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East AfricaEconomicOutlook2019Macroeconomicdevelopmentsand prospects

Political economy of regional integration

East AfricaEconomicOutlook2019

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 sovereignty over any territory, to the delimitation of international frontiers and boundaries, and to the name of any territory, city, or area.

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© African Development Bank 2019

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

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Acknowledgments v

Executive summary 1

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

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

Notes 35

References 36

Annexes 39

Statistical annex 45

Boxes1 The diversity of East Africa 62 Progress toward the African Continental Free Trade Area in East Africa 183 An empirical analysis of the East African Community’s readiness for monetary union 224 The Ethio-Eritrea Peace Agreement and its imperative for regional integration 265 Informal cross-border trade in Ethiopia and Uganda 27

Figures1 GDP growth, by region, 2008–20 62 GDP growth in East Africa, by country, 2014–20 7

CONTENTS

iii

3 Overlapping membership in regional economic communities in East Africa 204 Revealed comparative advantage of selected African countries and African trading

partners in manufactured goods, 2010–13 32

Tables1 Inflation in East Africa, by country, 2017–20 92 Fiscal balance, including grants, in East Africa, by country 103 External current account balance, including grants, in East Africa, by country 114 External debt stock and debt indicators in East Africa, by country, 2018 125 Domestic resource mobilization and financial sector development in East Africa, by

country, 2016 and 2017 136 Poverty and inequality in East Africa, by country, various years 147 Structural change, growth, and unemployment, various years 168 Macroeconomic convergence criteria in the Common Market for Eastern and Southern

Africa and the East African Community, by country 219 Intraregional trade in East Africa, 2012–17 2310 African Regional Integration Index ranks among Common Market for Eastern and

Southern Africa members, by country, 2016 2411 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 2512 Exports and imports in East Africa, by country, 2014–17 (exports) and 2017 (imports) 29A1.1 Real GDP growth rate in East Africa, by country, 2008–20 39A2.1 External debt accumulation in East Africa, by country, 2008–18 40A3.1 Unemployment rates in East Africa, by country, 2010–18 40

Statistical tables1 Basic indicators, 2018 452 Real GDP growth, 2010–20 463 Demand composition and growth rate, 2017–20 474 Public finances, 2017–20 485 Monetary indicators 496 Balance of payments indicators 507 Intraregional trade, 2017 518 Demographic indicators, 2018 529 Poverty and income distribution indicators 5310 Access to services 5411 Health indicators 5512 Major diseases 5613 Education indicators 5714 Labor indicators, 2018 58

iv C O N T E N T S

The East Africa Economic Outlook 2019 was prepared in the Vice Presidency for Eco-nomic Governance and Knowledge Man-agement, under the supervision and general direction of Célestin Monga, Vice President and Chief Economist, with support from Eric Kehinde Ogunleye, Amah Marie-Aude Ezanin Koffi, Tricia Baidoo, and Vivianus Ngong.

The preparation of the outlook was led and coordinated by Ferdinand Bakoup, Acting Director, Country Economics Depart-ment, with a core team consisting of Abra-ham Mwenda and Marcellin Ndong-Ntah, Lead Economists for East Africa.

The data appearing in the report were compiled by the Statistics Department, led by Charles Lufumpa, Director, and Louis Kouakou, Manager, Economic and Social Statistics Division. Their team included Anouar Chaouch, Mbiya H. Kadisha, Souma-ila Karambiri, Stephane Regis Hauhouot, Sla-heddine Saidi, Kokil Beejaye, Adidi Ivie, and Guy Desire Lakpa.

Contributions were received from Tilahun Temesgen, Chief Regional Economist, and

Patrick Kanyimbo, Principal Regional Inte-gration Officer for East Africa. Alemayehu Geda (University of Ethiopia) contributed a background note to the report. External consultant Esther Katende-Magezi provided the background note for the infographic on people and goods moving across East Africa.

Augustin Fosu (University of Ghana) and Peter Montiel (Williams College) served as peer reviewers.

The cover of the report is based on a gen-eral design by Laetitia Yattien-Amiguet and Justin Kabasele of the Bank’s External Rela-tions and Communications. Editing, transla-tion, and layout support was provided by a team from Communications Development Incorporated, led by Bruce Ross-Larson and including Joe Brinley, Joe Caponio, Meta de Coquereaumont, Mike Crumplar, Peter Redvers-Lee, Christopher Trott, and Elaine Wilson, with design support from Debra Naylor and translation support from Jean-Paul Dailly and a team at JPD Systems.

ACKNOWLEDGMENTS

v

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 pro-jected 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 eco-nomic growth across East Africa.

The region continues to face various downside risks that could undermine eco-nomic growth and development prospects. Major risks are agriculture’s vulnerability to the vagaries of nature, heavy reliance on pri-mary commodity exports, and — in oil-import-ing countries — rising oil prices. Another key risk is persistent current account deficits and related increases in external indebtedness. Finally, state fragility — with its adverse impli-cations for security and economic progress — is a risk for Burundi, Somalia, South Sudan, and, to some degree, Ethiopia.

Notwithstanding the variation across countries, the region’s fiscal deficit remained low, at an estimated 4.1 percent of GDP in

2018, and is projected to drop to 3.7 percent in 2019 and 3.5 percent in 2020. But cur-rent account deficits remain high, and two patterns are emerging. First, since almost all countries depend on primary commodities for exports, falling global commodity prices have negatively affected their terms of trade. Second, the region’s high growth has been achieved through high investment, which is above domestic savings. The internal invest-ment–savings gap is strongly associated with the persistent current account deficit (or external gap).

As in 2017, East Africa’s strong growth has not been matched by commensurate and substantial reduction in poverty and inequal-ity. So in 2018, the region is still characterized by high poverty, inequality, and unemploy-ment. Poverty pervades all countries in the region and is extremely high in Burundi and Rwanda and very low in Seychelles, Sudan, and Comoros.

Structural transformation remained mark-edly absent in the region. The service sector dominates the composition of GDP in the region, averaging 59.0 percent, followed by the agricultural sector, averaging 25.7 per-cent. Industry, which includes construction, is very small, averaging 15 percent. Similarly, the average share of manufactured exports — about 14.6 percent — also indicates the region’s lack of structural transformation.

T his report analyzes economic growth, its drivers, and its implications for social development

(including) poverty, employment, and inequality as well as progress in regional integration

in East Africa.

EXECUTIVE SUMMARY

1

2 E x E C U T I V E S U M M A R Y

East Africa is showing signs of only partial

convergence among key macroeconomic

variables used to assess readiness for

the EAC monetary union. EAC countries

need to strengthen their efforts and

further cooperate if they wish to achieve

their objective of establishing a monetary union

Countries in East Africa are members of three important regional economic communities (RECs): the Common Market for Eastern and Southern Africa (COMESA), the Intergovernmental Author-ity on Development (IGAD), and the East African Community (EAC). Progress in regional integra-tion in East Africa varies widely across these three RECs. The EAC is approaching the highest stage, having ratified the protocol for a monetary union, but IGAD is farther behind. COMESA is also work-ing toward a monetary union by 2025, but prog-ress in the prerequisite macroeconomic conver-gence criteria is lagging.

In East Africa, the Continental Free Trade Area (CFTA), launched in Kigali in March 2018, is the latest regional integration initiative. The tripartite free trade area involving COMESA, EAC, and the Southern African Development Community was an important impetus for the CFTA, especially in East and Southern Africa. These initiatives are believed to be advancing regional integration in East Africa.

Notwithstanding the progress in regional inte-gration, intraregional trade in East Africa trade is low, accounting for 8.3 percent of total trade in 2017, less than the continental average of 14.5 percent and roughly unchanged over the past five years. The figure is nearly halved (to 6.9 percent) if Djibouti, with its heavy trade with Ethiopia, and Uganda, with its heavy trade with Sudan and South Sudan, are excluded. Intra-EAC and intra-IGAD trade fares better. Intra-EAC trade is the highest among all RECs in Africa, above 20 percent of exports and significantly higher than the continental average.

East Africa remains susceptible to asymmetric shocks and is showing signs of only partial con-vergence among key macroeconomic variables used to assess readiness for the EAC monetary union. This suggests that EAC countries are not ready for monetary union and need to further align and coordinate their monetary policies. It may be better to fully implement the common market and customs union protocol, further har-monize policies, and increase intraregional trade before adopting a common currency. Adopting a common currency before reaching a greater level of convergence may be damaging.1

At the country level, Kenya, Uganda, and Sey-chelles had the highest performance in the region

on the African Regional Integration Index, while Eritrea, Ethiopia, Sudan, and Djibouti had the lowest.

There are numerous drivers of — and hence opportunities for — regional integration in East Africa, including considerable unexploited poten-tial in trade, underexploited cross-border transport corridors between landlocked and coastal member countries, endorsement by 44 African countries of the agreement to establish the CFTA, the necessity of regional peace and security that emanates from the large number of fragile states in the region, the recent discovery of natural resources, and substan-tial informal cross-border trade.

Considerable unexploited potential in trade. Except for Djibouti, which trades heavily with Ethi-opia, intraregional trade is far below its potential — less than 12 percent for all countries except for Comoros, half the value for Central and West Afri-can countries.

Five landlocked countries. The physical location of the landlocked countries and the existence of the other countries in the region with coastal land mass offer opportunities to enhance regional inte-gration. Similarly, for small island states Comoros and Seychelles, geographic isolation, poor links to the mainland, vulnerability to climate change, and small domestic markets drive regional integration.

Multiple fragile states, particularly in IGAD. Both human-made factors such as conflict and natural factors such as climate change could be causes of fragility and its consequences, including migra-tion and lack of peace and security. On the posi-tive side, the recent peace accord between Eritrea and Ethiopia has already increased cross-border trade and Ethiopia’s use of Eritrean ports, both of which could advance regional integration.

The recent discovery of natural resources and the need to ensure their optimal exploitation. Natural gas and oil discoveries in Ethiopia, Kenya, Tanzania, and Uganda, existing oil exploitation in South Sudan, Ethiopia’s large hydroelectric power potential and its work toward exporting power to Djibouti and Kenya—and pipeline development for gas and fuel import—and export in Djibouti,

E x E C U T I V E S U M M A R Y 3

The major challenges of regional integration in East Africa are lack of complementarity in trading, low competitive position of countries to supply goods in the region, institutional capacity weakness to advance regional integration, and failure to address political issues related to regional integration

Ethiopia, and South Sudan are important drivers of and opportunities for further regional integration.

Informal cross-border trade. Estimated to be as high as 50 percent of formal trade in Africa, informal cross-border trade is a diverse source of livelihood for millions of people. High tariff and nontariff bar-riers, excessive regulation, ease of infrastructure in border towns, and distortion in the official market or sectors are usually mentioned as major factors behind informal cross-border trade. So address-ing trade costs, harassment and corruption, infra-structure deficiency, excessive regulation, and excessive requirements at border customs posts and formalizing the informal sector are important policy directions to support informal cross-border trade and enhance regional integration.

Despite these drivers and opportunities, prog-ress in regional integration has been limited. What are the major challenges of regional integration in East Africa? Lack of complementarity in trading, low competitive position of countries to supply goods in the region (which is related to lack of structural transformation, low productivity, and a wide infrastructure gap), institutional capac-ity weakness to advance regional integration, and failure to address political issues related to regional integration.

Several policy directions aimed at boosting regional integration in East Africa emerge from this analysis. First is structural transformation — with its implications for employment and poverty reduction. The terms of trade deterioration and vulnerability of country growth to such external sector shocks is due essentially to trade in primary commodities, which has hindered structural trans-formation. Related to the lack of structural trans-formation is the external sector’s dependence on global commodity prices. When global com-modity prices fall, growth declines and current account deficits and external debt increase. The changing composition of East Africa’s debt toward China (and its export-import bank) and the growth of borrowing from Eurobonds are also making East Africa’s debt not only very burdensome, but also expensive. Sustained and inclusive growth accompanied by substantial job creation, poverty reduction, and healthy external balance is impos-sible without addressing this structural problem.

Second, policymakers need to focus on imple-mentation of regional integration initiatives, which have mostly been incommensurate with signed commitments.

Third is to approach regional integration from multiple dimensions to bring about synergy in trade, infrastructure, productive engagement, and policy and regulatory coordination as well as sociocultural issues.

Fourth, since increased intra-Africa trade is a major policy instrument for advancing regional integration, it is imperative to capitalize on the high political goodwill associated with the CFTA. The agreement establishing the CFTA also came with an implementation action plan that tackles constraints on intra-Africa trade by holistically addressing trade policy, trade facilitation, produc-tive capacity creation, trade-related infrastructure provision, trade finance, trade information, and factor market integration

Fifth, the lesson from East Asia on the policy direction of structural transformation and process integration is instructive: deliberate and conscious state action — in the form of unilateral tariff reduc-tions, the establishment of export processing zones and duty drawback arrangements, and entry into sectoral trade agreements (especially in infor-mation and communication technology and in the context of value chain creation) — are the foundation for success. East African policymakers may draw an important lesson from this experience and tune their own country policies along this line. These pol-icies also require building the capacity of regional and national institutions tasked with these issues.

