Macroeconomic and Social Developments in Eastern Africa 2019 Towards the Implementation of the African Continental Free Trade Area in Eastern Africa Macroeconomic and Social Developments in Eastern Africa 2019 Table of Contents ACKNOWLEDGEMENTS .................................................................................................................... 4 EXECUTIVE SUMMARY .................................................................................................................... 5 1. MACROECONOMIC AND SOCIAL DEVELOPMENTS ...................................................... 9 1.1. RESUMED GROWTH MOMENTUM IN EASTERN AFRICA ............................................................. 9 1.2. DEBT VULNERABILITIES PERSIST DESPITE NARROWING FISCAL DEFICITS ............................ 16 1.3. MODERATED INFLATION AND EXCHANGE RATE PRESSURES .................................................. 24 1.4. CURRENT ACCOUNT DEFICITS ARE CONSTRAINING GROWTH ................................................ 27 1.5. LEVERAGING EXTERNAL FINANCIAL FLOWS ........................................................................... 36 1.6. SOCIAL DEVELOPMENT ............................................................................................................ 40 1.6.1. Improvements in Life Expectancy .................................................................................. 41 1.6.2. Building a Literate Workforce ........................................................................................ 43 1.6.3. The Costs of Gender-Based Violence ............................................................................. 44 1.6.4. Progress on The Sustainable Development Goals ........................................................... 45 2. SPECIAL THEMATIC STUDY: THE IMPLEMENTATION OF THE AFRICAN CONTINENTAL FREE TRADE AREA IN EASTERN AFRICA ................................................................................... 49 PART I: DEMAND-SIDE PERSPECTIVES ON REGIONAL DEVELOPMENT ............................ 52 I.1. A DEMAND-DECOMPOSITION ANALYSIS OF REGIONAL GROWTH ............................................ 52 I.2. PATTERNS OF HOUSEHOLD CONSUMPTION ............................................................................... 54 I.3. TO WHAT EXTENT IS DOMESTIC DEMAND MET BY LOCAL PRODUCTION? .............................. 59 I.4. RECAPTURING DOMESTIC MARKETS ......................................................................................... 63 PART II: CREATING A CONTINENTAL MARKET........................................................................ 68 II.1. EMPIRICAL STUDIES OF THE IMPACT OF TRADE LIBERALISATION........................................... 68 II.1.1. How Does Trade Grow? Multilateral vs. Regional Processes ........................................... 68 II.1.2. Competing Methodologies: Econometric vs. Computable General Equilibrium Simulations ...................................................................................................................................................... 69 II.1.3. How Much is the East African Community Currently Under-trading? ............................. 72 II.2. UNLEASHING THE FULL POTENTIAL OF REGIONAL TRADE AND INDUSTRIALIZATION ............ 74 II.3. EXPANDING INTRA-AFRICAN AGRICULTURAL TRADE ............................................................ 81 II.3.1. The State of Agricultural Trade in Eastern Africa ............................................................. 82 II.3.2. The Scope for Expanding Agro-Industrial Trade Under the AfCFTA .............................. 84 II.4. THE BLUE ECONOMY AND THE AFCFTA ................................................................................. 86 II.4.1. The Northern and Central Corridors: Backbones of Transport of Intraregional Trade ..... 86 II.4.2. Lakes Victoria and Tanganyika: The Two Hidden Gems of the Northern and Central Corridors ...................................................................................................................................... 89 II.5. TAPPING THE POTENTIAL OF INTRA-AFRICAN SERVICES TRADE ............................................ 93 II.5.1. The Tourism Case .............................................................................................................. 95 II.6. A CALL FOR FREE MOVEMENT OF PERSONS ............................................................................ 99 REFERENCES ................................................................................................................................... 101 1 Draft version. Comments are welcomed. Macroeconomic and Social Developments in Eastern Africa 2019 List of Boxes, Figures and Tables Boxes BOX 1: THE ECONOMIC IMPLICATIONS OF THE RAPID RAPPROCHEMENT BETWEEN ERITREA AND ETHIOPIA .................................................................................................................................... 