves (19.6%) Used clothing (7.0%) Vessels (17.7%) Fruits (5.3%) Small iron containers (5.9%) Plastic housewares (4.0%) Djibouti Petroleum, noncrude (21.1%) 11 ... Raw sugar (4.8%) (12.7%) Palm oil (4.6%) Animals live (11.1%) Cars (3.4%) Mixed mineral and chemical fertilizers (2.8%) Other steel bar (2.6%) Eritrea Ores, slag, ash (97.0%) 1 ... Milling products, malt, starches Gems, precious metals (1.1%) (16.3%) Clothing, accessories (not knit or Machinery, including computers crochet (0.6%) (15.2%) Coffee, tea, (0.3%) Animal/vegetable fats, oils, waxes (9.5%) Electrical machinery, equipment ( 7.1%) Ethiopia Coffee (33.6%) 4 7.5 Consumer nondurables (22.1%) Vegetables (18.8%) Industrial machinery (18.0%) Oil seeds (16.6%) Oil and mineral (9.6%) Electrical Gold (10.1%) machinery, equipment (8.8%) Chat/Kat (9.2%) Mineral fuel/petroleum (8.4%) Consumer durables (9.4%) (continued)

Political economy of regional integration 29 TABLE 12 Exports and imports in East Africa, by country, 2014–17 (exports) and 2017 (imports) (continued)

Number of products Manufactured accounting for more exports, 2014–17 (% Top exports, 2004–17 than 75% of exports, of total merchandise Major imports, 2017 Country (% of total exports) 2014–17 exports) (% of total imports) Kenya Coffee, tea, spices (29.0%) 13 33.9 Refined petroleum (8.1%) Live trees, plants, cut flowers Packaged medicaments (3.1%) (10.4%) Cars (2.8%) Mineral fuels including oil (6.2%) Telephones (1.7%) Vegetables (3.6%) Hot rolled iron (1.5%) Clothing, accessories (not knit or crochet) (3.3%) Rwanda Ores, slag, ash (40.9%) 2 6.3 Electrical and industrial Coffee, tea, spices (37.8%) machinery (22%) Raw hides, skins not fur skins, Motor vehicles and parts (19%) leather (3.4%) Cereals and food stuffs (5.7%) Food industry waste, animal Chemical products (11%) fodder (2.6%) Vegetables (1.1%) Seychelles Tunas, skipjack and bonito 4 4.2 Ships and boats and (54.7%) transportation (38%) Tunas, excluding frozen (8.8%) Animal products (13%) Yellow fin tunas (8.6%) Oil and mineral fuels (11%) Foodstuffs (5%) Machinery (8.7%) Somalia Live animals (71.2% of total 2 ... Raw sugar (14.0%) exports) Gums, resins, other Rice (5.8%) vegetable saps (10.2%) Rubber (4.1%) Fish (9%) Concentrated mill (3.2%) Raw hides, skins not fur skins, Cars (2.7%) leather (1.8%) Waver fabrics, synthetic staple Ships, boats (1.7%) fibers (2.6 %) South Sudan Mineral fuels, including oil 1 0.0 Raw sugar (15.3%) (97.9%) Packaged medicaments (3.6%) Vegetables (0.8%) Cars (3.2%) Wood (0.6%) Palm oil (3.1%) Cotton (0.5%) Cement (2.3 %) Sudan G o l d (57.4%) 3 0.2 Wheat (4.1%) Crude petroleum (10.6%) Packaged medicaments (4.0%) Other oily seeds (9.9%) Cars (2.1%) Insect resins (4.2%) Rubber footwear (1.7%) Dried legumes (2.4%) Raw sugar (1.0%) Tanzania Gems, precious metals (29.4%) 9 21.3 Motor vehicles and Tobacco, manufactured transportation (9.9%) substitutes (11.0%) Industrial machinery (21%) Coffee, tea, spices (7.4%) Mineral products (21%) Ores, slag, ash (6.3%) Chemical products (12%) Fish (5.3%) Metals (7.5%) Plastics (6.6%)

Uganda Coffee, tea, spices (22.5%) 12 18.7 Oil and refined petroleum (14.2%) Gems, precious metals (14.4%) Mineral products (17%) Chemical Mineral fuels, including oil (6.4%) products (14%) Cereals (6.3%) Machinery (17%) Fish (4.7%) Transportation (9.5%) Textiles (5.2%)

... is not available. Source: Geda (2013) and updates from https://tradingeconomics.com and https://atlas.media.mit.edu.

importers of manufactured goods.61 Not only is the earnings. This is a challenge for regional integration region characterized by a lack of complementarity that underscores the need for diversification. between exports and imports, but it also depends A major factor behind the lack of diversifica- on a few primary commodities for the bulk of export tion and competitiveness in the region is the lack

30 Political economy of regional integration of structural transformation. Manufactured goods efficient suppliers are excluded through aggres- exports are less than 10 percent of total merchan- sive regional integration before global competi- dise exports for most East African countries, and tiveness is addressed. Thus, the call for structural manufacturing value added is below 15 percent of transformation and enhanced intraregional trade GDP and below 5 percent in populous countries in this report needs to be balanced with poten- such as Ethiopia. The lack of structural transfor- tial trade diversion and welfare loss possibilities, mation is in turn related to the weak enabling envi- which require further research. ronment, wide infrastructure gap, and inadequate In addition to these challenges to regional regional policy framework and institutional capacity.62 integration in East Africa, the African Develop- The region’s lack of competitiveness is also ment Bank has highlighted several challenges to related to its infrastructure deficit. All East Afri- cross-border trade (see also annex 5):66 can countries except Seychelles score below 30 • Data migration challenges between country (on a scale of 1, low, to 100, high) on the Africa customs systems. Data migration challenges Infrastructure Development Index. The region’s arise from the nature of declarations that clear- key infrastructure challenges include power ing agents enter into trade information tech- shortages, low electricity connection rates, and nology systems. Improper data entry affects The region’s key high effective cost of electricity to manufacturing the links between country customs systems enterprises (averaging four times the global aver- and increases the time traders spend at the infrastructure age). This is further aggravated by large energy border and, ultimately, the transit time to the challenges include deficits, characterized by low access rates and destination. power shortages, unreliable supply. Of the 13 East African countries, • Transit times above targets. Cross-border tran- 7 (Burundi, Ethiopia, Rwanda, Somalia, South sit is characterized by long delays and waiting low electricity Sudan, Tanzania, and Uganda) have access rates time at the border because of understaffed connection rates, below the Sub-­Saharan Africa average of 32 per- customs offices. and high effective cent.63 In addition, weak private sector participa- • Costly long waits at the border. The long wait- tion and access to finance in general and in fragile ing time at the border is costly, particularly for cost of electricity states in particular have greatly limited diversifi- truck drivers in terms of time, expenses, and to manufacturing cation, structural transformation, and advances general well-being. enterprises in regional integration.64 But some countries are • Information technology network challenges. address infrastructure bottlenecks­—­for example, Poorly functioning information technology net- Ethiopia and Kenya are improving roads, railways, works contribute to delays in clearing goods, and energy infrastructure. which in turn contribute to high costs in terms The revealed comparative advantage index of expenses, time, and well-being. values of manufactured goods exports of African • Political issues. Political standoffs between countries that could supply other African coun- Kenya and Tanzania, manifested in the failures tries (Algeria, Cameroon, Egypt, Kenya, Nigeria, of the customs systems used by both countries and South Africa) also reflect the lack of structural to consistently and predictably tally informa- transformation and its fundamental causes. The tion on goods, have contributed to operational revealed comparative advantage of these coun- challenges that have slowed trade. tries is less than half that of Organisation for Eco- • Infrastructure shortfalls. Exit points at the bor- nomic Co-operation and Development countries, ders are generally single file rather than mul- China, and India­—­and would have been less than tiple file (capable of handling several vehicles 10 percent without the high values from Egypt at the same time), and poorly designed roads and South Africa (figure 4). The disparity, com- (such as those with narrow turning angles and bined with the huge trade logistics and intra-Af- sharp corners) are dangerous and damage rica infrastructure problems noted above, further vehicles. shows the challenge of exploiting trade potential.65 Despite these challenges, Rwanda notes It also suggests considerable trade diversion and that joining the EAC, a relatively advanced REC, potential welfare losses for countries if current easily improved its competitiveness and helped