East Africa has considerable potential to benefit from regional integration and to advance intra-Af-rica 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 diversifica-tion, which in turn calls for policies that go beyond liberalization to actual realization of the potential for trade expansion and process integration.

PART 1MACROECONOMIC DEVELOPMENTS AND PROSPECTS

GDP growth and its driversThe countries with the highest economic growth are Ethiopia, Rwanda, Tanza-nia, Kenya, and Djibouti (figure 2; see also table A1.1 in annex 1). 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 agricul-tural sector, the main growth driver from the supply side.

In countries with low growth, such as South Sudan (–3.8 percent), Burundi (1.4 per-cent), Comoros (2.8 percent), and Somalia (2.9 percent), the main factor is lack of peace and stability, which has disrupted economic activity. In South Sudan, internal conflict dis-rupted oil production, and agricultural pro-duction declined because of poor weather conditions and violent conflict in many areas. In Burundi, political instability disrupted eco-nomic activity. And in Somalia, the continuing insecurity problem, poor infrastructure, cli-mate change, and low institutional capacity have limited economic growth.

In the rest of East Africa, economic growth rates have been high, ranging from

3.6 percent in Seychelles to 5.3 percent in Uganda. Growth is expected to improve mar-ginally in 2019 in almost all these countries, except Seychelles, where the growth rate is projected to decline by 0.3 percentage point, and Sudan, where the growth rate is projected to decline by 0.5 percentage point. The main drivers of growth also vary across countries. Despite estimated growth in 2018 being less than the 5.3 percent in 2017, the main drivers of growth in Seychelles remain the traditional tourism and fisheries sectors. In Sudan, the main driver is the mining sector, despite its small contribution to GDP; the sector is projected to grow by 7 percent in 2019–20. In Eritrea, investment in the mining sector and the government’s agricultural development programs are the primary con-tributors to growth.

Decomposition of GDP growth by sectorIn the majority of East African countries, real GDP growth from the supply side is driven primarily by growth in services, followed by industry, where the contribution of the con-struction sector is considerable.

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.

5

6 M A C R O E C O N O M I C D E V E LO P M E N T S A N D P R O S P E C T S

Among the fastest growing countries in the region — Ethiopia, Rwanda, and Tanzania, which all saw growth above 6 percent in 2018 — growth on the supply side is driven largely by growth in industry and services. In Ethiopia, industry (especially construction) grew by 18.7 percent in 2016/17, and services grew by 10.3 percent. In Rwanda, industry grew by 8.3 percent, and ser-vices grew by 7.6 percent. Services is also the main driver of growth in Tanzania. The service sector’s contribution to growth was highest in Kenya, at 71 percent, while agriculture accounted for 15 percent and industry for 14 percent.

Among slower growing countries — Djibouti, Eritrea, Seychelles, Sudan, and Uganda, which all saw growth of 3–5 percent in 2018 — growth on the supply side is also driven primarily by growth in services. In Djibouti, services (espe-cially the port facilities, which serve Ethiopia’s increasing cargo) accounted for 77 percent of growth in 2018, followed by industry, which accounted for 19 percent. In Seychelles, services and manufacturing (particularly tourism, trade, and food manufacturing) were also the main driv-ers of growth. And in Sudan, mining and agricul-ture are the leading contributors to growth from the supply side.

In countries with the least growth — South Sudan and Burundi — state fragility in general and conflict and insecurity in particular were the main causes of poor performance. The conflict in South Sudan disrupted oil production, which accounts for more than 70 percent of GDP, and agricultural activities, which account for 10 percent to GDP.

BOX 1 The diversity of East Africa

East Africa comprises a diverse set of coun-tries. Populations range from less than 1 mil-lion in Djibouti to more than 100 million in Ethi-opia, the continent’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 manufactured exports account for about 1 percent of total merchandise exports, to Kenya, where manufactured goods account for 37 percent of total merchandise exports and the financial sector functions well.

In 2018, eight East African countries had an economic vulnerability index1 higher than the threshold for classification as a least developed country. Five countries — Burundi, Comoros, Eritrea, Seychelles, and South Sudan — had a value above the aver-age for least developed countries. The most vulnerable countries have different eco-nomic and social characteristics — some are small island states, others landlocked — but generally depend on a few export products and suffer from instability in export earn-ings. And most are extremely vulnerable to natural disasters, with large fluctuations in agricultural production and a high reliance on the agricultural sector.

Note 1. The economic vulnerability index is based on

eight indicators that cover exposure to external

shocks, distance to the world market, sectoral

share of the primary sector, instability of export

earnings, and geographic distribution of the pop-

ulation, among other things.

Source: UNECA 2019.

FIGURE 1 GDP growth, by region, 2008–20

0

2

4

6

8

2020(projected)

2019(projected)

2018(estimated)

20172014–162011–132008–10

Percent

Central Africa

Southern Africa

West Africa

East Africa

North Africa

Africa

Source: African Development Bank statistics.

M A C R O E C O N O M I C D E V E LO P M E N T S A N D P R O S P E C T S 7

The prospects of sustained economic growth in the region remain positive, with growth projected at 5.9 percent in 2019 and 6.1 percent in 2020

Major sources and drivers of growth on the demand sideOn the demand side, consumption is the main driver of economic growth in East Africa, partic-ularly in the fastest growing economies (Ethiopia, Kenya, Rwanda, and Tanzania). In Ethiopia, pri-vate consumption, was the main driver of growth from the demand side, followed by investment. In Kenya, private final consumption expenditure accounted for about 84 percent of growth during 2011–18. In Tanzania, private consumption’s con-tribution to growth from the demand side was about 64 percent in 2018, followed by private investment (17 percent), and government con-sumption (12 percent).

Even in countries with the least growth (South Sudan, Burundi, and Comoros), private con-sumption is the driving force behind GDP growth (as well as its contraction) from the demand side. In South Sudan, real GDP contraction in 2017 was partly the result of a decline in household consumption. Higher public spending due to an increase in salaries in 2017 largely contributed to 56 percent growth in public consumption. Increased public expenditure is expected to con-tinue driving economic growth on the demand side in 2018.

Opportunities and risks to economic prospectsThe prospects of sustained economic growth in the region remain positive, with growth projected at 5.9 percent in 2019 and 6.1 percent in 2020. In Ethiopia, infrastructure investment, continued expansion in industry and services, sustained agricultural recovery, planned partial privatization, the new prime minister’s democratization reform (which is bringing about political stability), the peace agreement with Eritrea (see box 4 later in the chapter), and the crackdown on corruption will continue to drive high economic growth in 2019 and 2020. In addition, the ongoing program to develop industrial parks, continuing foreign direct investment inflows, and the government’s pro-ductivity-enhancing investments in agriculture are opportunities for continued economic growth.

In Kenya, growth is projected to be 6.0 percent in 2019 and 6.1 percent in 2020, driven by growth in agriculture due to good weather conditions, completion of ongoing infrastructure projects, and continued macroeconomic stability. In Sudan, benefits from the ongoing implementation of mac-roeconomic stabilization and structural reforms, strong rebounds of growth in manufacturing and handcrafts, and the permanent revocation of US

FIGURE 2 GDP growth in East Africa, by country, 2014–20

Percent

–15

–10

–5

0

5

10

15

EastAfrica

UgandaTanzaniaSudanSouthSudan

SomaliaSeychellesRwandaKenyaEthiopiaEritreaDjiboutiComorosBurundi

2020 (projected)2019 (projected)2018 (estimated)20172014–16


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NNM3652

Pencil

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Pencil

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Note

Rather add the following : " ....in the 2nd part)


A key risk factor confronting East

Africa is persistent current account

deficits and related increases in external

indebtedness

sanctions (which is expected to normalize Sudan’s relations with creditors and signals positive eco-nomic outlook for the country) are opportunities for increased economic growth.

In Rwanda, the “Made in Rwanda” campaign and policy is expected to narrow the current account deficit, consolidate private sector domes-tic activities, create jobs, and boost economic growth. In Seychelles, vibrant tourism arrival pro-jections and expanding private sector credit are expected to sustain economic growth. And in Eritrea, the normalization of relations with Ethiopia and the related peace and economic cooperation initiative with Djibouti and Somalia bring positive prospects for growth.

East Africa continues to face various downside risks that could undermine economic growth and development prospects. In Ethiopia, the vulnera-bility of rainfed agriculture to vagaries of nature, heavy reliance on agricultural commodity exports, and weak export performance and the resulting foreign exchange crunch are key downside risks. Political instability also remains a threat in the next two years before the first election after the new prime minister’s political reforms.

In Rwanda, South Sudan, Sudan, Tanzania, and Uganda, which depend heavily on rainfed agriculture and primary commodities for exports, downside risks relate to the climate and global commodity prices. In oil-importing countries, downside risks emanate from rising oil prices. Kenya’s downside risks also include slow credit uptake by the private sector, lack of fiscal and monetary policy coordination, and failure to raise external resources to finance fiscal deficit. In Sudan, the combined effects of uncertainty due to high inflation and the import rationalization policy are downside risks in the next two years.

Another key risk factor confronting East Africa is persistent current account deficits and related increases in external indebtedness. In Ethiopia, total debt is 60 percent of GDP (divided equally between domestic and external). Much of the external debt is owed to China and has expen-sive terms. A rising fiscal deficit and indebtedness are also risk factors for Kenya and led the gov-ernment to pursue stringent fiscal consolidation measures in 2018. This could be a downside risk for the country if the political will to address the

issue is not forthcoming. Debt stress (especially China debt exposures), with its adverse implica-tions for the current account balance, could also threaten Djibouti, Eritrea, Somalia, South Sudan, Sudan, and Tanzania. Rwanda’s present value of debt–to-export ratio, which stands at 7.2 percent, is expected to increase sharply to 17.3 percent in 2023, when the country’s Eurobonds are due, indicating a downside risk on the horizon. Sey-chelles also faces balance of payment–related risks that need careful management.

Finally, “state fragility” with its adverse impli-cations for security and economic progress, is another risk factor for countries such as Burundi, South Sudan, Somalia, and, to some degree, Ethi-opia. In Somalia and South Sudan, for instance, the security situation, institutional capacity defi-ciency and governance are expected to pose a major downside risk in the coming two years.

MACROECONOMIC STABILITY AND OUTLOOK

A stable macroeconomic environment is one of the major enabling environments for growth and structural transformation.2 Because growth and structural transformation are needed to sub-stantially reduce poverty,3 East African countries pay attention to macroeconomic stability. And because macroeconomic instability can lead to political and social instability,4 it captures the attention of policymakers and politicians. Inflation, an important indicator of macroeconomic stability, remained in the double digits in 2018, increasing by 0.5 percentage point from 14.0 percent in 2017. But if South Sudan’s exceptionally high 104.1 per-cent is excluded, the region’s average inflation rate drops to an estimated 12.8 percent in 2018, and is projected to decrease slightly to 10.9 percent in 2019 and 10.2 percent in 2020 (table 1).

Inflation and macroeconomic stabilityA combination of factors are behind South Sudan’s high inflation rate: rapid currency depreciation, high dependence on imported consumer and capital goods, increased monetization of the high fiscal deficit, GDP contraction due to disruption in oil production, and a general lack of peace and


The region’s overall exchange rate stability and low inflation are generally the result of monetary and fiscal policies that aim for price stability and high growth

security. Inflation also remained high in Burundi and Ethiopia and extremely high (43.4 percent in 2018) in Sudan.

Burundi’s expansionary monetary policy, which began with the 2015 sociopolitical crisis and aimed to facilitate the refinancing of commercial banks in order to support productive investments in 2016 and 2017, continues to place pressure on inflation. Inflation was estimated at 12.7 percent at the end of 2018 and is projected to sharply increase by 22.1 percent in 2019 and 23.1 percent 2020.

In Ethiopia, inflation pressure came from sig-nificant public spending, the 15 percent currency devaluation, shortage of foreign currency, and limited food supply. In Sudan, inflation increased by more than 10 percentage points from 2017 to 2018 and is projected to remain high, at 35.0 per-cent in 2019 and 33.1 percent in 2020, driven mainly by the weakening of the currency and mon-etization of the deficit.

