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Customs Territory to pave the way for the next phase of integration
The way to the realisation of a Customs Union in the East African Community has been one filled with roadblocks. It took four years from the conception of the EAC to set up the legal framework that paved the way for the establishment of a Customs Union.
Through the enactment and adoption of the EAC Customs Management Act, the wheels of economic integration began rolling in 2005.
Since 2004, the EAC has marked several milestones on the way towards the achievement of a fully fledged Customs Union. The most recent one of these was the Single Customs Territory (SCT), which was agreed upon during the EAC Summit held in April 2012.
In November 2013, the EAC published the framework for the attainment of the EAC-SCT. However, the adoption of the SCT was phased and on a pilot basis, with Uganda being the first country to implement it in 2014.
The SCT is a Customs system aimed at leveraging on the efficiencies derived from the adoption of the destination principle. It aims at strengthening the Customs Union, reducing the cost of business and increasing trade within the EAC.
Revenue in real time
The SCT has also solved the problem of revenue sharing among member states, as each will receive their Customs revenue in real time.
The destination principle is an international taxation concept most commonly applied in value added tax, but also applied for Customs duty.
Under this system, tax is ultimately borne by the final consumer. The fundamental purpose of this principle is to ensure that all revenue accrues to the jurisdiction where the supply to the final consumer occurs.
The EAC-SCT regime borrows heavily from this destination principle in the administration of Customs duties among the member states. Under the EAC-SCT, the destination country is responsible for the declaration of the goods entering the EAC into their Customs system.
This is a shift
But verification of imports is done by the country or port through which the goods enter the EAC. This is a shift from the previous Customs regime in which multiple declaration points existed for goods imported for consumption within the EAC.
An importer was required to declare the goods-in-transit at various border points and deposit a security bond for the same. This system increased the costs and hampered the free flow of goods within the EAC.
The centralisation of the declaration and verification of the goods under the SCT has led to the collapse of the Port Transfer, Transit and Warehouse Bonds into one General Guarantee Bond. The General Guarantee Bond is expected to translate into reduced financing cost and transport time and ease the administration of the bonds by the various revenue authorities.
Once the goods are verified by the originating country, a movement document (C2) is generated and they are ready for transport to the consignee. Although transit bonds and shipping documents are no longer required for member-state transfers, the revenue authorities plan to institute various checks along the transport route to authenticate the release documents.
In Uganda and Rwanda, for instance, all trucks carrying goods-in-transit will be monitored online using a unique number or seal.
These checks are designed to test whether the clearance procedures were observed at the port of entry and that no revenue authority is robbed of its rightful income.
In Kenya, the SCT was adopted on a pilot basis on September 15 and a notice issued by the Kenya Revenue Authority.
The goods that will be cleared under the SCT are divided into intra-trade products between Kenya and Tanzania and maritime products between Kenya, Uganda and Tanzania.
Intra-trade products include rice, maize, sugar, alcoholic products and cigarettes.
Maritime products are goods originating outside the SCT, including motor vehicles, textiles and fabrics, electronics and beverages.
The verification of the imports is done at the ports of Mombasa and Dar es Salaam and duty paid in the destination country.
In the selection of the products for the pilot clearance through the SCT, the revenue authorities may have considered the frequency of trade or import of the goods.
Critical interface
For a trading bloc to gain from the SCT, it is critical that the interface between the various revenue authorities’ information technology infrastructure runs without hitches.
In recent years, some of the Customs IT systems in place have experienced significant downtime that has hampered trade within the region.
Thus, it is important to ensure a smooth integration of the IT systems of the various revenue authorities.
It is also paramount to ensure that proper security controls are put in place to guard against fraud by unscrupulous traders.
The SCT regime, if well implemented, will result in increased trade within the EAC as well as bolster the Customs Union, paving the way for the next stage of economic integration.
Titus Nguhiu is a senior tax advisor at KPMG Kenya. The views expressed here do not necessarily represent those of KPMG.
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Kenya, Uganda agree to run standard, metre gauge railways side by side
Kenya, Rwanda, South Sudan and Uganda will soon sign a policy under the SGR Protocol, requiring all heavy cargo to be transported exclusively by rail between Mombasa and the capitals of the four countries.
Speaking in Kampala at a ceremony welcoming the arrival of Rift Valley Railways’ advance batch of refurbished General Electric locomotives on October 20, Ugandan Junior Minister for Works John Byabagambi said a decision had been taken by the Kenyan and Ugandan governments to maintain the existing metre-gauge rail alongside the standard gauge rail, because there was room for more than one rail operator.
“Ninety-three per cent of cargo out of Mombasa is still road-bound, so the SGR can and will complement the metre gauge. This is one of the policies contained in the SGR Protocol, and any cargo with a weight above 15 tonnes will not be allowed on our roads. This will save our expensive road infrastructure while ensuring that operators of the rail networks get enough traffic tonnage to pay their way,” Mr Byabagambi said.
Despite protections in the concession agreement, Mr Byabagambi’s remarks will reassure markets that had become sceptical about RVR’s future in the face of recent calls to terminate the concession by Kenya over alleged underperformance.
The rail operator was accused of failing to achieve a target of taking at least 10 per cent of the haulage business from the roads.
According to Uganda Railways managing director Charles Kateba, the strategy to use both services has been adopted because the metre gauge will form the logistical backbone for development of the SGR, and more importantly for Uganda where the government was pushing RVR to reinvest in the 500km Tororo-Pakwach line.
Currently, the line, which was revived last October after 20 years, cannot meet the demand for services, especially from the Kenyan cement industry, which uses it for trans-shipments to South Sudan. But RVR says recent investments in rolling stock and track improvement will change this state of affairs over the next few months.
Ugandan RVR stockholder Charles Mbire said new culverts and bridges installed between Jinja and Tororo, along with the power of the new locomotives, will lead to an increase in volume and speed.
“Each of these engines can haul 1,200 tonnes, and improvements to the track on the Ugandan side mean these heavier and longer trains can now run all the way to Kampala. That increases our capacity, and also improves time keeping because we no longer need to break up trains in Tororo,” Mr Mbire told The EastAfrican.