Political economy of regional integration 31 FIGURE 4 Revealed comparative advantage of selected African countries and African trading partners in manufactured goods, 2010–13

Revealed comparative advantage

An overarching and generic challenge for regional integration Egypt India Algeria Kenya Nigeria China Japan OECD in East Africa relates Germany Sweden Korea, Rep. South Africa Netherlands United States to institutional Sub-Saharan Africa design and failure to Africa African competitors see the challenges Source: Geda and Seid 2015. of regional integration that are related to political increased its exports to the regional market. This, factor in the credibility gap that African regionalism and the desire to advance regional integration, has faced. economy, which explains Rwanda’s signing of the Eastern African Among the major political economy includes the role Monetary Union protocol in 2013. In addition, challenges:69 of interest groups, recent empirical evaluations of the CFTA do not • Few regional integration institutions serve their 67 the incentives faced show welfare losses. Further research at both stated functions. Many of the key functions of the regional and country levels is needed before planning, budgeting, monitoring, transparency, by various interest adopting a concrete policy. and accountability are weakly developed and groups, and the An overarching and generic challenge for not mutually reinforcing. domestic political regional integration in East Africa relates to insti- • Implementation of regional initiatives takes tutional design and failure to see the challenges place only when they align with key national implications of of regional integration that are related to politi- interests, which include regional hegemonic regional integration cal economy, which includes the role of interest position, as defined by the ruling elites. This schemes groups, the incentives faced by various interest also explains overlapping REC membership. groups, and the domestic political implications of • Individual personalities and leadership within regional integration schemes. Regional integra- regional organizations tend to shape the imple- tion schemes in Africa are generally ambitious but mentation of regional agendas. have a very shallow institutional framework, with • The interests and incentives associated with few responsibilities delegated to regional institu- regional cooperation in different sectors or tions.68 The mismatch between institutional design policy areas (security, infrastructure, energy, and the mission of regional integration is a major gender, and the like) differ markedly according

32 Political economy of regional integration to the nature and characteristics of the sector, addressing trade policy, trade facilitation, produc- affecting implementation in these areas. tive capacity creation, trade-related infrastructure • The nature of donor support to regional orga- provision, trade finance, trade information, and nizations presents opportunities but also chal- factor market integration.72 The policy direction lenges. The challenges relate to the fact that that deserves priority in the region is enhanced strong donor dependency and poorly man- regional infrastructure (such as roads, energy, aged aid raise the risk of donors driving rather water resources, information and communication than supporting reforms. technology, pipelines, and port facilities) aimed The next section presents policy actions at addressing the infrastructure gap through a based on analysis of these challenges to advance regional approach, as well as productive (or ver- regional integration. tical) integration through structural transformation. Finally, political economy challenges also Third, the lesson from East Asia on the policy relate to the distribution of benefits and losses direction of structural transformation and process from regional integration, which must address integration is instructive. Intraregional trade has winners and losers equitably. Tanzania withdrew increased rapidly in East Asia, but there has not from COMESA in 2000, citing possible revenue been a regionwide preferential Regional integration losses. Similarly, the EAC disintegrated in 1977 among these countries. It was not the result of following perceptions of Kenyan dominance and a simple market-led integration. Deliberate and must be approached divergent political positions and ideologies; it was conscious state action­—­in the form of unilateral from multiple not revived until 2000. Political economy issues tariff reductions, the establishment of export dimensions to bring might also relate to nontariff barriers that benefit processing zones and duty-drawback arrange- an interest group.70 For instance, Kenya identified ments, and entry into sectoral trade agreements about synergy in protection tendencies through nontariff barriers (especially in information and communication trade, infrastructure, in the EAC as a challenge to advancing regional technology and in the context of value chain productive integration. These important challenges need the creation)­—­are the foundation for success. These attention of policymakers and regional institutions policies are generally followed by individual coun- engagement, policy tasked with advancing regional integration. try’s foreign policy in the region rather than by and regulatory regional authorities.73 Policymakers in East Africa coordination, may draw an important lesson from this experi- and sociocultural INTERVENTION STRATEGIES ence and tune their own country policies along AND POLICIES TO this line. dimensions such STRENGTHEN REGIONAL All the policy directions suggested above need as language, INTEGRATION a strong policy and institutional framework for ethnic groups, and market integration, investment, and value chain Several intervention strategies and policy direc- development.74 They also require building the artificial borders tions are crucial to strengthen regional integration capacity of the regional and national institutions in East Africa. First, regional integration must be tasked with these issues. approached from multiple dimensions to bring In addition to these strategies to promote about synergy in trade, infrastructure, productive regional integration in East Africa, the African engagement, policy and regulatory coordination, Development Bank offers several policy recom- and sociocultural dimensions such as language, mendations (see also annex 5):75 ethnic groups, and artificial borders.71 • Sensitize the public to the customs process. Second, since increased intra-Africa trade is Delays at border posts could be reduced by a major policy instrument for advancing regional sensitizing traders about the correct clearing integration, it is imperative to capitalize on the process to reduce errors and avoid the need high political goodwill associated with the CFTA. for re-entries and re-declarations when trucks The agreement establishing the CFTA came are at the border. with an implementation action plan that tackles • Further improve infrastructure to deal with long constraints on intra-Africa trade by holistically lines. Existing road infrastructure could be

Political economy of regional integration 33 improved by building multiple lanes at border in brokerage (to harness interests of different points to enable simultaneous clearance of stakeholders), and tag the issue to champions (by multiple vehicles and by improving the quality paying attention to influential actors).76 These are of poor road networks. important policy directions and guiding principles • Use more than one information technology net- for advancing regional integration in East Africa. work at a time. Multiple information technology In sum, East Africa holds significant potential to networks could be used at all border points benefit from regional integration and to advance so that when one network is down, another intra-Africa trade in order to promote sustainable system is available to avoid a stoppage of economic growth and development in member clearing operations. countries. However, realizing this potential is chal- • Introduce a border makeshift driver system. lenged by the lack of complementarities of exports Allowing drivers to hand over their vehicles to and imports and low competitive position of Afri- other drivers at the border to continue with the can potential export suppliers. This is the result clearing process would prevent exhaustion of weak infrastructure, low productivity, and poor among drivers, thereby reducing traffic risks. trade facilitation. It is accompanied by weak institu- Finally, the policy directions suggested above tions and political economy challenges, and it calls need to be articulated in the political economy for an innovative approach to enhance regional context of the region and address political econ- integration. Addressing export supply constraints, omy challenges in tandem with the policy direc- increasing export competitiveness, and diversify- tions and institutional framework for development. ing are crucial. Policies need to go beyond liber- As the political economy of regional integration alization to realization of the potential for expand- studies in Africa suggest, the implications of polit- ing trade, integration processes, building regional ical economy challenges for policymakers could (multicountry) and domestic infrastructure, har- be grouped under four policy directions: alter monizing macroeconomic policies, enhancing policies (to influence structures), adapt policy trade-enabling institutions, facilitating trade, and action (to current interest), avoid (political block- focusing on regional diversification. Institutional age), and await (favorable incentive conditions). In capacity building and addressing political econ- addition, the study also advises engaging in three omy challenges that emerge in the course of plan- other policy directions: examine ambitions (revisit ning and implementing these policies are also key ambitions in the light of what is feasible), engage policy directions that need to be pursued.