Rising inflation is generally associated with cur-rency depreciation and exchange rate instability. So another important aspect of macroeconomic stability in East Africa relates to exchange rate con-ditions. The region’s overall exchange rate stability

and low inflation are generally the result of mone-tary and fiscal policies that aim for price stability (including the exchange rate) and high growth. In Kenya, the central bank continued to pursue that stance to ensure price and exchange rate stability and stimulate growth when needed. The central bank loosened its monetary policy stance recently by reducing the interest rate to 9.5 percent in March 2018 and to 9 percent in July 2018 to stimu-late the economy. It also introduced various mone-tary policy instruments to manage system liquidity, including foreign exchange sales to reduce pres-sure on the shilling and minimize exchange rate passthrough to inflation. Thus, despite the interest rate decline in 2018, inflation remained low, and the shilling’s exchange rate with major currencies remained stable. A similar macroeconomic policy stance has resulted in a stable exchange rate in Ethiopia, Rwanda, Seychelles, and Tanzania.

The situation differs in postconflict (Eritrea) and conflict-ridden and unstable (Somalia, South Sudan, and Sudan) countries. In Eritrea, the offi-cial exchange rate of the nakfa remains fixed at 15.075 per US dollar, but on the parallel market, the exchange rate fluctuated between 20 and 24

TABLE 1 Inflation in East Africa, by country, 2017–20 (%)

20172018

(estimated)2019

(projected)2020

(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

Tanzania 5.3 4.8 5.2 5.1

Uganda 5.6 3.2 4.3 4.8

East Africa 14.0 14.5 12.5 11.4

Excluding South Sudan 11.3 12.8 10.9 10.2



The region’s fiscal deficit remained

low, at an estimated 4.1 percent of GDP

in 2018, comparable to the average for all of Africa

nakfa per US dollar.5 In Somalia, the shilling has stabilized at 23,606 per US dollar since the end of 2017, but counterfeit currency remains a major challenge for the central bank in the financial sector in general and the exchange rate market in particular. In South Sudan, the 30 percent increase in the monetary base in 2018, driven by monetization of the fiscal deficit, and the high infla-tion that followed, led to a substantial depreciation of the South Sudanese pound, from 117 per US dollar in June 2017 to 140 in June 2018 in the offi-cial market and to 316 in May 2018 in the parallel market. In Sudan, the Sudanese pound contin-ued to weaken in 2018, and the country’s multiple exchange rates have yet to be unified.

Fiscal and current account balancesThe region’s fiscal deficit remained low, at an esti-mated 4.1 percent of GDP in 2018 (table 2), com-parable to the average for all of Africa. Although the deficit was up in 2018 from 2017, it is pro-jected to drop to 3.7 percent of GDP in 2019 and 3.5 percent in 2020. The aggregate figure hides some high country values — Burundi, Djibouti, and Eritrea each have a fiscal deficit more than twice

the regional average. But in 9 of the region’s 13 countries, the fiscal deficit is below 5 percent of GDP, thanks to modest increases in public spend-ing and better revenue generation. This general picture is projected to prevail in 2019 and 2020.

The high fiscal deficits in Burundi, Djibouti and Eritrea in 2018 are the result of several factors. Weak economic activity, weak tax collection, and a less attractive business environment.

The region’s current account deficit was an estimated 4.9 percent of GDP in 2018, largely unchanged from 2017, and is projected to improve slightly in 2019 and 2020 (table 3). The current account balance ranges from a deficit of 18.2 per-cent of GDP in Seychelles and 17.8 percent in Djibouti to a deficit of 2.4 percent in Sudan and a surplus of 0.3 percent in Eritrea.

The highest current account deficits — more than twice the region’s average and thus in the double digits — are in Burundi, Djibouti, Seychelles, and South Sudan. The main factors behind the high deficit varies across these countries. Lower exports growth than imports growth for food and capital goods in Djibouti. External shocks, includ-ing rising fuel prices, a decline in the number

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

20172018

(estimated)2019

(projected)2020

(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.



Since almost all countries depend on primary commodities for exports, falling global commodity prices have negatively affected their terms of trade, resulting in the persistent current account deficits

of tourists, and stagnation in its exports in Sey-chelles. The disruption in oil production and trade (the result of political instability) in South Sudan.

Five countries have a current account deficit of 5–10 percent: Comoros, Ethiopia, Kenya, Rwanda, and Somalia. In these countries, the deficit is gen-erally the result of excess imports over exports, which is strongly associated with the internal deficit (investment being much larger than domestic sav-ings), particularly in Ethiopia and Somalia. In Ethi-opia, this is aggravated by a decline in commodity prices and shortfalls in the services account. The pattern is similar in Kenya and Somalia.

Two patterns have emerged in the region’s continued current account deficits. First, since almost all countries depend on primary commod-ities for exports, falling global commodity prices have negatively affected their terms of trade, resulting in the persistent current account deficits. The terms of trade for Africa as a whole deterio-rated from 193 in 2012 to 157.1 in 2016 and 168.7 in 2017, primarily because of falling primary com-modity prices.

Second, the drive for rapid economic growth and the resulting high growth have been achieved

through high investment, which is above domes-tic savings. The internal investment–savings gap, where investment is characterized by significant import content as well as a demand for imports that is generally inelastic, is strongly associated with the persistent current account deficit (or external gap). The resulting current account deficit is invariably financed by a combination of external finance, which leads to indebtedness, and mone-tization, which leads to inflationary pressure. The rising external debt in the region (see table A2.1 in annex 2) is in turn leading to further increases in the current account deficit through debt ser-vicing costs. In 2018, debt service in Ethiopia was $1.2 billion, or nearly a third of total exports ($3 billion), aggravating the current account deficit and forcing the country to reschedule its debt.

In absolute terms, debt stock is largest in Sudan (55.4 billion), Kenya (42.7 billion), and Ethiopia ($25.6 billion; table 4). Debt stock as a share of GDP is above 30 percent in all East Afri-can countries except in Burundi, Comoros, and Eritrea and is highest in Sudan (166.6 percent). The region’s debt comprises bilateral, multilateral, and private flows. On average, 65.6 percent of

TABLE 3 External current account balance, including grants, in East Africa, by country (% of GDP)

20172018

(estimated)2019

(projected)2020

(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

Sudan –2.5 –2.4 –2.2 –1.9

Tanzania –3.3 –3.7 –3.4 –3.3

Uganda –4.3 –4.9 –4.9 –5.4

East Africa –5.0 –4.9 –4.6 –4.6



Domestic resource mobilization is a major challenge

in East Africa

external debt is obtained on concessional terms and in foreign currency, with 58.6 percent in US dollars in 2016. The risk of debt stress is low in Kenya, Rwanda, Tanzania, and Uganda and high in the region’s remaining countries.6 Based on 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 6 (best performance) for Burundi, Comoros, Dji-bouti, and Sudan and 4.5 for Kenya, Tanzania, and Uganda.7

The debt-to-exports ratio is above 100 percent for all East African countries except Seychelles. And in Burundi, Ethiopia, and Kenya, debt service is putting tremendous pressure on limited foreign exchange earnings (see table 4). Many of these countries have already benefited from the Heav-ily Indebted Poor Country Debt Relief Initiative and the Multilateral Debt Relief Initiatives. Since 2010, African indebtedness has doubled, and in some cases tripled.8 And debt is increasingly dominated by bilateral flows coming from Brazil, India, Russia, South Africa, and particularly China. Credit form China is increasingly important in the region because of the Chinese government’s policy of “going global” and because of its easy

access to African countries. But its credit terms are expensive, especially compared with those of multilateral loans.9 This is an emerging policy con-cern for African countries in general and to coun-tries in East Africa in particular.

DOMESTIC RESOURCE MOBILIZATION

Domestic resource mobilization is a major chal-lenge in East Africa.10 Countries with tax revenues below 15 percent of GDP have difficulty funding basic state functions. From 1998 to 2008, tax-to-GDP ratios in the EAC ranged from 12 percent to 22 percent, compared with 36 percent in Organ-isation for Economic Co-operation and Develop-ment countries and 25.4 percent in South Africa (table 5). Tax revenue in fragile states is generally below 15 percent.11 East Africa has multiple frag-ile states, so domestic resource mobilization is far below what is needed to spur investment and growth. The low domestic saving and high nec-essary investment are leading to persistent fiscal deficits and growing indebtedness. In Ethiopia, investment as share of GDP was about 40 percent

TABLE 4 External debt stock and debt indicators in East Africa, by country, 2018

Total debt stock ($ billions)

Debt-to-GDP ratio (%)

Debt-to-exports ratio (%)

Debt service–to-exports ratio

(%)

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

Uganda 12.5 45.0 239.9 17.1

East Africa 165.2 52.5 370.3 27.4

Note: Data for Somalia and South Sudan are not available.

Source: African Development Bank statistics and International Monetary Fund World Economic Outlook

database.


It is imperative to implement policies that enhance domestic resource mobilization, including improved tax administration, financial sector development, and financial innovation

in 2017, while domestic saving as share of GDP was about 22 percent (though experts estimate that it is closer to 10–15 percent). This wide gap is financed through debt, leading to a debt-to-GDP ratio of close to 60 percent, divided equally between external and domestic.

It is imperative to implement policies that enhance domestic resource mobilization, includ-ing improved tax administration, financial sector development, and financial innovation. In addi-tion, illicit financial flows from Africa could be as much as $50 billion a year, more than double official development assistance.12 Over 1970–2010, African lost an estimated $1.3 trillion in the form of capital flight, many times the continent’s

debt stock of $283 billion.13 Thus, policies that curb capital flight and possibly reverse what is already left could contribute to domestic resource mobilization.

POVERTY, INEQUALITY, UNEMPLOYMENT, AND STRUCTURAL CHANGE

As in 2017, East Africa’s strong growth has not been matched by commensurate and significant reduction in poverty and inequality.14 As a result, in 2018 the region remains characterized by high poverty, inequality, and unemployment.

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

Country YearM2

(% of GDP)

Domestic credit in banking sector

(% of GDP)

Domestic credit to

the private sector

(% of GDP)

Gross domestic saving (% of GDP)

(%)Tax-to-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

2017 38.9 42.6 31.0 5.4 ...

Rwanda 2016 20.8 18.9 21.0 7.7 14.8

2017 ... 19.0 20.9 8.9 ...

South Sudan 2016 31.7 1.0 13.4 2.0 10.5

2017 ... 1.0 ... ... ...

Sudan 2016 20.3 22.5 8.9 20.0 ...

2017 ... ... ... 20.9 ...

Tanzania 2016 22.2 20.2 14.4 23.9 ...

2017 ... ... ... ... ...

Uganda 2016 22.9 23.4 15.6 15.5 13.5

2017 23.4 23.2 15.0 16.5 ...


Note: Data for Eritrea, Seychelles, and Somalia are not available.

Source: World Bank 2018b.


Trends in poverty and inequalityPoverty pervades all East African countries, though the region’s average (33.3 percent at $1.90 a day and 55.3 percent at $3.10 a day) is lower than the Sub- Saharan Africa average (42.1 percent and 66.3 percent; table 6). Poverty is lowest in Sey-chelles, Sudan, and Comoros and highest, above 60 percent at $1.90 a day, in Burundi and Rwanda. Poverty is more pronounced at $3.10 a day, rang-ing from about 40 percent in Comoros and Sudan to an extremely challenging 89 percent in Burundi. The situation is also reflected in the United Nations Development Programme’s Human Development Index values, which range from 0.400 (on a scale of 0, low, to 1, high) in Burundi and 0.420 in Eritrea to 0.550 in Kenya, with Seychelles (0.780) an outlier.15

East Africa faces a severe inequality prob-lem. On average, 48.4 percent of income goes to the richest 20 percent of income earners in the region, and 30 percent goes to the richest 10 per-cent. By contrast, only 6 percent of income goes to the poorest 20 percent, and only 2.3 percent goes to the poorest 10 percent. But averages

hide considerable variation across countries. Inequality is highest in South Sudan, Comoros, and Djibouti and lower in Burundi, Tanzania, and Sudan. Inequality should be a major concern for policymakers because it adversely affects poverty reduction and causes a lack of social cohesion that could lead to conflict.16

It is striking that poverty and inequality are so high despite efforts to address them. In Ethio-pia, the government committed 60 percent of its 2018 budget to poverty-targeted sectors such as education, health, agriculture, water, and roads. Tanzania and Sudan had a similar focus on rais-ing agricultural productivity and pursuing growth led by agro-industrialization. The persistent pov-erty and inequality call for further research and re-examination of the policies pursued. In coun-tries such as Somalia and South Sudan that have faced peace and security challenges and need policy direction most, spending has focused on defense and security, the priorities for these coun-tries, rather than on agriculture and related pover-ty-reducing sectors.

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

Poverty Inequality

Reference year

Population living on less

than 2011 PPP $1.90 a day

(%)

Population living on less

than 2011 PPP $3.10 a day

(%)Reference

year

Share of income going to each population segment

(%)

Richest 10%

Richest 20%

Poorest 10%

Poorest 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


Note: Data for Eritrea and Somalia are not available.

Source: World Bank 2017.