Although only three of the 20 locomotives on order has arrived, Mr Mbire said the number of engines will double to 40 by June next year.
He said there has been a 40 per cent increase in cargo moved between Mombasa and Kampala during the year to date, compared with the same point in 2013, and that transit times had been cut down to an average of 3.7 days.
The SGR, whose construction has started on the Kenyan side, is set to move cargo at 80km per hour and passengers at 120km per hour. Byabagambi says this aspect should make the SGR attractive regardless of the lower tariff the metre gauge will be charging.
There have also been concerns that the SGR, which is being developed at a cost of more than $20 billion for the entire network, will not be able to compete against a revamped metre gauge, a notion Mr Byabagambi dismisses.
“The gradient and other technical limitations of the metre gauge will not allow them to come anywhere close to the speed available on the SGR, and the $4,000 cost of shipping a container from Mombasa to Kampala by road leaves a large margin despite the lower cost of the metre gauge,” he said.
However, sources in RVR said the SGR will have an advantage of only nine hours between Mombasa and Kampala, at a cost of 45 per cent higher than the metric gauge.
According to provisions in the RVR concession agreement, the Kenya and Uganda governments are bound to compensate it for any losses arising from competition and decisions related to the SGR.
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TPP Ministers: Shape of trade deal “crystallising” following Sydney meet
Ministers from the Trans-Pacific Partnership (TPP) countries concluded a three-day meeting in Sydney, Australia on Monday, citing “significant progress” in their negotiations on both market access and on trade and investment rules.
“We consider that the shape of an ambitious, comprehensive, high standard and balanced deal is crystallising,” ministers said in a joint statement issued following their meeting.
The announcement that the shape of a potential deal is advancing comes ahead of a series of meetings where leaders from the 12-nation group are set to cross paths, which trade observers say could prove pivotal if a deal is indeed to be concluded this year.
Ministers have now pledged to continue focusing their efforts on consulting “widely at home and work intensely with each other to resolve outstanding issues in order to provide significant economic and strategic benefits for each of us.”
The 25-27 October gathering was preceded by a 19-24 October meeting of chief negotiators, and ministers confirmed that these chief negotiators would be staying in Australia for at least a few days longer to continue advancing the work.
The ministerial meeting, which officials said was meant to “lay the groundwork for the conclusion” of the TPP talks, was hosted by Australian Trade Minister Andrew Robb and chaired by US Trade Representative Michael Froman.
Along with meeting in plenary to discuss issues affecting the whole group – with officials afterward touting progress in difficult areas such as intellectual property, environmental protection, and state-owned enterprises – ministers also held various bilateral discussions during the Sydney meeting, which they said focused primarily on goods, services, and investment market access.
The 12 countries currently involved in the TPP negotiations are Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam.
Finish line approaching?
In his opening remarks to ministers on Saturday, Robb affirmed that, in his view, “we are working now to try and conclude this agreement by the end of this year.”
Some sort of TPP outcome by year’s end has been a stated goal of US President Barack Obama, who suggested in June that he would like there to be “something that we have consulted in Congress about, that the public can take a look at,” in time for his November trip to Asia in order to close the deal.
An ambitious agreement, US officials have repeatedly affirmed, could help build the support in Congress for passing a separate piece of domestic legislation, known as Trade Promotion Authority (TPA) or fast-track, that is essential for ratifying trade deals in Washington without subjecting them to additional amendments by US legislators.
Despite the recent ramp-up in TPP negotiating momentum, however, Robb acknowledged in a radio interview ahead of the ministerial that the greatest risk for the talks “is for this thing to be stalled.”
“Every company’s got its sensitivities, as we do – and the biggest risk is that those things prevent this agreement being concluded,” he said during the ABC AM interview.
Speaking to reporters after the meeting, Robb affirmed that this latest ministerial demonstrated “a real sense that we are within reach of the finish line,” adding that the focus of the group seems to have increased by “several notches.”
“We are seeing a great preparedness to make some of the difficult decisions, a willingness to compromise, to get to final decisions,” he added. “We are seeing places people are prepared to move providing the rest of the package ends up as they hope. But I would say, in conclusion, that as always [in] these types of agreements, nothing is decided until everything is decided.”
US-Japan market access
The question looming over the negotiations these past several months has been whether the US and Japan will be able to reach a bilateral deal on agricultural and automobile market access.
Despite repeated meetings between Washington and Tokyo officials, the two sides remain apart, ministers confirmed on Monday, though Froman stressed to reporters that there has been “substantial progress over the past several weeks.”
The protracted negotiations between the two largest economies in the 12-country talks have been widely blamed for slowing down the overall pace of negotiations, with other members reportedly hesitant to put too much on the table until it is clear whether a US-Japan deal is reached – and if so, what it would entail.
Officials from some other TPP members tried to dispel that notion last week, noting that the bilateral talks are necessary if the broader group-wide negotiations are to succeed.
“We would be extremely concerned with both the Japanese and the US delegations if they were not meeting privately because power is very important to integrate into a negotiating process,” New Zealand Trade Minister Tim Groser told reporters on Monday. “It is absolutely essential that they explore what I’d call the outer parameters of a deal, provided that the largest parties [are] in a continuous process of discussion with countries like mine and they are.”
The New Zealand trade official did qualify, however, that a “sweetheart deal that just is made in Tokyo and Washington” – without the participation of other players – would cause “immense disruption” to the 12-country negotiations overall.
Leaders’ meetings forthcoming
Ministers told reporters on Monday that chief negotiators will stay on in Australia for a few more days to continue these discussions, in line with the instructions given by their trade chiefs. A subsequent meeting of ministers will occur “in the coming weeks,” they added, without setting a specific date at that time.
Despite not publicly announcing dates for either a ministers’ or leaders’ meeting, the fact that at least two major gatherings of regional leaders are scheduled for the next month – along with Obama’s call for a November result of some kind – have fuelled speculation that a TPP-specific leaders’ event may be forthcoming.