34 Political economy of regional integration NOTES 39. EAC 2018. 40. UNECA 2018b. 1. UNECA 2018a. 41. African Development Bank 2018. 2. Durlauf, Kourtellos, and Tan 2008; Papageorgiou 42. Afrexim Bank 2018; African Development Bank and Kolovich 2014. 2018. 3. Shimeles 2014; McKay 2013. 43. African Development Bank 2018. 4. IMF 2014; Ncube and Jones 2013. 44. Afrexim Bank 2018; African Development Bank 5. Parallel markets are common in countries that have 2018; UNECA 2012. a managed floating (crawling-peg) exchange rate 45. Afrexim Bank 2018; African Development Bank regime because they often have a persistent balance 2018. of payment deficit and cannot satisfy all demand for 46. EAC 2018. foreign exchange by supplying it from the official 47. See Geda and Seid (2015), table 11. market. The East African countries with a parallel 48. African Development Bank 2018; Geda and Seid market are Eritrea, Ethiopia, Somalia, South Sudan, 2015. and Sudan. 49. Aidi 2018; UNECA, AU, and African Development 6. African Development Bank 2018. Bank 2016. 7. World Bank 2018b. 50. African Development Bank 2018. 8. World Bank 2018a. 51. Van Heukelom, Byiers, and Bil 2016. See also 9. Geda forthcoming a; World Bank 2018a. Byiers, Van Heukelom, and Kingombe (2015), cited 10. African Development Bank 2018. in Van Heukelom, Byiers, and Bil 2016). 11. African Development Bank 2018. 52. Van Heukelom, Byiers, and Bil 2016. 12. African Development Bank 2018. 53. Based on Geda and Seid’s (2015) simulation for 13. Ndikumana et al. 2015. North, East, and Southern African countries (includ- 14. Shimeles 2014; Fosu 2017. ing all COMESA members) comparing a gravity 15. UNDP 2017. model–based prediction of trade (taken as potential 16. Shimeles 2014; Fosu 2017. trade) with actual trade (see annex 4). 17. African Development Bank 2017. 54. Geda and Seid 2015; Geda and Kibret 2008; Ndulu 18. Valensisi and Davis 2011. et al. 2008. 19. Lundvall and Lema 2014. 55. African Development Bank 2018. 20. African Development Bank 2018. 56. OECD 2015. 21. UNECA 2012, 2016b. 57. Geda forthcoming b. 22. UNECA 2014, 2016a. 58. African Development Bank 2018; Geda forthcoming b. 23. Timmer et al. 2012; UNECA 2014, 2016a. 59. Minde and Nakhumwa 1998; UBOS and BOU 2010. 24. Shimeles 2014; McKay 2013. 60. African Development Bank 2018. 25. Chatterjee 2005. 61. African Development Bank 2018. 26. Aggarwal and Kumar 2012. 62. African Development Bank 2018. 27. African Development Bank 2018. 63. African Development Bank 2018. 28. Fox et al. 2016. 64. African Development Bank 2018; Geda and Kibret 29. See Fox et al. 2016. 2008. 30. UNECA 2013. 65. Geda and Seid 2015. 31. UNECA 2017. 66. African Development Bank 2018. 32. Pfaffenzeller, Newbold, and Rayner 2007; Geda 67. UNECA 2017. forthcoming a. 68. Ravenhill 2016. 33. Geda forthcoming a. 69. Van Heukelom, Byiers, and Bil 2016. 34. Geda 2018a, 2018b. 70. African Development Bank 2018. 35. Geda, Senbet, and Simbanegavi 2018. 71. See, among others, Geda and Kibret 2008. 36. Van Heukelom, Byiers, and Bil 2016. 72. UNECA, AU, and African Development Bank 2017. 37. Schneider 2017. 73. Ravenhill 2016. 38. African Development Bank 2018. 74. African Development Bank 2018.

Political economy of regional integration 35 75. African Development Bank 2018. 78. Geda and Seid 2015. 76. See Van Heukelom, Byiers, and Bil 2016. 79. These issues are discussed in detail in Geda and 77. Anderson 1979; Bergstrand 1985; Deardorff 1998; Seid (2015). Feenstra, Markusen, and Rose 1998. 80. African Development Bank 2018.

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38 Notes and references ANNEXES

ANNEX 1

TABLE A1.1 Real GDP growth rate in East Africa, by country, 2008–20 (%)

2018 2019 2020 Country 2008–10 2011–13 2014–16 2017 (estimated) (projected) (projected) Burundi 4.6 4.5 1.9 –0.2 1.4 0.4 1.2 Comoros 2.0 2.4 1.8 2.7 2.8 2.8 2.9 Djibouti 3.9 5.7 6.3 4.1 5.6 5.9 5.2 Eritrea –1.2 6.2 4.5 5.0 4.2 3.8 4.1 Ethiopia 10.7 10.1 9.5 10.7 7.7 8.2 8.2 Kenya 4.0 5.5 5.7 4.9 5.9 6.0 6.1 Rwanda 8.3 7.1 7.5 6.1 7.2 7.8 8.0 Seychelles 0.9 5.0 4.6 5.3 3.6 3.3 3.3 Somalia ... 2.0 3.6 2.3 2.9 3.5 3.5 South Sudan ... –11.6 –3.7 –11.1 –3.8 –2.6 –2.5 Sudan 4.9 2.2 3.7 3.3 4.1 3.6 3.8 Tanzania 5.8 6.8 7.0 7.1 6.7 6.6 6.6 Uganda 8.5 4.6 4.3 5.0 5.3 5.5 5.7 East Africa 6.2 5.2 5.8 5.9 5.7 5.9 6.1

... is not available. Source: African Development Bank statistics.

39 ANNEX 2

TABLE A2.1 External debt accumulation in East Africa, by country, 2008–18 (% of GDP)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Burundi 94.2 21.2 22.4 24.0 22.6 21.0 18.9 18.2 16.7 15.3 14.9 Comoros 68.5 51.9 48.9 44.9 40.7 18.6 19.1 22.7 26.3 30.1 26.5 Djibouti 65.0 65.2 57.9 52.7 49.2 48.6 49.9 69.3 87.8 97.4 102.9 Eritrea 61.9 49.1 45.8 35.8 29.4 25.1 22.5 22.6 20.5 20.1 20.1 Ethiopia 13.3 14.7 18.8 24.4 20.6 23.5 25.2 37.9 34.9 33.5 30.5 Kenya 19.9 28.8 29.9 31.1 30.2 29.3 35.9 40.4 43.4 46.3 47.6 Rwanda 13.7 15.6 17.6 20.2 20.3 25.2 26.8 29.3 36.7 40.0 41.4 Seychelles 82.5 184.9 171.0 182.9 167.8 125.2 118.2 99.3 98.3 100.1 99.6 Somalia ...... 29.2 29.1 35.3 143.3 149.8 ... Sudan 50.2 63.6 60.1 62.4 88.2 85.1 77.0 75.5 93.9 117.7 166.6 Tanzania 18.2 21.0 23.1 24.9 25.3 26.1 27.3 32.9 34.7 34.0 34.6 Uganda 18.1 21.3 25.3 27.4 28.2 30.8 31.2 39.0 39.7 42.7 45.0 East Africa 30.8 35.5 37.3 36.2 38.5 39.6 40.1 45.8 49.8 51.7 51.9

... is not available. Note: Data for South Sudan are not available. Source: African Development Bank statistics.