East Africa’s economic structure and growth patterns are characterized by low industrialization — including lack of economic diversification, product differentiation, and sophistication — and insufficient job creation

Unemployment, structural change, and poverty reductionThe impressive growth of East Asian economies such as China, the Republic of Korea, and Taiwan over the past four decades shows that high and inclusive growth underpinned by structural trans-formation can greatly reduce poverty. The limited change in poverty in Africa, despite impressive nontransformational and noninclusive economic growth since the turn of the century, supports this conclusion.17

This report advocates for structural transfor-mation policies in line with much research over the past few years. Africa’s impressive growth between 2000 and 2009 was the result of rapid growth in exports of hard commodities and cap-ital inflows. Most of the extra income generated was absorbed by middle-class consumption.18 In 38 of 49 countries, imports grew more than exports after this growth episode. Only agricul-ture grew slowly, and most countries experienced deindustrialization. This growth pattern did not create enough decent jobs for young people. It also established a vulnerable economic structure in which the entire economy depends on a single or small number of commodity exports.19 The pat-tern results from low industrialization and value adding economic activity.20 Thus, inclusive and transformative development strategies are essen-tial for translating Africa’s recent growth momen-tum into decent jobs and poverty reduction.

Industrialization is often taken as a sure way of breaking the commodity boom and bust cycle and ending dependence on primary commodity exports.21 In Africa, the process entails a relative decline in low-productivity agriculture and low value added extractive activities and a relative increase in manufacturing and high-productivity services.22 African economies’ inability to accel-erate this diversification and structural transfor-mation, and hence to benefit from the technol-ogy-driven dynamism of globalization, has kept them vulnerable to external shocks and resulted in limited poverty reduction. This is why structural transformation is advocated as policy direction for job creation and poverty reduction in a sustainable manner.23

This policy direction is also motivated by the contrasting poverty reduction outcome of growth

with structural transformation in East Asia and without structural transformation in Africa. Despite Sub- Saharan Africa’s impressive growth since 2002, 47 percent of the population still lives on less than $1.25 a day. Between 1981 and 2008, the poverty rate declined by only 4 percent-age points. In contrast, East Asia’s poverty rate dropped dramatically, from 77 percent in 1981 to 14 percent in 2008, or 63 percentage points.24

Changing the sectoral composition of growth was also important in reducing poverty in Asia. But to promote growth of the appropriate sector, policymakers must carefully study the country sit-uation. Where poverty is high in the rural sector and structural transformation possibilities are low, agricultural growth remains important for some time. Otherwise, growth in the secondary sector may be more inclusive. Both approaches require active policies to abate inequality and ensure a flexible labor market with high labor absorp-tion.25 India has also seen structural transforma-tion reduce poverty, but the country’s experience shows that structural transformation needs to be accompanied by distributional policies and that increasing the share of industry is reduces poverty while increasing the share of services and agricul-ture is poverty neutral.26

Services dominate the composition of GDP in East Africa, at 59.0 percent in 2016, followed by agriculture, at 25.7 percent (table 7). Industry, which includes construction, accounts for only 15.3 percent of GDP, below the Sub- Saharan Africa average of 27.7 percent. East Africa’s eco-nomic structure and growth patterns are charac-terized by low industrialization — including lack of economic diversification, product differentiation, and sophistication — and insufficient job creation. Similarly, manufacturing value added grew by just 1.7 percent over 2000–16, which was less than GDP growth, reducing the manufacturing sector’s share in GDP. Average manufacturing value added in GDP was just 8.1 percent, far below the Sub- Saharan Africa average of 10.3 percent in 2016.27 The average share of manufactured exports in total merchandise trade, 14.6 percent, also shows the region’s lack of structural transformation. Notwith-standing this poor performance on average, some countries — Ethiopia, Kenya, Tanzania, and Uganda — have made progress in industrialization recently.


One implication of the lack of structural trans-formation in East Africa is high unemployment, despite strong growth. Unemployment averages 36.9 percent and ranges from 15.0 percent in Rwanda to 59.4 percent in Comoros (see table 7). Youth unemployment, at 48.2 percent, is a major problem. African economies’ failure to transform structurally from low-productivity agriculture to higher productivity nonagricultural sectors com-bined with high fertility and low infant mortality has limited change in the structure of employment. The lack of formal wage jobs is forcing young people to search for innovative employment in agriculture and informal household businesses.28 Because the informal economy will remain import-ant for employing young people, policymakers must raise its productivity, support it, and eventu-ally formalize it.29 Policies will vary from country to country. But Ethiopia shows that providing credit using micro finance institutions, providing working space, relaxing some regulations, and offering tax incentives can provide the necessary support.

The slow progress in reducing unemployment (see table A3.1 in annex 3) has implications for poverty and inequality, and governments in East Africa are taking policy initiatives and actions to address the challenge. Ethiopia is tackling lack of structural transformation with its five-year Growth and Structural Transformation Plan II. In Kenya, the government created a Vision 2030 policy framework to address the slow progress in pov-erty reduction due to lack of structural change. And in Rwanda the National Strategy for Trans-formation launched in 2017 aims to bring about structural transformation through the “Made in Rwanda” campaign.

Poverty in Africa is still spatial — and highly prev-alent in rural areas. Inclusive growth has encoun-tered specific sectoral challenges — including poor rural infrastructure, failure to modernize rural livelihoods, and little job diversification.30 This underscores the importance of looking at the spatial dimensions of structural transformation, particularly in East Africa, and pursuing spatial

TABLE 7 Structural change, growth, and unemployment, various years

Manufactured exports

(% of total merchandise

trade)

Sectoral share of GDP, 2016 (%) Unemployment, 2017

Agriculture Industry Services

International Labour Organization model-

based estimate (% of population)

Total (% ages 15 and older)

Youth (% ages 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


a. Based on national estimates.

Note: Data for Eritrea and South Sudan are not available.

Source: Based on World Bank 2018b.


Structural transformation — with its implications for employment and poverty reduction — is the main policy issue emerging in East Africa

targeting — strategically directing and prioritizing investments and interventions to leverage the advantages of spatial areas such as urban cen-ters for industrial development. In short, when a policy for structural transformation is envisaged, it is imperative to recognize the spatial dimen-sions of what to produce and where to produce it. Strategies should be tailored to the specific spatial needs of targeted sectors and firms, which may have a regional dimension.31 Policies target-ing spatial investments should thus consider both national and regional economic geography.

EMERGING POLICY ISSUES

Structural transformation — with its implications for employment and poverty reduction — is the main policy issue emerging in East Africa. This is because structural transformation is related to terms of trade deterioration, vulnerability of coun-tries to external shocks and indebtedness, and low-quality growth — growth that is vulnerable to global primary commodity prices, that is not accompanied by structural transformation, and that has limited effect on employment and poverty.

All East African countries export mainly pri-mary commodities and import manufactured goods. The terms of trade of primary commodi-ties with respect to manufactured goods in Africa was deteriorating for more than a century before improving between 2003 and 2013, when global commodity prices started to improve.32 The terms of trade challenge is attributed largely to Africa’s primary commodity dependence, based in histor-ical reasons.33 That dependence has re-appeared in the recent economic engagement with China, India, and other emerging economies. The terms of trade deterioration and vulnerability of African

countries’ growth to such external sector shocks has resulted in an economic structure that has hindered structural transformation.34 Thus, sus-tained and inclusive growth that is accompanied by significant job creation and poverty reduction is impossible without addressing Africa’s fundamen-tal structural problems through appropriate strat-egies.35 This is an emerging and vital policy issue in East Africa too.

A related emerging policy issue is persistent current account deficits and growing external indebtedness, which are related partly to declining global commodity prices. The changing compo-sition of East Africa’s debt toward China and its export-import bank as well as the growth of bor-rowing from Eurobonds are making East Africa’s debt not only very burdensome, but also more expensive as global financial conditions tighten. The debt burden requires proper debt manage-ment in the short run and structural transformation to reduce commodity dependence in the medium to long run.

Low-quality growth is also another emerging policy issue. It is imperative to diagnose the nature of the region’s growth in order to identify the right strategies, policies, and programs to improve its quality — that is, to ensure that it is accompanied by structural transformation that is inclusive and reduces poverty.

The finally emerging policy issue is regional integration. The prospects for regional integra-tion have looked bright for the past few years, as suggested by the signing of the agreement estab-lishing the CFTA by almost all East African coun-tries as well as by IGAD member countries’ active involvement in peace and security (box 2). But regional integration is challenged by implementa-tion incommensurate with signed commitments. This topic is addressed in more detail in part 2.


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 African Union 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 Indian Ocean Commission — need to take the lead in reaching this objective.

Source: UNECA 2019.

PART

POLITICAL ECONOMY OF REGIONAL INTEGRATION

PROGRESS IN REGIONAL INTEGRATION

Progress in regional integration in East Africa varies widely across the three RECs. The EAC is approaching the highest stage of regional integration, followed by COMESA and IGAD. This section discusses progress in regional integration in East Africa start-ing with the more advanced RECs that are moving toward a monetary union. It then covers progress toward a free trade area, a customs union, and enhanced intraregional trade. It concludes by summarizing overall

country performance in advancing regional integration.

Progress toward monetary union in the Common Market for Eastern and Southern Africa and the East African CommunityEast Africa has made considerable prog-ress in regional integration over the past few years. The EAC is leading this progress, fol-lowed by COMESA and IGAD. The EAC’s rat-ification of the protocol for monetary union is one indicator of this progress — and is import-ant because macroeconomic convergence

C ountries in East Africa are members of three important RECs: COMESA, the EAC, and

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.

2

19

20 P O L I T I C A L E C O N O M Y O F R E G I O N A L I N T E G R AT I O N

The EAC is leading progress in regional

integration in East Africa, followed by COMESA and IGAD

is a prerequisite for such advanced economic integration.

Countries are progressing well toward the COMESA macroeconomic convergence criteria. Of the 10 COMESA members with data, 5 are on target for the fiscal balance criterion, and 4 are on target for the external reserves criterion (table 8). But only 3 countries are on target for the inflation criterion and the current account balance criterion, and only 2 are on target for the growth criterion.

EAC members have also made excellent prog-ress toward that REC’s macroeconomic conver-gence criteria. All members have met the crite-rion for debt-to-GDP ratio, which is 50 percent or less, except in Kenya, where it is 50–54 percent. Tanzania and Uganda are the only countries that have met the fiscal criterion, and Kenya, Tanzania, and Uganda are the only countries that have met the reserves criterion. See box 3 for an empiri-cal analysis of the EAC’s readiness for monetary union.

The EAC journey to a monetary union began with the establishment of the East African Mon-etary Union in 2015, which provided a roadmap to achieve a single currency region within 10 years (by 2024). A memorandum of understand-ing for currency convertibility has since been signed, and fiscal, monetary, and exchange rate policies are being harmonized. The EAC is also streamlining financial sector operations, including stock market trading practices and regulations. To facilitate this, the EAC passed a bill in 2017 to establish the East African Monetary Institute, drawing on lessons from the West Africa Mone-tary Union, where such an institution has been crucial.38 Finally, the EAC is moving beyond eco-nomic integration to a political federation. At the 18th EAC Summit in 2017, political confederation was adopted as a transitional model or interme-diate step toward that goal.39 Notwithstanding this progress, the EAC has been cautioned not to rush the process.40

FIGURE 3 Overlapping membership in regional economic communities in East Africa

COMESA

Comoros

EAC

Tanzania

BurundiRwanda

KenyaUganda

IGAD

DjiboutiEritrea

EthiopiaSouth Sudan

Sudan

Somalia

SADCSeychelles

Source: East Africa Economic Outlook team.

P O L I T I C A L E C O N O M Y O F R E G I O N A L I N T E G R AT I O N 21

COMESA also aspires to be a monetary union by 2025. But progress in macroeconomic conver-gence criteria is not proceeding well. While some member countries, particularly those in the EAC, have made good strides toward the convergence criteria, most are far behind, particularly on the debt and current account balance criteria. The debt-to-GDP ratio is above the target of 50 per-cent in Sudan (166.6 percent), Djibouti (102.9 per-cent), and Seychelles (99.6 percent; see table 4).41 Progress on financial integration is also hindered by various regulatory constraints.42

Finally, the CFTA, launched in Kigali in March 2018, is the latest regional integration initia-tive in East Africa. It aims to raise intra-Africa to trade from the current average of 14 percent to

50 percent by 2045.43 It builds on several previous initiatives that are still pillars of the drive toward the continent’s integration: the Program for Infra-structure Development in Africa, the Action Plan for Boosting Intra-African Trade (which aims to boost intra-Africa trade to 25 percent by 2025), and Accelerated Industrial Development for Africa.44 The tripartite free trade area involving COMESA, EAC, and the Southern African Devel-opment Community was an important impetus for the CFTA, especially in East and Southern Africa. It covers 26 countries and 530 million people (57 percent of Africa’s population) and has an esti-mated GDP of $630 billion (53 percent of the con-tinent’s total). These initiatives are believed to be advancing regional integration in East Africa.