For instance, leaders from TPP countries will be present during the Asia-Pacific Economic Cooperation (APEC) Leaders’ Meeting in Beijing, China in early November, given that all TPP members are part of the 21-nation APEC group.
However, the fact that Beijing is hosting this year’s APEC event has sparked questions as to whether TPP leaders will indeed meet separately in the Chinese capital, given that China is not currently part of the 12-country negotiations.
While China is not in the TPP, it is involved in a separate regional integration initiative, known as the Regional Comprehensive Economic Partnership, which was launched in November 2012. (See Bridges Weekly, 21 November 2012) Along with China, those negotiations include all ten members of the Association of Southeast Asian Nations, India, South Korea, and some TPP countries such as Japan, New Zealand and Australia.
Trade officials involved in the latter talks have suggested that the deal could be another pathway toward reaching a Free Trade Area of the Asia-Pacific – though whether it would be complementary to, or in competition with, the TPP has sparked significant debate.
Another key meeting is the upcoming summit of G-20 leaders in Brisbane, Australia on 15-16 November. Some TPP members – the US, Australia, Canada, Japan, and Mexico – are part of the G-20 configuration. New Zealand and Singapore, while not G-20 members, are listed as “guest countries” for this year’s meeting.
In his remarks to fellow ministers this past weekend, US Trade Representative Michael Froman highlighted the upcoming meetings as another incentive for ramping up the talks.
“We now have in front of us an excellent opportunity to resolve the outstanding issues where possible, to narrow our differences, and to tee up these issues for our leaders as they see each other in the coming weeks in various places around Asia,” Froman said.
“It’s an effort that will further the integration of this very important region, the Asia-Pacific region, and very importantly it will be an agreement that will help set the rules of the road for this region, and it will be a very important economic and strategy opportunity,” the US trade chief said.
This article is published under Bridges, Volume 18 - Number 36.
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How to de-enclave the African resource sector for more inclusive growth and development
The recent acceleration in growth rates across much of sub-Saharan Africa may not be purely commodity-driven, but for many of the region’s economies macro-economic stability is still dependent on prudent management of natural resources. For this reason, a strategic shift is required to shield African economies from commodity boom-burst cycles.
For much of the last half century, the dominant political economy model of natural resource management in Africa was this: states received royalties from mostly private mining companies and then were supposed to invest in public goods such as roads, hospitals, and schools. Private mining companies, for their part, would pick up the slack whenever states failed. Most of the time this happened through corporate social responsibility (CSR) initiatives, as a way of buying the social license needed to operate in specific communities.
This model has proven to be a complete failure in nearly all resource-rich African states, for a number of reasons.
Opacity and leakages inherent in revenue management chains, short-term electoral calculations, and the lack of accountability of governments all have led to the misuse of royalty revenues. This has left many private companies holding the bag with regard to community development projects. And since mining companies are not development agencies, most CSR initiatives have focused on low-hanging-fruit projects whose long-term developmental impacts remained spotty and unlikely to scale up to the national level.
Furthermore, the royalties-focused strategy has encouraged the evolution of export-oriented enclave economies around natural resource sectors. These exports have contained little to no local content and related production processes generated negligible value addition.
As a result, the exploitation of natural resources in Africa has failed to create jobs, instead fueling inequality as a few politically connected interest groups benefitted from resource rents.
A new initiative by the African Union – the Africa Mining Vision (AMV) – has set out to change this. At the core of the AMV is the push to de-enclave the Africa’s resource sector and link it with other sectors in the economies of resource-rich states. Doing so will help to ensure that resource exploitation in Africa results in sustainable, job-creating growth and development.
How can this be done? It will center on two key strategies: regional integration and spatial development initiatives (SDIs).
Currently, intra-Africa trade accounts for little more than 12 percent of the region’s total trade volume. Greater regional integration can help grow this number and attract new investment. Informed policy harmonization can also set local content provisions, help create economies of scale, increase local value addition, and improve governments’ bargaining position vis-à-vis mostly foreign mining companies.
SDIs will aim to create growth corridors within resource-rich regions that cut across state borders. These corridors will be built on multi-use, shared infrastructure – roads, railways, regional power pools, and harmonized resource management policies.
But while these goals are laudable, significant challenges remain.
First, the biggest challenge will be to square the domestic political economy of the resource sector in many African states with the regional goals of a more rationalized and efficient natural resource sector.
As is documented in the 2013 Africa Progress Panel Report, governance gaps are a key challenge to the successful management of the resource sector in Africa. Annual illicit flows from the region, much of it from leakages in the natural resource sector, amount to US$25 billion. Trade mispricing, still largely involving commodity exports, adds another $38.4 billion. Given the large sums involved, significant domestic interests exist that will resist any regional attempts at policy harmonization. Reform efforts must therefore not assume that domestic political interests will necessarily embrace the potential benefits of regionally harmonized policies regarding taxation, local content, environmental management, and other areas.
Second, local content and value addition policies will have to be matched with aggressive investment in the development of capacity among local firms. Many resource-rich countries lack firms with sufficient capacity to provide both direct and indirect services to mining companies. Capacity development ought to include technical training, loan facilities, and amendment of procurement laws to boost the competitiveness of local firms.
A good example is the Nigerian Content Act of 2010. The Act created the Nigerian Content Development and Monitoring Board and the Nigerian Content Fund, designed expressly to increase the level of participation of indigenous firms in the oil and gas sector, boost capacity of local firms, and encourage greater integration of the petroleum sector within the rest of the economy. For smaller resource-rich countries in Africa, such efforts are likely to succeed if implemented at the regional level in order to enable local firms to benefit from economies of scale.
Third, because strong states make for strong regions, any regional initiatives to improve the management of natural resources in Africa must not be seen as substitutes to the hard work of reforming domestic institutions in resource rich states. Beyond addressing the governance gaps discussed above, investments will be required in enhancing the capacity of line ministries directly related to natural resources, finance ministries, and ministries in charge of regional cooperation. These domestic reforms will ensure that regional initiatives remain rooted in domestic institutional and political realities in a manner to make them sustainable in the long run.