ANNEX 3

TABLE A3.1 Unemployment rates in East Africa, by country, 2010–18 (%)

2010 2011 2012 2013 2014 2015 2016 2017 2018 Burundi 1.6 1.6 1.5 1.5 1.6 1.6 1.6 1.6 1.5 Comoros 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.3 4.3 Djibouti 6.2 6.2 6.1 6.0 5.9 5.9 5.8 5.8 5.8 Eritrea 6.8 6.8 6.7 6.6 6.6 6.6 6.5 6.4 6.3 Ethiopia 5.2 5.2 5.1 5.0 5.0 5.0 5.1 5.2 5.3 Kenya 12.1 12.0 11.9 11.8 11.7 11.6 11.5 11.5 11.4 Rwanda 3.0 3.3 3.4 2.3 1.2 1.2 1.2 1.3 1.4 Somalia 6.0 6.0 6.0 6.1 6.1 6.1 6.0 6.0 5.9 South Sudan 12.1 11.7 11.3 12.9 12.2 12.0 11.5 11.5 11.5 Sudan 12.8 13.0 13.0 12.9 12.8 12.8 12.7 12.7 12.7 Tanzania 3.0 3.5 3.2 2.9 2.1 2.1 2.2 2.2 2.3 Uganda 4.0 3.9 3.6 1.9 1.9 1.9 2.0 2.1 2.2 East Africa 6.3 6.3 6.2 5.9 5.7 5.7 5.7 5.7 5.8

Note: Data for Seychelles are not available. Source: African Development Bank statistics.

40 Annexes ANNEX 4 THE GRAVITY MODEL USED TO CALCULATE POTENTIAL TRADE FOR COMMON MARKET OF EASTERN AND SOUTHERN AFRICA MEMBERS

The gravity model has widely been used to iden- function in these formulations. An experiment of tify determinants of bilateral trade, though they other estimations techniques such as fixed-effect are often criticized for lacking a strong theoretical and random-effect models did not change the basis. However, multiple researchers have devel- result. oped theoretical foundations to formally derive the The trade data are from the International Mon- model.77 In a typical gravity model, bilateral trade etary Fund’s Direction of Trade Statistics dataset. flows are determined by the size of the two econo- Macroeconomic indicators are from the World mies and the distance between them. However, it Bank’s World Development Indicators database. is always possible to expand the model to include The remoteness index was computed by the other relevant determinants of trade. The follow- authors. ing standard gravity model was specified here to The estimated coefficients of the gravity model examine the potential for intra-Africa trade:78 together with each country’s actual values for

β β β β β β β β β explanatory variables of the model were used to T α Y Y D N N RTA A REM REM η ij i j ij i j ij ij it jt ij compute (predict) potential trade. The results sug-

where Tij is bilateral trade between countries i gest the level of intra-Africa trade given geographic and j; Y is GDP; N is population; D is the bilat- proximity, cultural affinity, size of the economies, eral distance between the two countries; A is and the other variables of the model. The predicted other relevant variables (cultural and geographic level was then compared with the actual trade for factors such as common official language, shar- each country. The ratio of the two values was gen- ing a border, being landlocked, and the bilateral erally found to be less 1, indicating that actual trade exchange rate between partner countries); REM is below its potential given by the gravity model. is a remoteness index that captures multilateral But because the model is based on proxy vari- trade resistance term and measures the average ables and uses aggregate value of exports, it fails distance of country i from all trading countries (the to capture the structure of the supply of exports expected sign of the coefficient is positive, sug- and the demand for those products in the import- gesting that more remote countries trade more ing country. Thus, the result indicates only the nec- among each other); and η is the stochastic term. essary, but not the sufficient condition, for enhanc- The model is estimated using bilateral export ing intra-Africa trade. The sufficient condition is data of African countries. The censored nature that what is supplied by one country, specified by of such regional bilateral trade implies that (the commodity category, needs to be demanded by log-linearized) ordinary least squares estimates the trading African partner country. This requires are biased. Thus, the model is estimated using examining the pattern of demand and supply by Poisson pseudo-maximum likelihood to address commodity category. Moreover, even if one finds the problems associated with ordinary least complementarities between these trading part- squares. As alternative to Poisson pseudo-maxi- ners, it is imperative to examine the comparative mum likelihood, panel Tobit is also employed. The advantage of the potentially exporting African parameters of the model are thus computed by countries in replacing the current trading partners finding the estimates that maximize the likelihood of the importing African countries.79

Annexes 41 ANNEX 5 ASSESSING FREE MOVEMENT OF PERSONS AND GOODS WITHIN THE EAST AFRICAN COMMUNITY

This annex summarizes the assessment of oppor- has highlighted several challenges to cross-border tunities and constraints to trading and traveling trade (see also annex 5):80 across the Uganda, Kenya and Tanzania borders, • Data migration challenges between country covering the Busia, Namanga, and Dar es Salaam customs systems. Data migration challenges border posts in the EAC and provides policy rec- arise from the nature of declarations that clear- ommendations to improve the situation. ing agents enter into trade information tech- nology systems. Improper data entry affects Opportunities for trade and travel the links between country customs systems • The EAC in general. Despite its many chal- and increases the time traders spend at the lenges, the EAC as a customs union and a border and, ultimately, the transit time to the common market area is delivering on its mis- destination. sion. It is now possible for traders to move from • Transit times above targets. Cross-border one country to another without major problems transit times do not meet government targets. and to move goods across borders without Truck drivers complain about long waits at much difficulty when they comply with trading borders that force them to remain in their vehi- process requirements. cle because traffic moves in a single file line. • The EAC Customs Union. The EAC Customs The truck drivers suggest that the clearing Union has eliminated import duties for goods process is slow because customs offices are originating within the REC, making it cheaper understaffed. to import goods from the EAC than from China. • Long waits at the border. Some truck drivers This is a good opportunity for traders state that it is quicker and easier to drive from • Improved border post infrastructure. The EAC Busia to Kampala than to be on the 1 kilometer has developed infrastructure to facilitate cross- stretch between the Kenyan and Ugandan side cross-border trade and travel, including clean of Busia. They further observe that it takes so border offices, secure cargo yards with security long to clear a truck that drivers later fall asleep personnel, well-paved roads, well-lit properties, at the wheel. The truck drivers cannot go for and uncongested and clean convenience facili- lunch for fear of someone else overtaking them ties. The existence of the one-stop border posts in the queue, so they snack in their vehicles, also makes clearing goods much easier. Transi- which is not good for their health. Drivers com- tion times at border posts have improved tremen- plained that the long waits in Namanga force dously, with about 300 trucks cleared each day. them to spend their per diem for the entire jour- • Sufficient customs officials. Revenue officials are ney because the extra days spent in transit are now adequately distributed across major towns not budgeted for. within the EAC. This means that traders no longer • Information technology network challenges. have to first travel to their destination country to Unreliable information technology networks get merchandise valued; it can now be done in delays clearing of goods, especially in Busia the country in which are goods purchased. and Namanga, according to truck drivers and • Good-quality road infrastructure. Road infra- clearing agents. When the network is off, driv- structure is generally in good condition and ers just sit and wait. well-marked, except roads between Busia and • Political issues. Political standoffs between Kisumu. Kenya and Tanzania, manifested in the failures of the customs systems used by both countries Challenges of trade and travel to consistently and predictably tally informa- In addition to these challenges to regional integra- tion on goods, have contributed to operational tion in East Africa, the African Development Bank challenges that have slowed trade.

