Three East African economies begin to converge

By DAVID MUSOKE
Special Correspondent
Economies of the original member states of the East African Community post modest achievements during 2006 in their convergence efforts, says the East African Development Bank.

Kenya, with real GDP growth rate of 6 per cent, came out on top followed by Tanzania at 5.9 per cent and Uganda at 5.4 per cent.

The 2006 annual report and accounts 2006 of the EADB says the real GDP performance of the three economies during the review period did not attain the targeted seven per cent level.

“Although by the end of 2006, the member states’ performance with regard to the quantifiable convergence parameters was modest, it represented gradual progress,” it said.

The report said that with the commencement of the implementation of the East African Customs Union in January 2005, the member states have been working towards the convergence of key macroeconomic variables. The harmonisation of macroeconomic policies among the partner states continued to put emphasis on exchange rates, and monetary and fiscal policies.

The harmonisation is aimed at ensuring co-operation in monetary and financial matters and maintenance of convertibility of currencies of the member states as a basis for the eventual establishment of a single currency, the report said.

The parameters that form the convergence criteria are: Achieving and maintaining a real GDP growth of 7 per cent; achieving and maintaining an underlying inflation rate of less than 5 per cent; reducing the current account deficit as a percentage of GDP to sustainable levels; reducing the budget deficit, excluding grants, as a percentage of GDP to sustainable levels of less than 5 per cent and raising the ratio of gross savings to GDP to at least 20 per cent; and building foreign reserves to a level equivalent to six months of goods and non factor services.

The report said that the regional economies remained on course towards attainment of convergence on broad, non-quantifiable policy aspects.

The report said that as a reflection of the general inflationary pressure experienced in the three economies, the underlying inflation for Uganda and Tanzania surpassed the 5 per cent target while Kenya managed to attain the convergence criteria target.

During the period under review, Uganda registered the highest underlying inflation at 9.8 per cent, Tanzania 6.8 per cent and Kenya 3.8 per cent.

The respective member states’ central banks, according to the report, continued to pursue monetary policies to address the inflation pressure, bearing in mind that the headline inflation for Kenya and Uganda was at double digit levels by the end of the year.

Tanzania had the lowest headline inflation of 6.7 per cent followed by Uganda at 11.3 per cent and Kenya at 15.6 per cent.

The member states continued to put in place measures aimed at diversifying their export bases, especially due to the dependence of their commodity exports.

The report highlights the seven most important exports for the three countries. Coffee at 61.7 per cent continues to be the most important traditional export in Uganda and fish and fish products (53.1 per cent) was the most important contributor to nontraditional exports by December 2005/06.

In Tanzania, the most important export was tobacco (24.4 per cent) followed by coffee (23 per cent) and cotton (20.9 per cent) and the most important non-traditional export was gold ( 51.9 per cent).

In Kenya, the most important export is tea (19.4 per cent) followed by horticulture (14.8 per cent) and manufactured goods (12.1 per cent). Kenya has a category of other exports (31.5 per cent), which is unidentified. The report does not have figures of non-traditional exports for Kenya for the year under review.

With regard to nominal GDP, Kenya tops the list with $23.3 billion followed by Tanzania at $11.7 billion and Uganda at $9.2 billion. Equally, Kenya registered the highest gross national savings as well as gross domestic savings — almost as much as Tanzania and Uganda combined.

While Uganda and Tanzania were able to meet six months of import cover of foreign reserves, Kenya missed the target, although it attained its budgeting expectations. Foreign reserves (months of import cover) for Kenya were 4.5, Tanzania 6.0 and Uganda 6.2.

The bank said there was progress in strengthening the tax authorities, with tax reform measures being put in place to reduce reliance on external budgetary support, especially in the case of Uganda and Tanzania.