As the case of the Pilbara Region in Australia shows, even under the best of circumstances the boom-burst cycle of resource exploitation poses real risks to economic stability in resource-rich regions. One way of mitigating this risk is to ensure that the resource sector generates a significant amount of jobs in both directly and indirectly related sectors. Such a process is critical for the development of skills that can then be shifted to other sectors during downturn periods without resulting in significant job losses.
The previous model of linking the mining sector to the wider economy primarily through public expenditures has failed because of significant downside risk during periods of commodity bursts. It is time to take seriously the less risky alternative model of de-enclaving resource sectors through local content and value addition.
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Mobile wars and political barriers to entry: Safaricom vs. Equity Bank
A few years ago, Kenyan commercial banks were fighting hard to prevent mobile phone companies from engaging in the business of money transfer. They argued that money transfers were a preserve of banks – thus allowing mobile phone providers to engage in them was in violation of the Banking Act. The banks lost this fight. However, as banks have recently begun to tap into the mobile banking industry themselves, the mobile phone providers are now pressuring politicians to stop the banks from entering the mobile banking systems purely on their own.
The Fight Against Mobile Banking
Between 2007 and 2008, then-acting Minister of Finance John Michuki was increasingly leaning towards an over-regulated banking regime that would have seriously handicapped the expansion of Safaricom’s M-Pesa money transfer program as we know it today. In fact, Michuki ordered a probe of the mobile money transfer system because it was alleged that it posed dangers to the financial system – a decision possibly “influenced by an informal cartel of local banks unhappy with the threat Safaricom's mobile money transfer service poses to their business.” The Kenyan newspaper The Star even found “well-placed sources” reporting that four big local banks actually created an “ad hoc committee” designed to stop M-Pesa. The banks apparently approached Michuki in late 2008, alleging that M-Pesa was similar to a “pyramid scheme” and that “people could lose their money if it collapsed.” On this prompt, says The Star, Michuki ordered the Central Bank of Kenya to audit M-Pesa – reasoning that the service’s popularity had made the government “jittery.” He even stated, “I am not sure M-Pesa is going to end well.”
Michuki was not the only official approached: The governor of the Central Bank of Kenya, Prof. Njuguna Ndung’u, has asserted that he turned down a plea from commercial banks' chief executives in 2007 to stop the spread of mobile money service M-Pesa. According to the governor, some commercial banks’ CEOs approached him, “complaining that M-Pesa, offered by Safaricom, would cause a financial crisis in the country.”
Had the technocrats (the non-political experts in government) sided with the commercial banks and political elements, this intense lobbying would have cost the country a great opportunity – one that has turned Kenya into a leading example of an innovative approach to increasing financial inclusion in the world. To be sure, the credit for effectively opposing the lobbying efforts by commercial banks is shared – the Central Bank of Kenya (especially its regulatory and payments systems departments), the Communications Commission of Kenya, and notably also the then-permanent secretary of the Ministry of Information and Communications, Bitange Demo, who made a strong case for licensing mobile banking. These officials clearly understood the political economy of private interests seeking to erect political barriers to entry, the consequences of which would have been large welfare losses to society at large while concentrating benefits among the few.
Now the tables have turned. After the phenomenal success of mobile banking, which clearly threatened the profitability of traditional banking models, commercial banks changed their operations and began to invest in mobile phone-based banking. They started by introducing products that linked to the services offered by the mobile phone companies. Today, commercial banks have ratcheted up their operations to full mobile banking including introducing their own SIM cards instead of relying on those issued by the mobile phone providers. Now, mobile phone operators are crying foul and seeking political cover with the intention of barring such operations. They claim that this is an issue of security: Equity’s thin SIM technology could expose its users to financial fraud. These complaints are just another attempt to create barriers to entry in order to reduce competition, just from the other side.
The New Fight: Safaricom Versus Equity Bank
Equity Bank and Safaricom are some of the best managed, innovative and successful companies in Africa. Both headquartered in Kenya, they are leaders in their core businesses – Equity in banking and Safaricom in mobile telephony and mobile banking. They have coexisted in harmony and, in the past, Equity has even sought to backpack on Safaricom’s success by introducing products that tap on M-Pesa, thus benefiting both the mobile phone company (in expanding its business) and also increasing Equity’s profitability and customer base. Thus, by and large, they have coexisted harmoniously. Until now.
Recently, Equity Bank has introduced new technology that uses an independent SIM card (one not issued by a mobile phone company). This paper-thin SIM card is layered on top of a customer’s existing card without affecting the customer’s original service provider’s network reception. With this SIM card, customers need not change to dual SIM card handsets, and they can make calls, send messages and transfer funds from the same phone. In September 2014, the Communications Authority of Kenya gave Equity Bank a license to use the technology. Safaricom has come out strongly in opposition to the introduction of the new technology, arguing that it puts users at risk of fraud and that the approval was granted before full legislation was enacted. Just as commercial banks had done when their core business was threatened by mobile phone service providers, Safaricom has sought protection from politicians – who have now recommended that Equity’s approval be suspended until they are satisfied with the security of the technology.
Commercial banks venturing directly to provide services that are the domain of the mobile phone providers introduce a new margin of competition that is a real threat to the profitability of mobile phone services providers. Thus Safaricom is now seeking to erect political barriers to entry while disguising it as a concern over safety. As one analyst in The Economist has noted, “This is a classic incumbent move, claiming safety concerns to try and prevent Equity Bank offering value-added services that Safaricom offer through M-Pesa.”
The Legislation of Innovation
As demonstrated by these tussles, one of the dangers of innovation in financial service provision is that the appropriate legislation lags behind the innovation. In a 2009 study on the success of mobile banking in Kenya, Ndung’u and I note that there are two major policy options when approaching this issue. The first is to bar the products until legislation has been passed. We also note, however, that “given that most often the process of enacting legislation takes a long time, such an approach risks the possibility of stifling innovation and thus undermining access.” On the other hand, an alternative could be to enact legislation after the products have entered the market, but, again, we note that “this approach would achieve the goal of access but could associate with financial instability.”