42 Annexes • Infrastructure shortfalls. Exit points at the bor- • Further improve infrastructure to deal with long ders are generally single file rather than multi- lines. Multiple lanes could be created at border ple file (capable of handling several vehicles at points so that different types of vehicles (transit the same time). Truck drivers have suggested cars, fuel tanks, cargo trucks, and so on) could installing a multiple-file system that enables use different lanes or so that vehicles with a cargo trucks to use one lane and fuel tanks to longer clearance process could be in one line use a separate lane. Drivers also complain of and vehicles with a shorter process could be in the narrow turning angle at Busia’s cargo scan- another. The quality of the road network between ner, which is hard to maneuver, especially in a Busia and Kisumu could also be improved. large vehicle. They observed that the turning • Use more than one information technology net- angle is designed in an L shape, which spoils work at a time. Multiple information technology vehicle tires when maneuvering. networks could be used at all border points so that when one network is down, another Policy recommendations system is available to avoid a stoppage of • Sensitize the public to the customs process. clearing operations. Delays at border posts could be reduced by • Introduce a border makeshift driver system. sensitizing traders about the correct clearing Allowing drivers to hand over their vehicles to process to reduce errors and avoid the need other drivers at the border to continue with the for re-entries and re-declarations when trucks clearing process would prevent exhaustion are at the border. among drivers, thereby reducing traffic risks.

Annexes 43

STATISTICAL ANNEX

STATISTICAL TABLE 1 Basic indicators, 2018

Average Gross annual Population Gross domestic real GDP Land area density domestic product growth, Population (km2 (people producta per capitaa 2010–20 (thousands) thousands) per km2) ($ millions) ($) (%) Burundi 11,216 28 403 8,205 732 2.5 Comoros 832 2 447 1,387 1,666 2.4 Djibouti 971 23 42 3,974 4,091 5.6 Eritrea 5,188 118 44 10,024 1,932 4.7 Ethiopiab 107,535 1,104 97 220,681 2,052 9.7 Kenya 50,951 580 88 177,4 41 3,483 5.9 Rwanda 12,501 26 475 27,0 6 8 2,165 7.3 Seychelles 95 0 207 2,914 30,600 4.6 Somalia 15,182 638 24 21,564 1,420 3.0 South Sudan 12,919 620 21 19,819 1,534 –6.0 Sudan 41,512 1,886 22 177,251 4,270 3.5 Tanzania 59,091 947 62 175,929 2,977 6.8 Uganda 44,271 242 183 96,658 2,183 5.1 East Africa 362,265 6,214 58 942,915 2,603 3.5 Africa 1,286,206 30,049 43 6,764,685 5,259 4.0

a. Based on valuation. b. Based on fiscal year data (September–August). Source: UNDESA 2017, African Development Bank statistics and estimates, and various domestic authorities.

45 STATISTICAL TABLE 2 Real GDP growth, 2010–20 (%)

2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 (estimated) (projected) (projected) Burundi 5.1 4.0 4.4 4.9 4.2 –0.3 1.7 –0.2 1.4 0.4 1.2 Comoros 2.6 1.6 2.1 3.4 3.4 –0.2 2.2 2.7 2.8 2.8 2.9 Djibouti 4.1 7.3 4.8 5.0 6.0 6.5 6.5 4.1 5.6 5.9 5.2 Eritrea 2.2 8.7 7.0 3.1 5.0 4.8 3.8 5.0 4.2 3.8 4.1 Ethiopiaa 12.4 11.2 8.6 10.6 10.3 10.4 8.0 10.7 7.7 8.2 8.2 Kenya 8.4 6.1 4.5 5.9 5.4 5.7 5.9 4.9 5.9 6.0 6.1 Rwanda 7.3 8.0 8.7 4.7 7.6 8.9 6.0 6.1 7.2 7.8 8.0 Seychelles 5.9 5.4 3.7 6.0 4.5 4.9 4.4 5.3 3.6 3.3 3.3 Somalia ...... 1.2 2.8 2.4 3.9 4.4 2.3 2.9 3.5 3.5 South Sudan ...... –52.4 29.3 2.9 –0.2 –13.8 –11.1 –3.8 –2.6 –2.5 Sudan 6.5 0.9 1.4 4.4 2.7 4.9 3.5 3.3 4.1 3.6 3.8 Tanzania 6.4 7.9 5.1 7.3 6.9 7.0 7.0 7.1 6.7 6.6 6.6 Uganda 8.2 5.9 3.2 4.7 4.5 5.7 2.6 5.0 5.3 5.5 5.7 East Africa 8.0 5.4 3.0 7.2 5.8 6.5 5.1 5.9 5.7 5.9 6.1 Africa 5.8 2.9 7.3 3.6 3.7 3.5 2.1 3.6 3.5 4.0 4.1

... is not available. a. Based on fiscal year data (September–August). Source: African Development Bank statistics, estimates, and projections and various domestic authorities.

46 Statistical annex ...... 7.1 2.9 2.4 2.4 4.3 4.9 3.3 6.2 6.7 3.4 8.0 –1.3 –0.2 Imports ...... 2.9 2.4 2.4 4.3 5.8 5.1 3.6 0.3 6.2 6.7 3.2 3.2 10.3 Exports

...... 1.8 4.3 9.1 9.8 5.1 4.4 5.7 5.1 3.6 6.7 6.5 8.8 Total gross 14.3 capital formation (% real growth) 2020 (projected) 2020

...... 7.7 7.2 1.6 2.2 5.6 4.1 5.8 3.5 5.6 6.1 8.0 3.3 –2.9 Total final Total consumption ...... 2.6 2.8 2.3 5.4 2.3 5.0 2.2 3.4 4.5 6.5 9.2 –1.5 –2.0 Imports 7.7 ...... 2.7 6.7 2.9 3.4 4.5 2.2 5.9 6.9 6.3 3.2 20.1 15.7 Exports

...... 7.7 4.4 9.5 5.3 9.4 5.7 5.5 3.2 6.9 8.7 Total 10.0 13.8 10.4 gross capital formation (% real growth) 2019 (projected) 2019

...... 7.3 1.6 1.3 2.7 2.4 4.6 4.3 5.0 5.4 0.9 6.0 6.0 –3.6 Total final Total consumption ...... 1.0 1.7 2.0 4.1 0.1 5.7 6.5 6.2 –1.4 –1.6 –4.0 –10.5 –13.3 Imports ...... 7.0 7.7 1.8 2.9 2.8 4.7 4.8 4.0 5.6 5.9 6.8 17.2 14.4 Exports

...... 2.0 2.4 4.4 4.3 4.6 4.0 4.5 5.3 3.0 6.3 8.8 11.6 Total –3.0 gross capital formation (% real growth) 2018 (estimated) 2018

...... 1.3 2.4 4.7 4.9 0.3 3.6 3.3 3.8 6.3 3.4 3.8 3.9 –0.5 Total final Total consumption ...... 5.5 17.9 17.2 28.1 25.7 62.7 19.5 23.7 25.6 32.8 22.5 25.2 103.3 Imports ...... 7.7 2.7 9.4 9.9 6.0 17.9 22.7 16.4 13.9 18.2 13.2 34.0 90.9 External sector Exports ...... 7.7 7.6 5.7 2.9 2.0 4.0 9.5 3.6 17.4 27.7 11.2 10.1 14.0 Public Public 2017 ...... formation 7.5 (% of GDP) 5.6 8.4 11.4 11.3 15.1 21.6 13.7 12.2 18.0 15.8 16.9 25.6 Gross capital Private ...... Demand composition and growth rate, 2017–20 7.8 8.8 8.2 11.2 21.0 12.3 12.3 13.6 13.9 15.2 19.2 25.3 20.8 Public Final ...... 74.4 71.6 74.6 72.6 75.9 consumption 80.7 68.7 79.5 64.6 80.0 63.9 85.5 58.3 Private a Africa Seychelles Rwanda Tanzania Kenya Somalia South Sudan Sudan Uganda East Africa East Burundi Comoros Djibouti Ethiopia Eritrea ... is not available. ... a. Based on fiscal year data (September–August). Source: African Development Bank statistics, estimates, and projections and various domestic authorities. STATISTICAL TABLE 3