11 BOX 2: HOW VULNERABLE ARE THE EASTERN AFRICAN COUNTRIES? ............................................ 13 BOX 3: DO BUDGET ALLOCATIONS ALIGN WITH DEVELOPMENT PRIORITIES? .............................. 17 BOX 4: MODELLING THE ECONOMIC IMPACT OF THE CHINA BELT AND ROAD INITIATIVE ON EAST AFRICA ...................................................................................................................................... 23 BOX 5: THE EAST AFRICAN MONETARY UNION: READY OR NOT? ..................................................... 26 BOX 6: FINANCING GROWTH IN THE CONTEXT OF BALANCE OF PAYMENT CONSTRAINT ......... 28 BOX 7: THE IMPACT OF BREXIT ON THE AFRICAN CONTINENT – SOME NEW OPPORTUNITIES MAY OPEN UP FOR EASTERN AFRICA .......................................................................................... 34 BOX 8: ENHANCING FINANCIAL INCLUSION VIA MOBILE MONEY .................................................... 37 BOX 9: WISHFUL THINKING? – THE DEMOGRAPHIC DIVIDEND IN EASTERN AFRICA ................... 47 BOX 10: IDENTIFYING STRATEGIC SECTORS VIA PRODUCT SPACE ................................................... 66 BOX 11: HOW EAST AFRICA COULD USE THE AFCFTA TO TACKLE GENDER INEQUALITY ......... 79 Figures FIGURE 1: REAL GDP GROWTH IN EASTERN AFRICA, AFRICA AND THE WORLD ........................... 10 FIGURE 2: ECONOMIC VULNERABILITY INDEX OF EASTERN AFRICAN COUNTRIES, 2018 ........... 13 FIGURE 3: SHARE OF VALUE ADDED OF THE MANUFACTURING AND SERVICES SECTORS BETWEEN 2006 AND 2016 ............................................................................................................ 14 FIGURE 4: EMPLOYMENT AND GDP GROWTH IN SELECTED AFRICAN COUNTRIES ...................... 15 FIGURE 5: FISCAL BALANCE ......................................................................................................................... 16 FIGURE 6: KENYA’S SECTORAL ALLOCATIONS ....................................................................................... 17 FIGURE 7: RWANDA’S SECTORAL ALLOCATIONS ................................................................................... 19 FIGURE 8: UGANDA’S SECTORAL ALLOCATIONS .................................................................................... 20 FIGURE 9: LOANS TO THE REGION FROM CHINA..................................................................................... 22 FIGURE 10: NOMINAL EXCHANGE RATE, LOCAL CURRENCY VERSUS US DOLLAR ...................... 25 FIGURE 11: CURRENT ACCOUNT BALANCE .............................................................................................. 27 FIGURE 12: OFFICIAL FOREIGN EXCHANGE RESERVES ......................................................................... 27 FIGURE 13: TRADE BALANCE BETWEEN THE EAC AND KEY TRADING PARTNERS ....................... 31 FIGURE 14: COMPOSITION OF EASTERN AFRICA’S MANUFACTURED EXPORTS TO AFRICA ....... 32 FIGURE 15: AGOA SHARE OF EXPORTS TO USA VS SHARE OF EXPORTS TO USA, 2015-2017 AVERAGE ....................................................................................................................................... 33 FIGURE 16: SHARE OF ADULTS WITH A MOBILE MONEY ACCOUNT, 2014 AND 2017 ..................... 37 FIGURE 17: FOREIGN DIRECT INVESTMENT FLOW TO EASTERN AFRICA, 2008-2017 ...................... 39 FIGURE 18: IMPROVEMENTS IN LIFE EXPECTANCY, 2007-2017 ............................................................ 42 FIGURE 19: LIFE EXPECTANCY AT BIRTH (PLOTTED ACCORDING TO HDR RANK), 2017 .............. 42 FIGURE 20: PERCENTAGE OF WOMEN WHO CANNOT READ AT ALL.................................................. 43 FIGURE 21: MALE AND FEMALE WITH NO EDUCATION ......................................................................... 44 FIGURE 22: SDG DASHBOARD FOR EASTERN AFRICA ............................................................................ 46 FIGURE 23: TOTAL FERTILITY BY REGION, 1950-2050 ............................................................................. 47 FIGURE 24: DEPENDENCY RATIO, 2015 AND 2050..................................................................................... 48 FIGURE 25: DEMAND SHARES, 2016 ............................................................................................................. 52 FIGURE 26: GROWTH DECOMPOSITION, 1990-2015 ................................................................................... 53 FIGURE 27: COMPOSITION OF ACTUAL INDIVIDUAL CONSUMPTION, 2011 ...................................... 55 FIGURE 28: PRICE LEVEL INDEX (WORLD = 100), 2011 ...........................................................................