Kenya has somewhat followed the second approach, as we explain in our paper: “In Kenya, the strategic policy choice has been to allow technological innovations in mobile banking, but under prudent monitoring and review to ensure that the integrity of the financial system is maintained. … At the institutional level, the Central Bank of Kenya has undertaken various strategies to enhance the oversight capacity effectively keeping abreast of innovation and technologically driven financial services. This has made it possible to increase access to financial services but at the same time maintain stability.”
Clearly, mobile banking innovation should be encouraged to thrive, but watched closely by the relevant authorities, who should prioritize balancing access and stability. We emphasize that “it would be extremely unwise to expand access at the expense of financial stability and integrity of the payment system. Countries that do not have adequate supervisory capacity of their payment system would be ill advised to allow new technologically-driven financial products and should carefully weigh the potential costs of instability. Some vulnerabilities of mobile phone banking that can destabilize the financial system and lower the efficiency of the payment system include fraudulent movement of funds, network hitches, mismatch of cash balances at the pay points, and problems that associate with high velocity of funds making it difficult to stop suspect transactions.”
Thus, the key to Kenya’s successful mobile banking industry is permitting innovations and, at the same time, ensuring that the regulatory agencies work continuously to evaluate and manage potential risks. This is what the authorities are doing by allowing the commercial banks to enter the market. It is also a major reason mobile banking has been so successful in Kenya and not in many other African countries.
The technocrats have already evaluated the Equity Bank’s technology and are convinced that it is secure. Such innovations are crucial to advancing welfare and erecting barriers to entry in the name of security will only serve to undermine innovations and reduce consumer welfare. Politicians should be careful not to undermine competition as is evident in the current case of Equity versus Safaricom. Incumbent and dominant firms like Safaricom must brace for increased competition arising from technological innovations, and the best strategy for them to keep ahead of entrants is investing in innovation so as to be able to provide more, better and cheaper services.
Mwangi S. Kimenyi is senior fellow and director of the Africa Growth Initiative and currently serves as advisory board member of the School of Economics, University of Nairobi.
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2014 African Economic Conference to focus on knowledge and innovation
The critical role which knowledge and innovation should play in Africa’s development will be the focus of this year’s African Economic Conference (AEC) scheduled to take place from November 1-3 in Addis Ababa, Ethiopia.
Organized each year by the African Development Bank, United Nations Development Programme and UN Economic Commission for Africa, the conference will provide a unique opportunity to explore how to harness Africa’s knowledge industry for the continent’s transformation and inclusive growth.
The conferees, usually policy-makers, researchers, development practitioners and cohorts from Africa and elsewhere, will explore extant knowledge generation approaches and frameworks, as well as the efficacy of Africa’s knowledge and innovation institutions in developing needed skills, technology and innovation capacities. They will also discuss policies required in knowledge generation and innovation to achieve Africa’s transformation agenda.
The AEC 2014 theme, “Knowledge and Innovation for Africa’s Transformation”, draws from the African Union Agenda 2063 and the African Common Position on its Post-2015 Development Agenda which identify science, technology and innovation as key pillars for Africa’s development.
As the continent pursues its agenda of “an integrated, prosperous and peaceful Africa driven by its own citizens and representing a dynamic force in the global arena,” success will depend on adequate accumulation of skills, technology and competences for innovation, the organizers say.
Noting that while African countries are well aware that their development hinges on how fast and how well they acquire technological competences, acute skills deficit in domains critical to the realisation of structural transformation goals, significant number of engineers and science graduates remain unemployed in Africa further underling the many facets (including the slow pace of structural transformation) of the mismatch between the demand and supply of skills that exists on the continent.
Africa’s stock of graduates is still highly skewed towards the humanities and social sciences, while the share of students enrolling in science, technology, engineering, and mathematics averages less than 25 percent, according to pre-conference briefs.
“The proliferation since the 1950s of institutions of higher learning and think tanks devoted to addressing the various challenges of Africa’s development has not brought about a significant narrowing of the continent’s skills/innovation gap,” they note.
In the area of soft skills, the Bank notes that African enterprises can only develop and influence the breadth and depth of industrial linkages if they harnessed the needed skills and technologies to upgrade production processes, and identify market opportunities. Similarly, African enterprises will need to upgrade operational competitiveness, meet global technical standards and adopt world-class manufacturing practices to qualify for entry into the global value chain.
The conference will have plenary and break-out sessions featuring presentations and discussions by prominent academics, policy-makers, business actors (including emerging technological/digital entrepreneurs and the youth) and opinion leaders, as well as representatives of peer organisations.
The break-out sessions will involve in-depth and technical analyses of salient issues arising from the thematic focus of the conference. The sub-themes will enable a broad range of discussions on the current state of Africa’s transformation capacity and generate valuable insights for improved policy-making.
These include Knowledge Generation for Structural Transformation; Technology for Africa’s Transformation; and Addressing the Skills Deficit.
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Fossil fuels won’t benefit Africa in absence of sound environmental policies
Recent discoveries of sizeable natural gas reserves and barrels of oil in a number of African countries – including Uganda, Tanzania and Kenya – have economists hopeful that the continent can boost and diversify its largely agriculture-based economy.
But environmentalists and climate change experts in favour of renewable energy say that the exploration of oil and gas must stop, as they are concerned that many African countries lack the capacity to exploit oil and gas at minimal risk to the environment.
Economic policies are not driven by environmental concerns, Hadley Becha, director of local nongovernmental organisation Community Action for Nature Conservation, told IPS.
Becha said that despite the global shift away from fossil fuels, “exploration and production of oil and gas will continue” while Africa’s natural resources, particularly oil and gas, are controlled by multinationals.
Like many experts in the oil and gas industry, Becha believes that multinationals will still be awarded permits by local governments as the extractive industry has shown a great potential for revenue generation.
According to KPMG Africa, a network of professional firms, as of 2012 there were 124 billion barrels of oil reserves discovered in Africa, with an additional 100 billion barrels still offshore waiting to be discovered.
And while only 16 African countries are exporters of oil as of 2010, at least five more countries, Mozambique, Uganda, Tanzania, Kenya and Ghana, are expected to join the long list of oil-producing countries.