TABLE 8 Macroeconomic convergence criteria in the Common Market for Eastern and Southern Africa and the East African Community, by country

Country

Overall fiscal balance

(excluding grants)

(% of GDP)

Annual average inflation

(%)

External reserves

(months of imports of goods and nonfactor services)

Growth of real GDP

(%)

Current account balance

(excluding grants)

(% of GDP)

Domestic investment rate

(%)

Criterion 5 percent or lowera

5 percent or lowerb

4 months or morec

7 percent or higher

Sustainable level

20 percent 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


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).

http://comstat.comesa.int/kfioiqd/macro-economic-convergence-achievements

http://comstat.comesa.int/kfioiqd/macro-economic-convergence-achievements


Progress toward free trade areas, customs unions, and greater intraregional tradeThough East African countries have not yet achieved a monetary union, they have made prog-ress toward free trade areas and customs unions.

COMESA launched its customs union in June 2009, with an implementation framework of three years. The EAC ratified a customs union in 2005 and operationalized it in 2014, reducing documenta-tion requirements and enabling real-time exchange of information.45 In the Central Corridor, the time

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.


Across East African countries, intraregional exports accounted for an average of only 17.3 percent of total exports in 2017, which is close to the continental average of 16.6 percent and reflects a decline over the past five years

needed to clear imported goods from the Dar es Salaam port has dropped from more than 22 days to 7 in Burundi and to 5 in Kigali, and in the North-ern Corridor, the time needed to clear imported goods from the Mombasa port has dropped from 21 days to 7 days in Bujumbura, to 6 days in Kigali, and to 4 days in Kampala. The internal tariff reduc-tion program reduced all EAC internal tariffs to zero in January 2005, and the Elimination of Non-Tar-iff Barriers Act of 2017 is being operationalized. In addition, the common market protocol to advance regional integration through the free movement of goods, persons, labor, capital, and services, as well as through the rights of establishment and res-idence in the EAC, was signed in November 2009 and went into force in July 2010.46

Intraregional trade is generally constrained by tariff and nontariff barriers as well as lack of com-plementarity of trade among REC members.47 So progress in addressing these constraints in general and removing tariff and nontariff barriers in partic-ular would imply growth in intraregional trade. But across East African countries, intraregional exports accounted for an average of only 17.3 percent of total exports in 2017 (table 9), which is close to the

continental average of 16.6 percent and reflects a decline over the past five years. The figure is lower (to 13.9 percent), if Djibouti, with its heavy trade with Ethiopia, and Uganda, with its heavy trade with Sudan and South Sudan, are excluded. Trade among COMESA members remains low, around the regional average. But intra-EAC and intra-IGAD trade fares better. Intra-EAC trade is the highest among all RECs in East Africa, above 20 percent of total exports and significantly higher than the continental average, though the rate has been stagnant over the past decade and remains below the region’s goal of 25 percent by 2025.48 This underscores the need to examine the major factors impeding regional integration.

Overall progress toward regional integration in East AfricaAmong eight RECs, the EAC has the highest scores overall on the Africa Regional Integration Index; IGAD ranks sixth and COMESA seventh. The EAC scores particularly high in trade integra-tion and productive integration. IGAD scores high in regional infrastructure.49 As in other regions, the average East African REC scores differ most for

TABLE 9 Intraregional trade in East Africa, 2012–17 (% of total exports)

Country 2012 2013 2014 2015 2016 2017

Burundi 8.9 8.3 9.5 10.2 9.8 6.6

Comoros 0.3 0.1 0.4 0.1 0.1 0.1

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).

https://unctadstat.unctad.org


free movement of people. And although regional integration in East Africa is above average for Africa, it still lags behind developing regions out-side Africa, such as East Asia, where intraregional trade is above 35 percent of total trade.50

At the country level, Kenya, Uganda, and Sey-chelles had the highest performance in the region on the African Regional Integration Index, while Eritrea, Ethiopia, Sudan, and Djibouti had the lowest (table 10). Except Seychelles, even the top performers, perform poorly in regional infrastruc-ture and macroeconomic and financial integration.

POLITICAL ECONOMY OF REGIONAL INTEGRATION

This section is based on a comprehensive political economy approach to regional integration in the

three East African RECs.51 It uses five lenses to identify the main drivers and opportunities as well as challenges of regional integration in East Africa: the interactions between foundational or structural factors; the relationship between formal and infor-mal institutions; actors, agency, and incentives; governance characteristics in particular sectors and subsectors; and external drivers.52

Main drivers and opportunities of regional integrationThere are numerous major drivers of — and hence opportunities for — regional integration in East Africa, including considerable unexploited poten-tial in trade, underexploited cross-border transport corridors between landlocked and coastal member countries, endorsement by 44 African countries of the agreement to establish the CFTA, the necessity 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

Country OverallTrade

integrationRegional

infrastructureProduction integration

Free movement of persons

Financial and macroeconomic

integration

Zambia 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

Mauritius 6 11 14 12 3 4

Madagascar 7 12 4 4 10 8

Zimbabwe 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

Malawi 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.


The recent discovery of natural resources is a driver of and opportunity for regional integration in East Africa

the large number of fragile states in the region, the recent discovery of natural resources, and substan-tial informal cross-border trade.

Except for Djibouti, which trades heavily with Ethiopia, intraregional trade is far below its potential — less than 12 percent for all countries except for Comoros, half the value for Central and West African countries (table 11).53 This untapped potential could be taken as a driver of and an opportunity for regional integration in East Africa.

Econometric studies also show that being landlocked adversely affects bilateral trade in East Africa.54 This is mainly because landlocked countries incur higher logistics costs to access the sea, which adversely affects their competitiveness and hence their level of exports and imports as well as their economic growth. Of the 13 coun-tries in East Africa, 5 (Burundi, Ethiopia, Rwanda, South Sudan, and Uganda) are landlocked. Their physical location and the existence of the other countries in the region with coastal land mass offer opportunities to enhance their economic competitiveness through efficient cross-border transport corridors that offer secure and efficient access to seaports and neighboring markets. This is thus another major driver of and opportunity for regional integration. Similarly, for small island states Comoros and Seychelles, geographic iso-lation, poor links to the mainland, vulnerability to climate change, and small domestic markets drive regional integration.55

The endorsement of the agreement to establish the CFTA in March 2018 in Kigali by 44 countries is a major opportunity to accelerate intraregional trade in East Africa. If successfully implemented, the CFTA will promote greater intraregional trade by eliminating both tariffs and nontariff barriers to trade (see box 2).

All East African countries except Djibouti, Sey-chelles, and Tanzania are fragile states based on the Organisation for Economic Co-operation and Development definition (“a state that has weak capacity to carry out basic governance functions, that denies people entitlement to basic services, that lacks the ability to develop mutually constructive relation with societies, …. and that exhibits lack of capacity, political com-mitment, and legitimacy to govern its population and territory”56). The World Bank and African

Development Bank definition (based on Country Policy and Institutional Assessment ratings) also excludes Ethiopia, Kenya, Rwanda, and Ugan-da.57 Both human-made factors such as con-flict and natural factors such as climate change could be causes of fragility and its conse-quences, including migration and lack of peace and security. This calls for a collective action and could be an important driver of regional integra-tion, particularly in IGAD.58 Regional integration could be advanced for scaling up peace build-ing in the region. For instance, the recent peace accord between Eritrea and Ethiopia has already increased cross-border trade and Ethiopia’s use of Eritrean ports, both of which could advance regional integration (box 4).

Another driver of and opportunity for regional integration in East Africa is the recent discovery of natural resources. Natural gas and oil discov-eries in Ethiopia, Kenya, Tanzania, and Uganda, existing oil exploitation in South Sudan, Ethiopia’s large hydroelectric power potential and its work toward exporting power to Djibouti and Kenya, and pipeline development for gas and fuel import and export in Djibouti, Ethiopia, and South Sudan

TABLE 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 (%)

Country

Actual intra-Africa trade (% of potential intra-

Africa trade)

Burundi 11.8

Comoros 28.9

Ethiopia 4.1

Kenya 7.7

Rwanda 2.4

Seychelles 2.9

Sudan 3.4

Uganda 0.5

Note: See annex 4 for details on the gravity model

used to calculate potential trade. Data for Djibouti,

Eritrea, and South Sudan are not available.

Source: Geda and Seid 2015.


BOX 4 The Ethio-Eritrea Peace Agreement and its imperative for regional integration

Eritrea and Ethiopia signed a landmark peace and cooper-ation agreement in 2018 that is expected to boost regional security and cooperation. The agreement ended the military confrontation between the countries and aims to support postconflict socioeconomic reconstruction and develop-ment. Following the agreement, telecommunication, trade, transport services, and diplomatic relations between the two countries were restored. Eritrea also re-established relations with Djibouti and Somalia. Access to Eritrea’s ports will diver-sify Ethiopia’s access routes to the sea and ease conges-tion at Djibouti’s ports, which handle more than 80 percent of Ethiopia’s trade. Feedback from Ethiopian Airlines reveals that the airline is saving up to $10 million a month in fees that were previously paid to contiguous countries to use their airspace.

Eritrea and Ethiopia had signed cooperation agreements following Eritrea’s independence in 1993, after which 80 per-cent of Ethiopia’s trade passed through Eritrean ports (which were “free ports” for Ethiopia). Ethiopia was also a market for about 80 percent of Eritrea’s exports, and the two countries used the Ethiopian currency, the birr. They also shared the oil refinery at Assab port. But obstacles to the implementation of the agreements, among other things, led to conflict. Mac-roeconomic policy was difficult to coordinate between the two countries before the conflict. The countries adopted dif-ferent development strategies: Eritrea was outward oriented, while Ethiopia was inward looking. Their de facto monetary union strained macroeconomic and fiscal policy coordina-tion, which was apparent just before the onset of the war. When Eritrea issued its currency, the nakfa, in November 1997, the Ethiopian government took the position that eco-nomic relations with Eritrea should be identical to those with other neighboring countries such as Kenya, using the US dollar as the medium of exchange. This became another major issue in the outbreak of the conflict.

Thus the real cause of the war goes beyond politics and border conflict. Analysts agree that the economic issues stated above were at the heart of the conflict that cost more than 70,000 human lives. The total measurable cost of the war for Ethiopia alone, including reconstruction of damaged and destroyed social and physical infrastructure, resettle-ment of internally displaced persons and deportees from

Eritrea, and rehabilitation of disabled people is estimated to be more than $6 billion — twice the country’s annual exports.

The lesson from this overview and the cost of conflict is the resolution never to repeat it and to work for durable peace, which requires addressing the root causes of the con-flict and devising amicable solutions to the economic coexis-tence problem. Regional integration is a key policy direction that Eritrea and Ethiopia could pursue for this purpose.

Following the peace deal, free movement of people and cross-border trade are expanding rapidly. But emerging challenges in border towns and the theory and experience of regional integration in Africa suggest that the free move-ment of labor and goods will raise the cost of living in Ethi-opian border towns as people form Eritrea move to them. This could derail the peace process and thus needs to be handled in a delicate and sustainable manner. In theory, free movement of capital and labor is the last stage of a union, the precondition of which includes macroeconomic conver-gence. The challenge is that the free movement of people and goods is already happening and needs the attention of policymakers to make it rule based.

The geopolitics in the area includes the presence of Saudi Arabia and the United Arab Emirates in the ports of Djibouti, Eritrea, and Somaliland and the presence of Iran and Turkey in Sudan. Geopolitics also need to be brought in the negotia-tion with Eritrea and the IGAD members to ensure the welfare and security of the region’s population. In addition, the Chi-nese interest in Djibouti’s ports as part of its Belt and Road Initiative also needs to be considered in a regional strategy. China owns more than 82 percent of Djibouti’s debt and offered over a billion dollar loan in 2016, which is equivalent to 75 percent of Djibouti’s GDP. If Djibouti fails to pay its debt, it might hand over its ports (or a significant share of them) to China, as Sri Lanka did last year, which would have strate-gic implications for Ethiopia and the region at large. On top of this, major Western countries have also established naval bases in Djibouti, with implications for the region. These geo-political issues need to be at the center of regional integration discussions among IGAD members to ensure the collective advantage of countries in the region.

Source: Geda and Befekadu 2005


Addressing trade costs, harassment and corruption, infrastructure deficiency, excessive regulation, and excessive requirements at border customs posts and formalizing the informal sector are important policy directions to support informal cross-border trade and enhance regional integration

are important drivers of and opportunities for fur-ther regional integration.