Statistical annex 47 0.1 –1.2 –2.9 –2.8 –4.3 –4.9 –3.5 –3.7 –3.5 –5.8 –3.6 – 0.1 –14.4 –15.4 –10.3 Overall balance

… 9.9 and 17.6 27.5 41.5 19.4 18.2 18.3 25.9 lending 25.1 25.5 25.4 Total 20.5 46.2 45.0 net expenditure 2020 (projected) 2020

… 8.7 41.3 21.9 12.5 14.8 14.7 15.1 15.0 15.1 16.9 22.2 Total 20.2 30.7 48.1 revenue and grantsand 0.1 –1.4 –1.6 –2.9 –4.0 –4.4 –4.4 –3.7 –3.3 –5.4 –5.7 –8.8 –0.4 –12.4 –16.0 Overall balance

… and 17.8 47.2 27.8 41.7 19.8 24.7 18.4 10.4 18.5 25.3 lending 25.8 Total 20.4 26.6 56.7 net expenditure 2019 (projected) 2019

… 8.8 17.1 41.2 31.2 21.3 14.8 14.9 15.1 15.3 15.9 13.1 22.3 Total 20.1 45.3 revenue and grantsand … –1.5 –2.2 –4.5 – 4.1 –4.7 –4.3 –3.0 –3.9 – 3.1 –8.8 –0.3 –6.7 –12.6 –15.5 Overall balance

… and 17.9 17.5 47.1 11.1 27.3 57.4 41.4 21.1 24.8 18.2 25.7 lending Total 28.3 20.1 23.9 net expenditure 2018 (estimated) 2018

... 8.9 17.2 17.1 41.0 31.6 21.2 14.1 14.4 14.9 14.4 15.4 16.1 Total 23.1 35.6 revenue and grantsand … 0.4 0.0 5.8 –1.2 –1.9 –4.8 –5.8 –3.8 –3.3 –3.9 –8.9 –6.5 –15.3 –13.8 Overall balance

… and 17.5 17.7 11.0 27.5 27.5 19.0 15.7 18.2 2017 lending 22.5 Total 28.5 28.4 50.2 40.0 46.5 net expenditure

Public finances, (% of GDP) 2017–20 … 9.1 31.2 21.7 14.3 15.0 15.2 15.9 13.7 18.6 16.4 16.1 25.0 Total 23.6 40.1 revenue and grantsand a b a a a Kenya Africa Eritrea East Africa East Djibouti Ethiopia Somalia Uganda Burundi Comoros Rwanda Seychelles South Sudan South Sudan Tanzania ... is not available  a. Based on fiscal year (July–June).data Based b. on fiscal year data (September–August). Source: African Development Bank statistics, estimates, and projections and various domestic authorities. STATISTICAL TABLE 4

48 Statistical annex STATISTICAL TABLE 5 Monetary indicators

Inflation Exchange rate (%) (local currency unit per US dollar) 2018 2019 2020 2018 2017 (estimated) (projected) (projected) 2015 2016 2017 (estimated) Burundi 16.1 12.7 22.1 23.1 1,571.9 1,654.6 1,729.1 1,820.7 Comoros 1.0 2.0 2.0 2.0 443.6 444.8 436.6 406.2 Djibouti 0.6 0.8 2.4 2.7 177.7 177.7 177.7 177.7 Eritrea 9.0 9.0 9.0 9.0 15.4 15.4 15.4 15.4 Ethiopiaa 7.2 13.0 9.3 8.5 20.6 21.7 22.3 25.6 Kenya 8.0 4.8 5.5 5.4 98.2 101.5 103.4 103.5 Rwanda 8.2 0.9 4.1 4.0 721.0 787.3 831.5 843.5 Seychelles 2.9 4.4 3.6 3.1 13.3 13.3 13.6 13.9 Somalia 2.9 5.1 4.7 4.6 ...... South Sudan 187.9 104.1 108.2 91.4 4.1 49.4 115.4 184.3 Sudan 32.6 43.4 35.0 33.1 6.0 6.2 6.7 13.8 Tanzania 5.3 4.8 5.2 5.1 1,991.4 2,177.1 2,228.9 2,273.1 Uganda 5.6 3.2 4.3 4.8 3,240.6 3,420.1 3,611.2 3,739.5 East Africa 14.0 14.5 12.5 11.4 ...... Africa 12.6 10.9 9.2 8.1 ......

... is not available. a. Based on fiscal year data (September–August). Source: African Development Bank statistics, estimates, and projections; various domestic authorities; and the International Monetary Fund Inter- national Financial Statistics database.

Statistical annex 49

–7.4 –1.9 –2.1 –4.6 –3.0 –3.3 –5.4 –5.3 –5.8 –8.3 –0.3 –6.3 2020 –17.0 –11.2 –16.9 (projected)

–7.7 –1.1 –2.8 –2.2 –9.2 –4.6 –4.9 –9.2 –3.4 –5.2 –5.9 –6.5 2019 –17.6 –10.1 –16.3 (projected)

(% of(% GDP) 0.3 –7.2 –2.4 –4.9 –4.9 –3.0 –3.7 –5.8 –8.4 –6.0 –6.0 2018 –17.8 –12.7 –10.4 –18.2 (estimated) Current account balance account Current 1.7 0.7 –2.5 –4.3 –4.3 –3.6 –5.0 –3.3 – 8.1 2017 –6.7 –6.8 –6.7 –17.5 –11.6 –20.5

–8 –116 –172 –417 –518 –422 –956 –330 2020 –1,877 – 6,161 –2,316 –1,880 –5,237 –78,510 –20,410 (projected)

–84 –113 –313 –373 –329 –982 –303 –509 2019 –2,117 –2,184 –1,529 – 5,740 –4,753 –19,327 –69,596 (projected)

22 ($ millions) ($ –84 –375 –324 –321 –867 –533 –503 2018 –2,195 –1,431 –2,222 –5,689 –4,903 –19,425 –70,979 (estimated) Current account balance account Current 51 39 –53 –473 –346 –622 –305 –364 2017 –1,184 –1,724 –5,018 –6,551 –3,272 –19,821 –81,227

223 –201 –425 –577 –982 2020 –1,070 –1,035 –1,369 –2,722 –4,613 –2,600 –11,794 – 87,419 –15,483 –42,648 (projected)

785 –192 –928 –449 –553 2019 –1,024 –1,277 –1,226 – 4,193 –2,268 –2,506 –11,546 –14,407 –76,739 –39,783 (projected)

($ millions) ($ 535 Trade balance Trade –184 –479 –961 –880 –500 2018 –1,153 –1,642 –1,992 –2,495 –3,944 –11,561 –13,919 – 39,175 –69,644 (estimated) Balance of payments indicators payments Balance of 333 –159 –872 –450 –469 –904 –643 2017 –1,701 –2,725 –2,841 –3,005 –76,217 –12,895 –10,202 –36,531 a Africa Somalia South Sudan South Africa East Seychelles Sudan Uganda Rwanda Tanzania Burundi Eritrea Ethiopia Kenya Comoros Djibouti  a. Based on fiscal year data (September–August). Source: African Development Bank statistics, estimates, and projections. STATISTICAL TABLE 6