But Kenyan environmentalist and policy expert, Wilbur Otichillo, believes that in light of the global shift away from fossil fuels, “newly-found oil will remain underground. Most of the companies which have been given concessions for exploration in East Africa are from the West.”
He told IPS that these companies were likely to heed calls for clean energy, “especially since they are likely to be compensated for investments made to explore.”
But unlike Egypt, which has specific Environmental Impact Assessment (EIA) guidelines for oil and gas exploration, many African countries, including Kenya, have only one classification of EIAs, Becha said.
For example, in Kenya, oil and gas exploration and production is controlled by the archaic Petroleum Act of 1984, which was briefly updated in 2012.
“The Petroleum Act of 1984 is a weak law, especially with regards to benefits sharing and is also silent on the management of gas,” Becha said, adding that the oil and gas sector was very specialised and required detailed and specific environmental impact guidelines.
Experts say fossil fuels will have a significant impact on weather patterns. The Intergovernmental Panel on Climate Change (IPCC), which was released last month, revealed that temperatures on the African continent are likely to rise significantly.
“There ought to be specific guidelines for upstream [exploration and production], midstream [transportation, storage and marketing of various oil and gas products] and downstream exploration [refining and processing of hydrocarbons into usable products such as gasoline],” Becha said.
Policy experts are pushing Kenya’s government to develop sound policies and comprehensive legal and regulatory frameworks to ensure that Kenya benefits from upstream activities and can also explore technology with fewer emissions.
Executive director of Green Africa Foundation John Kioli told IPS that Kenya was committed to adopting technology with fewer emissions “for example, coal [one of Kenya’s natural resources] will be mined underground as opposed to open mining.”
Kioli, the brains behind Kenya’s Climate Change Authority Bill 2012, emphasised the need to address the issue of governance and legislation in Africa.
He added that while Africa was committed to climate change mitigation and adaptation efforts, “the continent lacks the necessary resources. Africa cannot continue looking to the East or West indefinitely for these resources.”
Kenya’s government estimates that the 2013-2017 National Climate Change Action Plan for climate adaptation and mitigation would require a substantial investment of about 12.76 billion dollars. This is equivalent to the current 2013-2014 national budget.
Danson Mwangangi, an economist and market researcher in East Africa, told IPS that to achieve growth and development, and hence reduce poverty, “Africa will need to exploit fossil fuels.”
He says that industrialised countries are responsible for a giant share of greenhouse gas emissions and Africa too “should be allowed their fair share of greenhouse gas emissions, but within a certain period. Not indefinitely.”
Mwangangi said it is now common to find assistance to Africa simultaneously counted towards meeting climate change obligations and development commitments. “This means that measured against more pressing problems like combating various diseases, climate change projects will not be given a priority,” he added.
But even as Africa is adamant that oil and gas exploration will continue, Becha says the gains will be short term and unlikely to revive the economy.
“With oil and gas, it is not just about licensing, there are also issues of taxation…” Becha said.
He explained that in the absence of capital gains tax, as is the case in Kenya and many other African countries, “the government will lose a lot of revenue to briefcase exploration companies who act as middlemen, robbing national governments of significant revenue.”
He added that African countries will have to establish a solvent fund where revenue from oil and gas will be stored to stabilise the economy “oil can inflate the prices of certain commodities hence the need to control surges in inflation.”
Ghana is also among the few countries with a capital gains tax and a solvent fund.
This is part of a series sponsored by the Climate and Development Knowledge Network (CDKN).
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AfDB Board approves Financial Sector Development Policy and Strategy 2014-2019
Executive Directors of the African Development Bank Group on Wednesday, October 29, 2014 in Abidjan approved a landmark Financial Sector Development Policy and Strategy (FSDPS) which aims to improve access to financial services by the underserved and to broaden and deepen the continent’s financial systems.
Described as “the next page in the history of the Bank’s work,” the FSDPS lays out the strategic direction of the Bank Group’s financial sector work in RMCs during 2014-2019, with a strong focus on financing to accelerate Africa’s transformation.
The FSDPS supports the Bank’s vision for Africa’s financial sector. Through it, the Bank Group, working with other key development partners, will support African countries and the regional economic communities in meeting three mutually reinforcing objectives:
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Increasing access to a range of quality, reliable, and affordable financial services paying particular attention to reaching the traditionally underserved (including women and youth) through the most effective approaches, including innovations consistent with the requirements of financial stability.
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Deepening financial markets through sound financial sector policies, laws, and regulatory frameworks that provide a conducive environment for a diverse range of financial institutions that can provide a wide range of products and services (leasing, factoring, insurance), and the development of diverse financial instruments (credit lines, bonds, equities,) that can mobilize term finance.
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Safeguarding the stability of Africa’s financial system through strengthening the monitoring and supervision of financial institutions and capacities to ensure compliance with national and regional regulations and international financial standards.
By promoting vibrant, efficient, innovative and robust financial systems in a competitive market in line with the goals and objectives of the Bank’s Ten Year Strategy (2013–2022), the FSDPS will put finance at the service of the productive sectors, and strengthen the capacity to finance Africa’s inclusive growth. The new Policy and Strategy also complements the Bank Group’s Private Sector Development Strategy and takes into account the special needs of Middle-Income Countries (MICs), Lower-Income Countries (LICs), and Fragile States, as well as gender and food security considerations.
It will facilitate access to investment and working capital by financial institutions, contribute to developing local capital markets, and help reduce the trade finance gap on the continent. Under the policy and strategy, the Bank Group will promote better corporate governance and better risk management of financial institutions, in compliance with international best practices, standards and regulations.
In preparing the FSDPS, the Bank Group identified the absence of deep, efficient financial markets as key constraints to Africa’s economic growth. “Limited access to finance lowers welfare and hinders the alleviation of poverty and the emergence of a middle class, while implementing monetary policy in a context of shallow markets is costly and inefficient.” The Strategy is cognizant that the demand from RMCs is high and the Bank can neither respond alone, nor try to do everything. Forging strategic alliances will therefore be essential for successful implementation.