Finally, informal cross-border trade is a driver of and an opportunity for regional integration. Estimated to be as high as 50 percent of formal trade in Africa,59 informal cross-border trade is a diverse source of livelihood for millions of people (box 5). High tariff and nontariff barriers, exces-sive regulation, ease of infrastructure in border towns, and distortion in the official market or sec-tors are usually mentioned as major factors behind informal cross-border trade. So addressing trade costs, harassment and corruption, infrastructure deficiency, excessive regulation, and excessive

requirements at border customs posts and for-malizing the informal sector are important policy directions to support informal cross-border trade and enhance regional integration.

In addition to these drivers of and opportuni-ties for regional integration in East Africa, the Afri-can Development Bank has highlighted several reasons for increased cross-border trade in the region (see also annex 5):60

• The EAC in general. Despite its many chal-lenges, the EAC as a customs union and a common market area is delivering on its mis-sion. It is now possible for traders to move from one country to another without major problems

BOX 5 Informal cross-border trade in Ethiopia and Uganda

EthiopiaThe pastoral village economy around the border of Ethiopia and Kenya, though heavily reliant on 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-ity (livestock) of complex composition with promising international and domestic market demand. In one village, Borana, an average of 77.2 percent of village production (milk and meat) is exported 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 community, using the formal or informal channel is a matter of absolute convenience and com-parative economic attractiveness rather than one of legality or legitimacy. The estimated value of imported commodity demand is 23 percent of the gross annual value of village production, and 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 cross-border flows shows that the peripheral pastoral economy is more integrated into the cross-border Kenyan markets than into the central Ethiopian market.

UgandaThe intra-Africa trade data used in most reports are based on officially recorded trade data and fail to capture significant unrecorded intra-Africa trade that is common across the continent—usually 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 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

Notes1. 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.

Bujumbura

TANZANIA

SEYCHELLES

COMOROS

SUDAN

ETHIOPIA

ERITREA

DJIBOUTI

Busia

NamangaArusha

Dar es Salaam

SOMALIA

UGANDA KENYA

SOUTH SUDAN

Kigali

Victoria

Djibouti

Khartoum

Nairobi

Moroni

Asmara

Mogadishu

Juba

Addis Ababa

Bujumbura

Kampala

RWANDA

BURUNDI

Busia—Busiest border post in the EAC, with Ugan-

da’s exports valued at about $220 million in 2017 •

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

crossing takes 2–5 hours • Single file exit lane increases

waiting time • Instead, entry lanes should differentiate

cars, tankers, and cargo trucks, since transit time is short

• Car passengers take less than 5 minutes to pass through

immigration • Officers at eight police checkpoints on the

Busia–Kisumu road are friendly, courteous, well equipped,

and apparently not harassing travelers or truckers • Much

of that road is in poor condition and prone to accidents.

Namanga—Majority of trucks are heading for or

coming from the Central Corridor through Arusha

to Dodoma and then to Dar es Salaam • No cargo scanner,

so trucks have to be physically searched by onsite inspec-

tors • Having different Kenyan and Tanzanian customs

systems delays the clearing of goods • On the Namanga

side, when one network connection is down, the

officials switch to another, a good practice to apply

elsewhere.

Dar es Salaam—The Tanzania Port Authority has

a-one stop center for customs and immigration

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.

Moving Across

EAST AFRICA

1

2

3

1

2

3

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 Arusha and by air from

Arusha to Dar es Salaam 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.

• Electronic cargo tracking reduces costs for importers, and weigh-in motion bridges reduces transit times for trucks.



and to move goods across borders without much difficulty when they comply with trading processes requirements.

• The EAC Customs Union. The EAC Customs Union has eliminated import duties for goods originating within the REC, making it cheaper to import goods from the EAC than from other countries.

• Improved border post infrastructure. The EAC has developed secure cargo yards, one-stop border posts, high-quality roads, well-lit prop-erties, and clean convenience facilities, which have increased cross-border trade.

• Sufficient customs officials. Revenue officials are now adequately distributed across major towns within the EAC. This means that traders no longer have to first travel to their destination country to get merchandise valued; it can now be done in the country in which goods are purchased.

Main challenges of regional integrationDespite the numerous drivers and opportunities, progress in regional integration has been limited. What are the major challenges of regional inte-gration in East Africa? Lack of complementarity in trading, low competitive position of countries to supply goods in the region (which is related to lack of structural transformation, low produc-tivity, and a wide infrastructure gap), institutional capacity weakness to advance regional integra-tion, and failure to address political issues related to regional integration.

The complementarity problem arises because of limited product differentiation in trade between countries in the region (table 12). East African coun-tries do not produce enough of what their neigh-bors want to import because they are all produc-ers and exporters of primary commodities and

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

CountryTop exports, 2004–17 (% of total exports)

Number of products accounting for more than 75% of exports,

2014–17

Manufactured exports, 2014–17 (% of total merchandise

exports)Major imports, 2017 (% of total imports)

Burundi Coffee, tea (48%)Gems, precious metals (12.4%)Milling products, malt, starches

(4.6%)Beverages, spirits (4.6%)Tobacco, manufactured

substitutes (4.3%)

5 13.8 Oil and mineral fuels (9%)Pharmaceuticals (21%)Motor vehicles and parts (11%)Electrical and industrial

machinery (15%)

Comoros Essential oils (26.0%)Cloves (19.6%)Vessels (17.7%)

5 8.9 Other furniture (11.7%)Used clothing (7.0%)Fruits (5.3%)Small iron containers (5.9%)Plastic housewares (4.0%)

Djibouti Petroleum, noncrude (21.1%)Sheep (12.7%)Animals live (11.1%)

11 ... Raw sugar (4.8%)Palm oil (4.6%)Cars (3.4%)Mixed mineral and chemical

fertilizers (2.8%)Other steel bar (2.6%)

Eritrea Ores, slag, ash (97.0%)Gems, precious metals (1.1%)Clothing, accessories (not knit or

crochet (0.6%)Coffee, tea, spices (0.3%)

1 ... Milling products, malt, starches (16.3%)

Machinery, including computers (15.2%)

Animal/vegetable fats, oils, waxes (9.5%)

Electrical machinery, equipment (7.1%)

Ethiopia Coffee (33.6%)Vegetables (18.8%)Oil seeds (16.6%)Gold (10.1%)Chat/Kat (9.2%)

4 7.5 Consumer nondurables (22.1%)Industrial machinery (18.0%)Oil and mineral (9.6%) Electrical

machinery, equipment (8.8%)Mineral fuel/petroleum (8.4%)Consumer durables (9.4%)

(continued)


importers of manufactured goods.61 Not only is the region characterized by a lack of complementarity between exports and imports, but it also depends on a few primary commodities for the bulk of export

earnings. This is a challenge for regional integration that underscores the need for diversification.

A major factor behind the lack of diversifica-tion and competitiveness in the region is the lack

CountryTop exports, 2004–17 (% of total exports)

Number of products accounting for more than 75% of exports,

2014–17

Manufactured exports, 2014–17 (% of total merchandise

exports)Major imports, 2017 (% of total imports)

Kenya Coffee, tea, spices (29.0%)Live trees, plants, cut flowers

(10.4%)Mineral fuels including oil (6.2%)Vegetables (3.6%)Clothing, accessories (not knit or

crochet) (3.3%)

13 33.9 Refined petroleum (8.1%)Packaged medicaments (3.1%)Cars (2.8%)Telephones (1.7%)Hot rolled iron (1.5%)

Rwanda Ores, slag, ash (40.9%)Coffee, tea, spices (37.8%)Raw hides, skins not fur skins,

leather (3.4%)Food industry waste, animal

fodder (2.6%)Vegetables (1.1%)

2 6.3 Electrical and industrial machinery (22%)

Motor vehicles and parts (19%)Cereals and food stuffs (5.7%)Chemical products (11%)

Seychelles Tunas, skipjack and bonito (54.7%)

Tunas, excluding frozen (8.8%)Yellow fin tunas (8.6%)

4 4.2 Ships and boats and transportation (38%)

Animal products (13%)Oil and mineral fuels (11%)Foodstuffs (5%)Machinery (8.7%)

Somalia Live animals (71.2% of total exports) Gums, resins, other vegetable saps (10.2%)

Fish (9%)Raw hides, skins not fur skins,

leather (1.8%)Ships, boats (1.7%)

2 ... Raw sugar (14.0%)Rice (5.8%)Rubber (4.1%)Concentrated mill (3.2%)Cars (2.7%)Waver fabrics, synthetic staple

fibers (2.6 %)

South Sudan Mineral fuels, including oil (97.9%)

Vegetables (0.8%)Wood (0.6%)Cotton (0.5%)

1 0.0 Raw sugar (15.3%)Packaged medicaments (3.6%)Cars (3.2%)Palm oil (3.1%)Cement (2.3 %)

Sudan Gold (57.4%)Crude petroleum (10.6%)Other oily seeds (9.9%)Insect resins (4.2%)Dried legumes (2.4%)

3 0.2 Wheat (4.1%)Packaged medicaments (4.0%)Cars (2.1%)Rubber footwear (1.7%)Raw sugar (1.0%)

Tanzania Gems, precious metals (29.4%)Tobacco, manufactured

substitutes (11.0%)Coffee, tea, spices (7.4%)Ores, slag, ash (6.3%)Fish (5.3%)

9 21.3 Motor vehicles and transportation (9.9%)

Industrial machinery (21%)Mineral products (21%)Chemical products (12%)Metals (7.5%)Plastics (6.6%)

Uganda Coffee, tea, spices (22.5%)Gems, precious metals (14.4%)Mineral fuels, including oil (6.4%)Cereals (6.3%)Fish (4.7%)

12 18.7 Oil and refined petroleum (14.2%)Mineral products (17%) Chemical

products (14%)Machinery (17%)Transportation (9.5%)Textiles (5.2%)


Source: Geda (2013) and updates from https://tradingeconomics.com and https://atlas.media.mit.edu.

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

https://tradingeconomics.com

https://atlas.media.mit.edu


The region’s key infrastructure challenges include power shortages, low electricity connection rates, and high effective cost of electricity to manufacturing enterprises

of structural transformation. Manufactured goods exports are less than 10 percent of total merchan-dise exports for most East African countries, and manufacturing value added is below 15 percent of GDP and below 5 percent in populous countries such as Ethiopia. The lack of structural transfor-mation is in turn related to the weak enabling envi-ronment, wide infrastructure gap, and inadequate regional policy framework and institutional capacity.62

The region’s lack of competitiveness is also related to its infrastructure deficit. All East Afri-can countries except Seychelles score below 30 (on a scale of 1, low, to 100, high) on the Africa Infrastructure Development Index. The region’s key infrastructure challenges include power shortages, low electricity connection rates, and high effective cost of electricity to manufacturing enterprises (averaging four times the global aver-age). This is further aggravated by large energy deficits, characterized by low access rates and unreliable supply. Of the 13 East African countries, 7 (Burundi, Ethiopia, Rwanda, Somalia, South Sudan, Tanzania, and Uganda) have access rates below the Sub- Saharan Africa average of 32 per-cent.63 In addition, weak private sector participa-tion and access to finance in general and in fragile states in particular have greatly limited diversifi-cation, structural transformation, and advances in regional integration.64 But some countries are address infrastructure bottlenecks — for example, Ethiopia and Kenya are improving roads, railways, and energy infrastructure.

The revealed comparative advantage index values of manufactured goods exports of African countries that could supply other African coun-tries (Algeria, Cameroon, Egypt, Kenya, Nigeria, and South Africa) also reflect the lack of structural transformation and its fundamental causes. The revealed comparative advantage of these coun-tries is less than half that of Organisation for Eco-nomic Co-operation and Development countries, China, and India — and would have been less than 10 percent without the high values from Egypt and South Africa (figure 4). The disparity, com-bined with the huge trade logistics and intra-Af-rica infrastructure problems noted above, further shows the challenge of exploiting trade potential.65 It also suggests considerable trade diversion and potential welfare losses for countries if current

efficient suppliers are excluded through aggres-sive regional integration before global competi-tiveness is addressed. Thus, the call for structural transformation and enhanced intraregional trade in this report needs to be balanced with poten-tial trade diversion and welfare loss possibilities, which require further research.

In addition to these challenges to regional integration in East Africa, the African Develop-ment Bank has highlighted several challenges to cross-border trade (see also annex 5):66

• Data migration challenges between country customs systems. Data migration challenges arise from the nature of declarations that clear-ing agents enter into trade information tech-nology systems. Improper data entry affects the links between country customs systems and increases the time traders spend at the border and, ultimately, the transit time to the destination.

• Transit times above targets. Cross-border tran-sit is characterized by long delays and waiting time at the border because of understaffed customs offices.

• Costly long waits at the border. The long wait-ing time at the border is costly, particularly for truck drivers in terms of time, expenses, and general well-being.