50 Statistical annex ...... 39.6 251.6 725.2 736.3 137.2 171.9 597.3 295.5 430.0 World World 1,121.0 1,351.1 9,163.0 1,962.6 5,747.4 1,060.0 5,595.9 4,178.1 1,189.2 2,901.5 4,240.6 3,160.7 10,031.9 15,942.7 16,690.2 ...... 2.6 2.8 37.1 39.3 26.6 43.4 58.3 43.5 172.8 261.3 129.3 691.7 143.3 669.3 712.7 351.4 202.3 Africa Africa 1,0 37.0 1,075.5 1,050.9 1,958.4 2,017.7 1,140.2 1,449.9

...... 2.6 2.1 0.3 0.1 6.0 11.3 79.6 53.3 15.0 24.1 89.8 80.6 East East 410.9 170.6 514.2 191.9 662.9 418.5 771.7 315.3 192.5 Africa Africa 688.5 1,165.1 1,443.1 ...... na ...... na 1.4 0.7 2.5 0.5 0.0 0.0 0.7 0.2 0.6 0.4 0.0 29.4 53.8 46.9 50.3 524.3 101.7 Uganda Uganda 249.8 455.6 ...... na na 0.0 0.0 9.6 0.0 0.8 0.1 0.0 0.7 2.8 2.8 3.3 0.5 0.6 0.9 39.8 11.1 64.3 66.4 60.2 217.0 224.0 Tanzania Tanzania ...... na 1.6 0.1 2.2 0.3 0.1 0.6 0.0 na 2.5 0.2 0.1 0.0 0.2 0.0 0.1 0.0 67.3 67.0 70.3 22.0 36.3 297.3 Sudan Sudan

...... na na 2.1 0.2 3.1 0.0 0.0 6.3 0.2 0.0 South South 331.9 Sudan Sudan 163.2 ...... na 1.5 1.2 0.0 na 0.3 0.0 0.1 0.8 0.9 257.3 191.6 Somalia Somalia ...... Exports to ...... 1.8 0.1 0.0 0.2 0.3 na na Imports from 1.9 0.8 0.1 0.0 0.0 0.0 Seychelles Seychelles ...... 1.1 0.1 0.0 3.7 na na 1.5 2.8 2.9 0.1 50.7 41.9 14.2 16.7 150.9 188.0 Rwanda Rwanda ...... 1.7 1.4 1.9 2.2 0.0 0.0 na na 2.8 2.1 3.7 17.1 67.7 13.0 60.2 86.0 66.5 221.4 Kenya Kenya 105.4 486.8 192.0 263.4 596.6 ...... na ...... 2.8 5.7 4.3 0.1 0.0 na 1.1 0.5 0.6 0.2 0.5 0.1 0.1 57.0 40.5 60.9 22.7 20.2 242.6 Ethiopia Ethiopia ...... na 0.0 2.1 0.1 0.0 na 1.4 0.0 0.0 0.8 0.0 17.4 11.3 Eritrea Eritrea ...... na ...... 1.5 2.3 0.4 0.1 5.8 na 2.7 2.4 0.0 0.1 0.0 0.0 87.5 29.7 48.0 Djibouti Djibouti ...... na ...... 0.1 0.0 0.0 3.7 na 0.0 0.0 32.4 Comoros Comoros Intraregional millions) trade, ($ 2017 na ...... 0.1 0.2 0.0 0.0 na 1.9 2.8 0.9 4.7 3.8 0.0 17.2 47.6 41.7 54.9 Burundi Burundi Uganda Uganda Tanzania Tanzania Sudan Sudan South South Sudan South South Sudan Somalia Somalia Kenya Ethiopia Rwanda Seychelles Ethiopia Kenya Eritrea Seychelles Rwanda Eritrea Djibouti Djibouti Comoros Comoros Burundi Burundi ... is not available. ... applicable. not is  na Source: United Nations Conference and on Trade Development. STATISTICAL TABLE 7

Statistical annex 51 STATISTICAL TABLE 8 Demographic indicators, 2018

Age distribution (% of population Population Urban Fertility rate growth rate population 65 and (births per (%) (% of total) 0–14 15–64 older woman) Burundi 3.2 13.0 45.1 52.3 2.6 5.5 Comoros 2.3 29.0 39.5 57.5 3.0 4.2 Djibouti 1.5 77.8 30.6 65.1 4.3 2.7 Eritrea 2.3 40.1 41.5 55.0 3.6 4.0 Ethiopia 2.5 20.8 40.0 56.5 3.5 4.0 Kenya 2.5 27.0 40.1 57.2 2.7 3.7 Rwanda 2.4 17.2 39.8 57.1 3.1 3.7 Seychelles 0.5 56.7 22.4 68.7 8.9 2.3 Somalia 3.0 45.0 46.3 50.9 2.7 6.1 South Sudan 2.7 19.6 41.5 55.1 3.4 4.7 Sudan 2.4 34.6 40.5 55.9 3.6 4.4 Tanzania 3.1 33.8 44.7 52.2 3.1 4.9 Uganda 3.3 23.8 47.4 50.4 2.2 5.4 East Africa 2.7 26.8 42.2 54.7 3.1 4.4 Africa 2.5 42.5 40.6 55.8 3.5 4.4

Source: African Development Bank statistics and estimates, UNDESA 2017, and various domestic authorities.

52 Statistical annex STATISTICAL TABLE 9 Poverty and income distribution indicators

International poverty line National poverty linea ($1.90 a day) Gini indexb Population Population below below the poverty the poverty Survey year line (%) Survey year line (%) Survey year Value Burundi 2014 64.9 2006 71.7 2013 38.6 Comoros 2014 42.0 2013 18.1 2013 45.3 Djibouti 2017 21.1 2013 22.5 2013 44.1 Eritrea ...... Ethiopia 2015 23.5 2010 33.6 2015 39.1 Kenya 2015 36.1 2005 33.6 2015 40.8 Rwanda 2013 39.1 2013 60.4 2013 45.1 Seychelles 2013 39.3 2014 1.1 2013 46.8 Somalia ...... South Sudan 2016 82.3 2009 42.7 2009 46.3 Sudan 2009 46.5 2009 14.9 2009 35.4 Tanzania 2011 28.2 2011 37.8 Uganda 2016 21.4 2012 34.6 2016 42.8 East Africa ...... Africa ......

... is not available. a. Defined as two-thirds of average consumption. b. Based on income distribution. Source: Various domestic authorities and the World Bank.

Statistical annex 53 STATISTICAL TABLE 10 Access to services

Telecommunications, 2016 Population using Population using at least basic at least basic Main Mobile Population using Access to drinking water sanitation telephone lines telephone lines the Internet electricity, 2016 services, 2015 services, 2015 (per 100 people) (per 100 people) (%) (% of population) (%) (%) Burundi 0.2 50.9 5.2 7.6 55.9 50.5 Comoros 1.6 57.1 7.9 77.8 83.7 34.2 Djibouti 2.6 36.6 13.1 51.8 76.9 51.4 Eritrea 1.3 10.2 1.2 46.7 19.3 11.3 Ethiopia 1.1 50.0 15.4 42.9 39.1 7.1 Kenya 0.2 80.4 16.6 56.0 58.5 29.8 Rwanda 0.1 74.9 20.0 29.4 56.7 62.3 Seychelles 22.1 161.2 56.5 100.0 96.3 100.0 Somalia 0.3 46.5 1.9 29.9 40.0 16.2 South Sudan 0.0 22.1 6.7 8.9 50.4 10.4 Sudan 0.3 70.3 28.0 38.5 58.9 34.6 Tanzania 0.2 72.1 13.0 32.8 50.1 23.5 Uganda 0.9 55.0 21.9 26.7 38.9 19.2 East Africa 0.6 60.0 16.2 37.5 47.4 21.6 Africa 2.1 78.5 23.7 51.6 63.3 38.0

Source: African Development Bank statistics, the International Telecommunication Union World Telecommunication/ICT Indicators database, the United Nations Statistics Division Energy Statistics Database, WHO/UNICEF Joint Monitoring Programme for Water Supply and Sanitation 2015, and various domestic authorities.