Thus, the FSDPS aims to put in place “well-functioning financial systems that mobilize and allocate savings, supply the credit needs of economic agents, and allocate resources more efficiently while reducing intermediation costs,” says Stefan Nalletamby, AfDB’s Financial Sector Development Director.
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Major new steps to boost international cooperation against tax evasion
Governments commit to implement automatic exchange of information beginning 2017
The new OECD/G20 standard on automatic exchange of information was endorsed on 29 October 2014 by all OECD and G20 countries as well as major financial centres participating in the annual meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes in Berlin. A status report on committed and not committed jurisdictions will be presented to G20 leaders during their annual summit in Brisbane, Australia on November 15-16.
Fifty-one jurisdictions, many represented at Ministerial level, translated their commitments into action during a massive signing of a Multilateral Competent Authority Agreement that will activate automatic exchange of information, based on the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Early adopters who signed the agreement have pledged to work towards launching their first information exchanges by September 2017. Others are expected to follow in 2018.
The new Standard for Automatic Exchange of Financial Account Information in Tax Matters was recently presented by the OECD to the G20 Finance Ministers during a meeting in Cairns last September. It provides for exchange of all financial information on an annual basis, automatically. Most jurisdictions have committed to implementing this Standard on a reciprocal basis with all interested jurisdictions.
The Global Forum will establish a peer review process to ensure effective implementation of automatic exchange. Governments also agreed to raise the bar on the standard of exchange of information upon request, by including a requirement that beneficial ownership of all legal entities be available to tax authorities and exchanged with treaty partners.
The Global Forum invited developing countries to join the move towards automatic exchange of information, and a series of pilot projects will offer technical assistance to facilitate the move. Ministers and other representatives of African countries agreed to launch a new “African Initiative” to increase awareness of the merits of transparency in Africa. The project will be led by African members of the Global Forum and the Chair, in collaboration with the African Tax Administration Forum, the OECD, the World Bank Group, the Centre de Rencontres et d'Etudes des Dirigeants des Administrations Fiscales (CREDAF).
“We are making concrete progress toward the G20 objective of winning the fight against tax evasion,” OECD Secretary-General Angel Gurria said after the signing ceremony. "The fact that so many jurisdictions have agreed today to automatically exchange financial account information shows the significant change that can occur when the international community works together in a focused and ambitious manner. The world is quickly becoming a smaller place for tax cheats, and we are determined to ensure that developing countries also reap the benefits of greater financial sector transparency.” Read the speech here.
The Global Forum is the world’s largest network for international cooperation in the field of taxation and financial information exchange, gathering together 123 countries and jurisdictions on an equal footing. Peru and Croatia joined the Forum at the Berlin meeting.
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Rwanda to accelerate digital payments by joining the Better Than Cash Alliance
The Government of Rwanda has moved to accelerate its plans to transform Rwanda into a cashless economy and achieve 80 percent financial inclusion by 2017.
Rwanda’s commitment to using information and communications technology (ICT) for financial services was made as it officially joined the Better Than Cash Alliance, an initiative that works with governments, the development community, and the private sector to adopt the use of electronic payments. The Alliance provides support to those who commit to make the transition. These efforts aim to help people who do not have access to formal financial services and frequently have no option but to subsist almost entirely in an informal, cash-only economy. Living in a cash economy makes it extremely difficult to access financial services like bank accounts, save for the future, build assets, or get credit.
“We understand the crucial role ICT plays in all sectors of the economy, including finance. This is why we have endeavored to promote a cashless economy by digitizing financial transactions,” Claver Gatete, the Minister of Finance and Economic Planning said. “Today the Government conducts its business electronically, including paying salaries. We have put in place policies that encourage payment digitization and continue to support the private sector, especially financial institutions to embrace the use of ICT to champion financial inclusion. We believe that partnering with the Better Than Cash Alliance will further our ambition to transform Rwanda into a cashless economy and ensure that every Rwandan is financially included.”
The shift to electronic payments has the potential to advance financial inclusion and help people build savings while giving governments, development organizations, and companies a more cost-effective, efficient, transparent, and safer means of disbursing and collecting payments. For example, a recent report by the World Bank examines growing evidence that integrating digital payments into the economies of emerging and developing nations addresses crucial issues of broad economic growth and individual financial empowerment.
Currently, all government employees in Rwanda are paid electronically. The new announcement advances the commitment to transition all forms of government payments to electronic forms. The further digitization of Rwanda’s economy is expected to contribute to achieving the government’s financial inclusion goals. Additionally, Rwanda aims to expand the use of banking and retail transactions electronically, including in fuel stations, by merchants and customers across the country.
“We welcome Rwanda as the newest member of the Better Than Cash Alliance and commend the Government’s leadership and commitment to continue transitioning away from cash,” said Dr. Ruth Goodwin-Groen, Managing Director of the Better Than Cash Alliance. “We recognize that while the opportunities of digital payments abound, getting there takes work and we stand ready to support our members. Digitizing payments is achievable when a government articulates a clear vision, leads by example, and provides the right incentives for the private sector to do what they do best: innovate, develop infrastructure, and create products designed to succeed in the marketplace.”
Better Than Cash Alliance is hosted by the United Nations Capital Development Fund and is funded by the Bill & Melinda Gates Foundation, Citi, Ford Foundation, MasterCard, Omidyar Network, United States Agency for International Development (USAID), and Visa Inc.
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Economic Diplomacy and the Need for a New Multilateralism
By Christine Lagarde
Managing Director, International Monetary Fund
Acceptance Speech for Foreign Policy Diplomat of the Year Award, Washington, D.C., October 29, 2014
As prepared for delivery
Introduction: Diplomats and Economists
Good evening. Thank you so much, David, for your kind introduction. And let me also thank Secretary Pritzker and President Fred Hochberg for their generosity.
For almost half a century, Foreign Policy has been an indispensable voice in promoting global understanding and cooperation – in the service of diplomacy. This role has never been more important than today; a role that we are fortunate to have Foreign Policy play with such distinction under the leadership of David Rothkopf.