• Information technology network challenges. Poorly functioning information technology net-works contribute to delays in clearing goods, which in turn contribute to high costs in terms of expenses, time, and well-being.

• Political issues. Political standoffs between Kenya and Tanzania, manifested in the failures of the customs systems used by both countries to consistently and predictably tally informa-tion on goods, have contributed to operational challenges that have slowed trade.

• Infrastructure shortfalls. Exit points at the bor-ders are generally single file rather than mul-tiple file (capable of handling several vehicles at the same time), and poorly designed roads (such as those with narrow turning angles and sharp corners) are dangerous and damage vehicles.Despite these challenges, Rwanda notes

that joining the EAC, a relatively advanced REC, easily improved its competitiveness and helped


An overarching and generic challenge for

regional integration in East Africa relates

to institutional design and failure to

see the challenges of regional

integration that are related to political

economy, which includes the role

of interest groups, the incentives faced

by various interest groups, and the

domestic political implications of

regional integration schemes

increased its exports to the regional market. This, and the desire to advance regional integration, explains Rwanda’s signing of the Eastern African Monetary Union protocol in 2013. In addition, recent empirical evaluations of the CFTA do not show welfare losses.67 Further research at both the regional and country levels is needed before adopting a concrete policy.

An overarching and generic challenge for regional integration in East Africa relates to insti-tutional design and failure to see the challenges of regional integration that are related to politi-cal economy, which includes the role of interest groups, the incentives faced by various interest groups, and the domestic political implications of regional integration schemes. Regional integra-tion schemes in Africa are generally ambitious but have a very shallow institutional framework, with few responsibilities delegated to regional institu-tions.68 The mismatch between institutional design and the mission of regional integration is a major

factor in the credibility gap that African regionalism has faced.

Among the major political economy challenges:69

• Few regional integration institutions serve their stated functions. Many of the key functions of planning, budgeting, monitoring, transparency, and accountability are weakly developed and not mutually reinforcing.

• Implementation of regional initiatives takes place only when they align with key national interests, which include regional hegemonic position, as defined by the ruling elites. This also explains overlapping REC membership.

• Individual personalities and leadership within regional organizations tend to shape the imple-mentation of regional agendas.

• The interests and incentives associated with regional cooperation in different sectors or policy areas (security, infrastructure, energy, gender, and the like) differ markedly according

FIGURE 4 Revealed comparative advantage of selected African countries and African trading partners in manufactured goods, 2010–13

Revealed comparative advantage

0.0

0.5

1.0

1.5

2.0

2013201220112010

OECD

Unite

d Stat

es

Unite

d King

dom

Swed

en

Netherl

ands

Korea

, Rep

.Ja

pan

Italy

German

y

Franc

eInd

iaChin

a

Sub-S

ahara

n Afric

a

South

Afric

a

Nigeria

Keny

aEg

ypt

Algeri

a

Africa African competitors

Source: Geda and Seid 2015.


Regional integration must be approached from multiple dimensions to bring about synergy in trade, infrastructure, productive engagement, policy and regulatory coordination, and sociocultural dimensions such as language, ethnic groups, and artificial borders

to the nature and characteristics of the sector, affecting implementation in these areas.

• The nature of donor support to regional orga-nizations presents opportunities but also chal-lenges. The challenges relate to the fact that strong donor dependency and poorly man-aged aid raise the risk of donors driving rather than supporting reforms.The next section presents policy actions

based on analysis of these challenges to advance regional integration.

Finally, political economy challenges also relate to the distribution of benefits and losses from regional integration, which must address winners and losers equitably. Tanzania withdrew from COMESA in 2000, citing possible revenue losses. Similarly, the EAC disintegrated in 1977 following perceptions of Kenyan dominance and divergent political positions and ideologies; it was not revived until 2000. Political economy issues might also relate to nontariff barriers that benefit an interest group.70 For instance, Kenya identified protection tendencies through nontariff barriers in the EAC as a challenge to advancing regional integration. These important challenges need the attention of policymakers and regional institutions tasked with advancing regional integration.

INTERVENTION STRATEGIES AND POLICIES TO STRENGTHEN REGIONAL INTEGRATION

Several intervention strategies and policy direc-tions are crucial to strengthen regional integration in East Africa. First, regional integration must be approached from multiple dimensions to bring about synergy in trade, infrastructure, productive engagement, policy and regulatory coordination, and sociocultural dimensions such as language, ethnic groups, and artificial borders.71

Second, since increased intra-Africa trade is a major policy instrument for advancing regional integration, it is imperative to capitalize on the high political goodwill associated with the CFTA. The agreement establishing the CFTA came with an implementation action plan that tackles constraints on intra-Africa trade by holistically

addressing trade policy, trade facilitation, produc-tive capacity creation, trade-related infrastructure provision, trade finance, trade information, and factor market integration.72 The policy direction that deserves priority in the region is enhanced regional infrastructure (such as roads, energy, water resources, information and communication technology, pipelines, and port facilities) aimed at addressing the infrastructure gap through a regional approach, as well as productive (or ver-tical) integration through structural transformation.

Third, the lesson from East Asia on the policy direction of structural transformation and process integration is instructive. Intraregional trade has increased rapidly in East Asia, but there has not been a regionwide preferential trade agreement among these countries. It was not the result of a simple market-led integration. Deliberate and conscious state action — in the form of unilateral tariff reductions, the establishment of export processing zones and duty-drawback arrange-ments, and entry into sectoral trade agreements (especially in information and communication technology and in the context of value chain creation) — are the foundation for success. These policies are generally followed by individual coun-try’s foreign policy in the region rather than by regional authorities.73 Policymakers in East Africa may draw an important lesson from this experi-ence and tune their own country policies along this line.

All the policy directions suggested above need a strong policy and institutional framework for market integration, investment, and value chain development.74 They also require building the capacity of the regional and national institutions tasked with these issues.

In addition to these strategies to promote regional integration in East Africa, the African Development Bank offers several policy recom-mendations (see also annex 5):75

• Sensitize the public to the customs process. Delays at border posts could be reduced by sensitizing traders about the correct clearing process to reduce errors and avoid the need for re-entries and re-declarations when trucks are at the border.

• Further improve infrastructure to deal with long lines. Existing road infrastructure could be


improved by building multiple lanes at border points to enable simultaneous clearance of multiple vehicles and by improving the quality of poor road networks.

• Use more than one information technology net-work at a time. Multiple information technology networks could be used at all border points so that when one network is down, another system is available to avoid a stoppage of clearing operations.

• Introduce a border makeshift driver system. Allowing drivers to hand over their vehicles to other drivers at the border to continue with the clearing process would prevent exhaustion among drivers, thereby reducing traffic risks.Finally, the policy directions suggested above

need to be articulated in the political economy context of the region and address political econ-omy challenges in tandem with the policy direc-tions and institutional framework for development. As the political economy of regional integration studies in Africa suggest, the implications of polit-ical economy challenges for policymakers could be grouped under four policy directions: alter policies (to influence structures), adapt policy action (to current interest), avoid (political block-age), and await (favorable incentive conditions). In addition, the study also advises engaging in three other policy directions: examine ambitions (revisit ambitions in the light of what is feasible), engage

in brokerage (to harness interests of different stakeholders), and tag the issue to champions (by paying attention to influential actors).76 These are important policy directions and guiding principles for advancing regional integration in East Africa.

In sum, East Africa holds significant potential to benefit from regional integration and to advance intra-Africa trade in order to promote sustainable economic growth and development in member countries. However, realizing this potential is chal-lenged by the lack of complementarities of exports and imports and low competitive position of Afri-can potential export suppliers. This is the result of weak infrastructure, low productivity, and poor trade facilitation. It is accompanied by weak institu-tions and political economy challenges, and it calls for an innovative approach to enhance regional integration. Addressing export supply constraints, increasing export competitiveness, and diversify-ing are crucial. Policies need to go beyond liber-alization to realization of the potential for expand-ing trade, integration processes, building regional (multicountry) and domestic infrastructure, har-monizing macroeconomic policies, enhancing trade-enabling institutions, facilitating trade, and focusing on regional diversification. Institutional capacity building and addressing political econ-omy challenges that emerge in the course of plan-ning and implementing these policies are also key policy directions that need to be pursued.


NOTES

1. UNECA 2018a.

2. Durlauf, Kourtellos, and Tan 2008; Papageorgiou

and Kolovich 2014.

3. Shimeles 2014; McKay 2013.

4. IMF 2014; Ncube and Jones 2013.

5. Parallel markets are common in countries that have

a managed floating (crawling-peg) exchange rate

regime because they often have a persistent balance

of payment deficit and cannot satisfy all demand for

foreign exchange by supplying it from the official

market. The East African countries with a parallel

market are Eritrea, Ethiopia, Somalia, South Sudan,

and Sudan.

6. African Development Bank 2018.

7. World Bank 2018b.

8. World Bank 2018a.

9. Geda forthcoming a; World Bank 2018a.




13. Ndikumana et al. 2015.

14. Shimeles 2014; Fosu 2017.

15. UNDP 2017.

16. Shimeles 2014; Fosu 2017.


18. Valensisi and Davis 2011.

19. Lundvall and Lema 2014.


21. UNECA 2012, 2016b.

22. UNECA 2014, 2016a.

23. Timmer et al. 2012; UNECA 2014, 2016a.

24. Shimeles 2014; McKay 2013.

25. Chatterjee 2005.

26. Aggarwal and Kumar 2012.


28. Fox et al. 2016.

29. See Fox et al. 2016.

30. UNECA 2013.

31. UNECA 2017.

32. Pfaffenzeller, Newbold, and Rayner 2007; Geda

forthcoming a.

33. Geda forthcoming a.

34. Geda 2018a, 2018b.

35. Geda, Senbet, and Simbanegavi 2018.

36. Van Heukelom, Byiers, and Bil 2016.

37. Schneider 2017.


39. EAC 2018.

40. UNECA 2018b.


42. Afrexim Bank 2018; African Development Bank

2018.



2018; UNECA 2012.


2018.

46. EAC 2018.

47. See Geda and Seid (2015), table 11.

48. African Development Bank 2018; Geda and Seid

2015.

49. Aidi 2018; UNECA, AU, and African Development

Bank 2016.


51. Van Heukelom, Byiers, and Bil 2016. See also

Byiers, Van Heukelom, and Kingombe (2015), cited

in Van Heukelom, Byiers, and Bil 2016).


53. Based on Geda and Seid’s (2015) simulation for

North, East, and Southern African countries (includ-

ing all COMESA members) comparing a gravity

model–based prediction of trade (taken as potential

trade) with actual trade (see annex 4).

54. Geda and Seid 2015; Geda and Kibret 2008; Ndulu

et al. 2008.


56. OECD 2015.

57. Geda forthcoming b.

58. African Development Bank 2018; Geda forthcoming b.

59. Minde and Nakhumwa 1998; UBOS and BOU 2010.





64. African Development Bank 2018; Geda and Kibret

2008.

65. Geda and Seid 2015.


67. UNECA 2017.

68. Ravenhill 2016.



71. See, among others, Geda and Kibret 2008.

72. UNECA, AU, and African Development Bank 2017.

73. Ravenhill 2016.


36 N OT E S A N D R E F E R E N C E S


76. See Van Heukelom, Byiers, and Bil 2016.

77. Anderson 1979; Bergstrand 1985; Deardorff 1998;

Feenstra, Markusen, and Rose 1998.

78. Geda and Seid 2015.

79. These issues are discussed in detail in Geda and

Seid (2015).


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ecdpm.org/peria/synthesis.

WHO (World Health Organization)/UNICEF (United Na-

tions Children’s Fund) Joint Monitoring Programme.

2015. Progress on Sanitation and Drinking Water:

2015 Update and MDG Assessment. Geneva and

New York.

World Bank. 2017. World Development Indicators [data-

base]. Washington, DC.

———. 2018a. International Debt Statistics [database].

Washington, DC.

———. 2018b. World Development Indicators [database].

Washington, DC.

http://ecdpm.org/peria/synthesis

http://ecdpm.org/peria/synthesis

ANNEXES

ANNEX 1

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

Country 2008–10 2011–13 2014–16 20172018

(estimated)2019

(projected)2020

(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



39

40 A N N E x E S

ANNEX 2

ANNEX 3

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


Note: Data for South Sudan are not available.


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.


A N N E x E S 41

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-tify determinants of bilateral trade, though they are often criticized for lacking a strong theoretical basis. However, multiple researchers have devel-oped theoretical foundations to formally derive the model.77 In a typical gravity model, bilateral trade flows are determined by the size of the two econo-mies and the distance between them. However, it is always possible to expand the model to include other relevant determinants of trade. The follow-ing standard gravity model was specified here to examine the potential for intra-Africa trade:78

Tij = α Yi

β1 Yj

β2 Dij

β3 Ni

β4 Nj

β5 RTAij

β6 Aij

β7 REMit

β8 REMjt

β9 ηij,

where Tij is bilateral trade between countries i and j; Y is GDP; N is population; D is the bilat-eral distance between the two countries; A is other relevant variables (cultural and geographic factors such as common official language, shar-ing a border, being landlocked, and the bilateral exchange rate between partner countries); REM is a remoteness index that captures multilateral trade resistance term and measures the average distance of country i from all trading countries (the expected sign of the coefficient is positive, sug-gesting that more remote countries trade more among each other); and η is the stochastic term.