54 Statistical annex STATISTICAL TABLE 11 Health indicators

Life expectancy at birth, 2018 Prevalence of Health personnel, 2010–16 (years) undernourished, (per 100,000 people) 2016 (% of Nurses and Total Male Female population) Physicians midwives Burundi 58.2 56.2 60.3 ...... Comoros 64.1 62.4 65.9 ...... Djibouti 62.8 61.1 64.6 19.7 22.9 55.7 Eritrea 66.0 63.8 68.2 ...... Ethiopia 66.3 64.4 68.2 21.4 2.2 23.6 Kenya 67.5 65.2 69.9 24.2 20.4 158.2 Rwanda 67.8 65.6 69.9 36.1 6.4 83.2 Seychelles 73.9 69.7 78.7 ... 98.4 443.3 Somalia 57.1 55.5 58.9 ... 2.9 7.8 South Sudan 57.8 56.7 58.8 ...... Sudan 64.9 63.3 66.6 25.2 28.0 115.7 Tanzania 66.8 65.1 68.5 32.0 2.2 41.6 Uganda 60.5 58.3 62.7 41.4 9.3 64.8 East Africa 64.8 62.9 66.7 27.7 9.6 67.0 Africa 63.1 61.4 64.9 18.5 33.6 123.3

... is not available. Source: African Development Bank statistics, UNDESA 2017, the Food and Agriculture Organization, and the World Health Organization.

Statistical annex 55 STATISTICAL TABLE 12 Major diseases

Healthy life expectancy at birth, 2016 Infant Under-five (years) Prevalence mortality mortality of HIV, ages rate, 2017 rate, 2015 15–49, 2017 (per 1,000 (per 1,000 Total Male Female (%) live births) live births) Burundi 52.6 51.2 54.0 1.1 42.5 61.2 Comoros 56.6 55.4 57.8 0.1 52.2 69.0 Djibouti 56.6 55.3 57.9 1.3 51.5 61.7 Eritrea 57.4 56.0 59.0 0.6 32.1 43.1 Ethiopia 57.5 56.1 58.9 0.9 41.0 58.5 Kenya 58.9 57.0 60.8 4.8 33.6 45.6 Rwanda 59.9 58.8 61.0 2.7 28.9 37.9 Seychelles 65.7 62.2 69.5 ... 12.2 14.2 Somalia 50.0 48.8 51.3 0.1 79.7 127.2 South Sudan 50.6 50.0 51.3 2.4 62.5 96.4 Sudan 55.7 54.7 56.8 0.2 43.7 63.2 Tanzania 56.5 54.9 58.0 4.5 38.3 54.0 Uganda 54.9 52.9 56.9 5.9 35.4 49.0 East Africa 56.4 54.9 57.9 2.6 41.0 59.1 Africa 55.1 54.0 56.3 3.5 47.7 68.7

... is not available. Source: UNAIDS 2018, the UN Inter-agency Group for Child Mortality Estimation CME Info database, and the World Health Organization Global Health Observatory Data Repository.

56 Statistical annex STATISTICAL TABLE 13 Education indicators

Estimated adult rate, 2010–17 Gross enrollment ratio, primary, 2010–17 Public (% ages 15 and older) (%) expenditure on education, 2010–17 Total Male Female Total Male Female (% of GDP) Burundi 61.6 69.7 54.7 126.2 126.1 126.2 4.3 Comoros 49.2 56.5 42.6 99.4 101.6 97.2 4.3 Djibouti ...... 63.9 67.5 60.2 4.5 Eritrea ...... 49.4 53.1 45.6 2.1 Ethiopia ...... 101.9 106.8 97.0 4.7 Kenya 78.7 83.8 74.0 105.3 105.1 105.5 5.2 Rwanda 70.8 76.1 66.1 133.4 134.1 132.8 3.2 Seychelles 94.0 93.5 94.4 112.8 113.2 112.4 4.4 Somalia ...... South Sudan ...... 66.6 77.8 55.1 1.0 Sudan ...... 76.4 78.9 73.9 2.2 Tanzania 77.9 83.2 73.1 85.3 84.3 86.2 3.5 Uganda 70.2 79.1 62.0 99.0 97.7 100.3 2.6 East Africa 74.6 80.9 68.9 95.8 97.7 93.8 2.6 Africa 65.5 77.0 62.6 99.5 101.6 97.4 4.4

... is not available. Source: African Development Bank statistics, the United Nations Educational, Scientific and Cultural Organization Institute for Statistics database, and various domestic authorities.

Statistical annex 57 STATISTICAL TABLE 14 Labor indicators, 2018

Employment to population ratio, Labor force participation rate, ages 15 and older ages 15 and older (%) (%) Unemployment rate, total Total Female Youth Total Female Male (%) Burundi 77.7 79.4 50.7 83.3 84.3 82.3 1.5 Comoros 41.4 34.5 11.9 57.7 35.8 79.5 4.3 Djibouti 55.6 46.2 33.3 52.6 36.7 68.5 5.8 Eritrea 76.2 70.3 63.8 83.2 77.2 89.5 6.3 Ethiopia 78.2 71.5 69.4 83.1 77.2 89.1 5.3 Kenya 57.9 52.9 25.1 67.2 62.5 72.0 11.4 Rwanda 84.9 84.8 74.0 84.8 85.9 83.7 1.4 Seychelles ...... Somalia 43.4 17.4 29.1 54.5 33.6 75.9 5.9 South Sudan 64.0 61.8 49.8 ...... 11.5 Sudan 40.5 18.1 19.6 47.8 24.2 71.3 12.7 Tanzania 81.5 77.1 69.5 78.4 73.9 83.1 2.3 Uganda 69.2 64.7 51.7 85.1 82.6 87.8 2.2 East Africa 68.4 60.9 52.7 74.6 64.7 82.2 5.8 Africa 59.6 51.0 40.1 65.9 55.5 75.9 7.8

... is not available. Source: International Labour Organization ILOSTAT database.

58 Statistical annex In 2018, real GDP in East Africa grew by an estimated 5.7 percent, slightly less than the 5.9 percent in 2017 and the highest among African regions. Economic growth is projected to remain strong, at 5.9 percent in 2019 and 6.1 percent in 2020. The countries with the highest economic growth are Ethiopia, Rwanda, Tanzania, Kenya, and Djibouti. In both Ethiopia and Rwanda, real GDP growth has been driven by industry and services. The service sector has also been the main driver of growth in Tanzania and Kenya, followed by the agricultural sector, the main growth driver from the supply side. On the demand side, consumption has been the main driver of economic growth across East Africa.

East Africa has considerable potential to benefit from regional integration and to advance intra-Africa trade to promote sustainable economic growth and development in member countries. But realizing this potential—and hence the effort to advance regional integration—is challenged by the lack of complementarities of exports and imports as well as the relative competitive position of potential export suppliers. The result of weak infrastructure, productivity, and trade facilitation, this calls for addressing export supply constraints, export competitiveness, and export diversification, which in turn calls for policies that go beyond liberalization to actual realization of the potential for trade expansion and process integration.

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