The model is estimated using bilateral export data of African countries. The censored nature of such regional bilateral trade implies that (the log-linearized) ordinary least squares estimates are biased. Thus, the model is estimated using Poisson pseudo-maximum likelihood to address the problems associated with ordinary least squares. As alternative to Poisson pseudo-maxi-mum likelihood, panel Tobit is also employed. The parameters of the model are thus computed by finding the estimates that maximize the likelihood

function in these formulations. An experiment of other estimations techniques such as fixed-effect and random-effect models did not change the result.

The trade data are from the International Mon-etary Fund’s Direction of Trade Statistics dataset. Macroeconomic indicators are from the World Bank’s World Development Indicators database. The remoteness index was computed by the authors.

The estimated coefficients of the gravity model together with each country’s actual values for explanatory variables of the model were used to compute (predict) potential trade. The results sug-gest the level of intra-Africa trade given geographic proximity, cultural affinity, size of the economies, and the other variables of the model. The predicted level was then compared with the actual trade for each country. The ratio of the two values was gen-erally found to be less 1, indicating that actual trade is below its potential given by the gravity model. But because the model is based on proxy vari-ables and uses aggregate value of exports, it fails to capture the structure of the supply of exports and the demand for those products in the import-ing country. Thus, the result indicates only the nec-essary, but not the sufficient condition, for enhanc-ing intra-Africa trade. The sufficient condition is that what is supplied by one country, specified by commodity category, needs to be demanded by the trading African partner country. This requires examining the pattern of demand and supply by commodity category. Moreover, even if one finds complementarities between these trading part-ners, it is imperative to examine the comparative advantage of the potentially exporting African countries in replacing the current trading partners of the importing African countries.79

42 A N N E x E S

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

This annex summarizes the assessment of oppor-tunities and constraints to trading and traveling across the Uganda, Kenya and Tanzania borders, covering the Busia, Namanga, and Dar es Salaam border posts in the EAC and provides policy rec-ommendations to improve the situation.

Opportunities for trade and travel• The EAC in general. Despite its many chal-

lenges, the EAC as a customs union and a common market area is delivering on its mis-sion. It is now possible for traders to move from one country to another without major problems and to move goods across borders without much difficulty when they comply with trading process requirements.

• The EAC Customs Union. The EAC Customs Union has eliminated import duties for goods originating within the REC, making it cheaper to import goods from the EAC than from China. This is a good opportunity for traders

• Improved border post infrastructure. The EAC has developed infrastructure to facilitate cross-cross-border trade and travel, including clean border offices, secure cargo yards with security personnel, well-paved roads, well-lit properties, and uncongested and clean convenience facili-ties. The existence of the one-stop border posts also makes clearing goods much easier. Transi-tion times at border posts have improved tremen-dously, with about 300 trucks cleared each day.

• Sufficient customs officials. Revenue officials are now adequately distributed across major towns within the EAC. This means that traders no longer have to first travel to their destination country to get merchandise valued; it can now be done in the country in which are goods purchased.

• Good-quality road infrastructure. Road infra-structure is generally in good condition and well-marked, except roads between Busia and Kisumu.

Challenges of trade and travelIn addition to these challenges to regional integra-tion in East Africa, the African Development Bank

has highlighted several challenges to cross-border trade (see also annex 5):80

• Data migration challenges between country customs systems. Data migration challenges arise from the nature of declarations that clear-ing agents enter into trade information tech-nology systems. Improper data entry affects the links between country customs systems and increases the time traders spend at the border and, ultimately, the transit time to the destination.

• Transit times above targets. Cross-border transit times do not meet government targets. Truck drivers complain about long waits at borders that force them to remain in their vehi-cle because traffic moves in a single file line. The truck drivers suggest that the clearing process is slow because customs offices are understaffed.

• Long waits at the border. Some truck drivers state that it is quicker and easier to drive from Busia to Kampala than to be on the 1 kilometer stretch between the Kenyan and Ugandan side of Busia. They further observe that it takes so long to clear a truck that drivers later fall asleep at the wheel. The truck drivers cannot go for lunch for fear of someone else overtaking them in the queue, so they snack in their vehicles, which is not good for their health. Drivers com-plained that the long waits in Namanga force them to spend their per diem for the entire jour-ney because the extra days spent in transit are not budgeted for.

• Information technology network challenges. Unreliable information technology networks delays clearing of goods, especially in Busia and Namanga, according to truck drivers and clearing agents. When the network is off, driv-ers just sit and wait.

• Political issues. Political standoffs between Kenya and Tanzania, manifested in the failures of the customs systems used by both countries to consistently and predictably tally informa-tion on goods, have contributed to operational challenges that have slowed trade.

A N N E x E S 43

• Infrastructure shortfalls. Exit points at the bor-ders are generally single file rather than multi-ple file (capable of handling several vehicles at the same time). Truck drivers have suggested installing a multiple-file system that enables cargo trucks to use one lane and fuel tanks to use a separate lane. Drivers also complain of the narrow turning angle at Busia’s cargo scan-ner, which is hard to maneuver, especially in a large vehicle. They observed that the turning angle is designed in an L shape, which spoils vehicle tires when maneuvering.

Policy recommendations• Sensitize the public to the customs process.

Delays at border posts could be reduced by sensitizing traders about the correct clearing process to reduce errors and avoid the need for re-entries and re-declarations when trucks are at the border.

• Further improve infrastructure to deal with long lines. Multiple lanes could be created at border points so that different types of vehicles (transit cars, fuel tanks, cargo trucks, and so on) could use different lanes or so that vehicles with a longer clearance process could be in one line and vehicles with a shorter process could be in another. The quality of the road network between Busia and Kisumu could also be improved.

• Use more than one information technology net-work at a time. Multiple information technology networks could be used at all border points so that when one network is down, another system is available to avoid a stoppage of clearing operations.

• Introduce a border makeshift driver system. Allowing drivers to hand over their vehicles to other drivers at the border to continue with the clearing process would prevent exhaustion among drivers, thereby reducing traffic risks.

STATISTICAL ANNEX

STATISTICAL TABLE 1 Basic indicators, 2018

Population(thousands)

Land area(km2

thousands)

Population density (people per km2)

Gross domestic producta

($ millions)

Gross domestic product

per capitaa ($)

Average annual

real GDP growth, 2010–20

(%)

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 88 177,441 3,483 5.9

Rwanda 12,501 26 475 27,068 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 purchasing power parity valuation.

b. Based on fiscal year data (September–August).

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

authorities.

45

46 S TAT I S T I C A L A N N E x

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

2010 2011 2012 2013 2014 2015 2016 20172018

(estimated)2019

(projected)2020

(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


a. Based on fiscal year data (September–August).

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

S TAT I S T I C A L A N N E x 47

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80.0

25.3

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STATISTICAL TABLE 5 Monetary indicators

Inflation (%)

Exchange rate (local currency unit per US dollar)

20172018

(estimated)2019

(projected)2020

(projected) 2015 2016 20172018

(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 ... ... ... ...


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.


STA

TIS

TIC

AL

TAB

LE

6 B

alan

ce o

f p

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ents

ind

icat

ors

Trad

e b

ala

nc

e ($

mill

ion

s)C

urr

en

t ac

cou

nt

ba

lan

ce

($ m

illio

ns)

Cu

rre

nt

acco

un

t b

ala

nc

e (%

of

GD

P)

2017

2018

(e

stim

ated

)20

19

(pro

jec

ted

)20

20

(pro

jec

ted

)20

1720

18

(est

imat

ed)

2019

(p

roje

cte

d)

2020

(p

roje

cte

d)

2017

2018

(e

stim

ated

)20

19

(pro

jec

ted

)20

20

(pro

jec

ted

)

Bur

undi

–450

–479

–449

–425

–346

–321

–313

–422

–11.

6–1

0.4

–9.2

–11.

2

Com

oros

–159

–184

–192

–201

–53

–84

–113

–116

–4.3

–6.0

–7.7

–7.4

Djib

outi

–904

–961

–1,0

24–1

,070

–364

–375

–373

–417

–17.

5–1

7.8

–16.

3–1

6.9

Erit

rea

–469

–500

–553

–577

3922

–84

–172

0.7

0.3

–1.1

–2.1

Ethi

opia

a–1

2,89

5–1

3,91

9–1

4,40

7–1

5,48

3–6

,551

–5,6

89–5

,740

–6,1

61–8

.1–6

.0–5

.9–5

.8

Ken

ya–1

0,20

2–1

1,56

1–1

1,54

6–1

1,79

4–5

,018

–4,9

03–4

,753

–5,2

37–6

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.8–5

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Rw

anda

–872

–1,1

53–1

,226

–1,3

69–6

22–8

67–9

82–9

56–6

.8–8

.4–9

.2–8

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Sey

chel

les

–643

–880

–928

–982

–305

–324

–329

–330

–20.

5–1

8.2

–17.

6–1

7.0

Som

alia

–2,8

41–2

,495

–2,5

06–2

,600

–473

–533

–509

–518

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–6.3

Sou

th S

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333

535

785

223

51–5

03–3

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7–1

0.1

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Sud

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,005

–1,6

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,277

–1,0

35–3

,272

–2,2

22–2

,117

–1,8

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Tanz

ania

–2,7

25–3

,944

–4,1

93–4

,613

–1,7

24–2

,195

–2,1

84–2

,316

–3.3

–3.7

–3.4

–3.3

Uga

nda

–1,7

01–1

,992

–2,2

68–2

,722

–1,1

84–1

,431

–1,5

29–1

,880

–4.3

–4.9

–4.9

–5.4

Eas

t Afr

ica

–36,

531

–39,

175

–39,

783

–42,

648

–19,

821

–19,

425

–19,

327

–20,

410

–5.0

–4.9

–4.6

–4.6

Afr

ica

–76,

217

–69,

644

–76,

739

–87,

419

–81,

227

–70,

979

–69,

596

–78,

510

–3.6

–3.0

–2.8

–3.0

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STATISTICAL TABLE 8 Demographic indicators, 2018

Population growth rate

(%)

Urban population (% of total)

Age distribution (% of population

Fertility rate (births per

woman)0–14 15–6465 and older

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.


STATISTICAL TABLE 9 Poverty and income distribution indicators

National poverty lineaInternational poverty line

($1.90 a day) Gini indexb

Survey year

Population below

the poverty line (%) Survey year

Population below

the poverty 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 ... ... ...


a. Defined as two-thirds of average consumption.

b. Based on income distribution.

Source: Various domestic authorities and the World Bank.


STATISTICAL TABLE 10 Access to services

Telecommunications, 2016

Access to electricity, 2016

(% of population)

Population using at least basic

drinking water services, 2015

(%)

Population using at least basic

sanitation services, 2015

(%)

Main telephone lines (per 100 people)

Mobile telephone lines (per 100 people)

Population using the Internet

(%)

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.


STATISTICAL TABLE 11 Health indicators

Life expectancy at birth, 2018 (years)

Prevalence of undernourished,

2016 (% of

population)

Health personnel, 2010–16 (per 100,000 people)

Total Male Female PhysiciansNurses and 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


Source: African Development Bank statistics, UNDESA 2017, the Food and Agriculture Organization, and the World Health Organization.


STATISTICAL TABLE 12 Major diseases

Healthy life expectancy at birth, 2016 (years) Prevalence

of HIV, ages 15–49, 2017

(%)

Infant mortality rate, 2017(per 1,000 live births)

Under-five mortality rate, 2015(per 1,000 live births)Total Male Female

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


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.


STATISTICAL TABLE 13 Education indicators

Estimated adult literacy rate, 2010–17 (% ages 15 and older)

Gross enrollment ratio, primary, 2010–17 (%)

Public expenditure

on education, 2010–17

(% of GDP)Total Male Female Total Male Female

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


Source: African Development Bank statistics, the United Nations Educational, Scientific and Cultural Organization Institute for Statistics database,

and various domestic authorities.


STATISTICAL TABLE 14 Labor indicators, 2018

Employment to population ratio, ages 15 and older

(%)

Labor force participation rate, 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


Source: International Labour Organization ILOSTAT database.

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.

African Development Bank GroupAvenue Joseph Anoma01 BP 1387 Abidjan 01Côte d’Ivoirewww.afdb.org

east africa economic outlook 2019 - afdb.org · 3 overlapping membership in regional economic...

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