I am glad to say that we are on the same side in this never-ending struggle for a better and more peaceful world. Throughout its 70-year history, the IMF has also sought to promote understanding and cooperation – economic diplomacy in the service of global financial stability.
I am delighted, therefore, to accept this award as recognition of the goal that we pursue. I receive it on behalf of our membership and my colleagues at the Fund. I am proud to lead this exceptional group of public servants, who strive tirelessly to support a global economy in which all nations and people can prosper.
When one speaks of diplomacy, political issues, conflicts typically come to mind. Yet, my experience is that economic issues often lie just beneath the surface of many political disputes and weave the fabric for many political solutions. The IMF is often involved in this interplay between economics and politics.
As you know, the Fund was created in 1944 through far-sighted diplomacy, in which the United States played the leading role. As the heirs to the Bretton Woods legacy, we have every reason to claim that diplomacy is in our DNA.
The IMF’s stock in trade, of course, is economic expertise. However, we approach our work with the mindset of multilateralism: the idea that no nation can go it alone; that key policies spill over and back; that the best solutions are negotiated solutions; and that knowledge is to be shared.
This is not a new idea. But it has undergone many changes, and I believe it needs to further evolve.
Tonight, I would like to discuss our multilateralism – the past, the present, and especially the future, where a multilateralism for the 21st Century is needed.
1. Multilateralism of the Past
First, the past. In 1944, the IMF’s founders had seen a half century of devastation. To avoid the same nightmare, they broke a fundamental link between economic isolationism, economic instability, and conflict.
In their new world, economic isolation would be replaced by cooperation, economic instability by prosperity, and war by peace. In this way, economists joined forces with traditional diplomats. It was the original multilateral moment.
That we regard such cooperation as a basic necessity today testifies to the success of this new approach then, even if the implementation proved challenging.
The commitment to cooperation through the Bretton Woods system was the foundation on which a new Europe rose from the rubble and ruins of war. I experienced it for myself: between 1950 and 1995, France’s per capita GDP rose nearly fivefold; Germany’s more than sevenfold.
And beyond Europe, throughout the world in the last 70 years, there has been more economic progress for more people than at any comparable period in history.
Multilateralism has been at the heart of it all.
It supported the newly independent nations when the winds of change and decolonization blew through Africa and other parts of the developing world. When the Iron Curtain lifted, the international community lent expertise and financing to ease the transition to new market economies.
Cooperative efforts helped Latin America to emerge from its debt crisis in the ‘80s, and East Asia from its financial crisis in the ‘90s.
The same has been true in recent times: the Great Recession that began in 2008 did not become another Great Depression largely due to the bold, coordinated response from the international community – led by the G-20.
What lessons can we draw from this history? For me, a major one is that multilateralism lies behind the success of the good times and reduces the duration and intensity of the bad times.
It is the IMF’s raison d’être to promote this cooperation. We provide a unique platform for global economic dialogue; and we employ the instruments of our economic diplomacy – financing, analysis, technical assistance – to bolster confidence and galvanize action.
By design, we are expected to go into the most difficult economic situations. We are expected to be the first responders. We are expected to be the problem solvers. We may not always get it right first time, but we are always learning – and always trying to find solutions, and improve them.
To paraphrase Woodrow Wilson, our job is to:
“… make the world safe for stable growth and prosperity.”
So this is where we have been: an IMF serving the broader interests of the international community since World War II.
Where are we now? That brings me to my second point – today’s multilateralism.
2. Multilateralism of the Present
I sometimes say, “This is not your father’s IMF.” It is certainly not your father’s world either – or your mother’s! Like many of you, we are dealing with problems with no easy answers. And yet we all must find answers.
What are some of today’s key economic challenges?
First, six years after the financial crisis hit, we still face the reality of a global economy struggling to regain cruising speed. I spoke at our recent Annual Meetings of the danger of a “New Mediocre” – the combination of anemic growth and weak job creation casting a dark cloud over the future. I am encouraged that our membership strongly agreed on policies to create “New Momentum” – including through growth- and job-friendly fiscal policies, structural reforms, and appropriate infrastructure investment.
Second, as this audience knows only too well, geopolitical problems compound our economic difficulties.
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In Ukraine, for example, a young democracy is struggling to piece together an economy undermined by conflict and corruption. The IMF – once again playing the role of first responder – is providing policy and financial support to create the space for badly needed reforms, and thereby catalyze assistance from others.
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In the Middle East, much of the hope engendered by the Arab Spring has vanished – in particular through conflict in Iraq, Syria, and Libya. Yet, with our partners, the Fund is actively supporting economic reform in Jordan, Morocco, Tunisia, and Yemen, including by making available over $9 billion in financing. In Egypt and elsewhere, our work to help build policymaking capacity aims to rekindle hope, especially for the young people of that region.
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In another fragile region, West Africa, it is Ebola that threatens to unravel hard-won stability. Working with the World Bank and others, we quickly disbursed $130 million in additional support to Guinea, Liberia, and Sierra Leone – a unique feature of the Fund’s financing being that it reached those countries within a matter of days. Still, we all recognize that the international response continues to lag the spread of this devastating disease. The IMF is ready to do more.
A “mediocre” global recovery. The intense confluence of politics and economics in various “hotspots.” Humanitarian disasters. Challenges like these can only be held at bay – they can only be overcome – through working together.
Indeed, cooperation is essential because even more complex issues loom on the horizon. This brings me to my third and final theme: the need for a “New Multilateralism” for the future.
3. Future Challenges and the New Multilateralism
One thing is certain: 21st Century challenges demand global solutions.
The model of Adam Smith’s “invisible hand” – where pursuing one’s own self-interest would also serve the collective interest – requires solid institutional underpinnings, such as the rule of law, a currency, a competition watchdog, to name a few.
On the international scene, these underpinnings are more tentative. Multilateral institutions such as the UN and the IMF have provided a global framework for the cooperation of sovereign states, and they have served their purpose well.
Yet, to me it looks more and more as if Adam Smith’s model is being turned upside down.
What do I mean?
Given the high degree of interconnectedness in the modern global economy, many of the challenges we face represent a collective threat, and call for a collective response. Rather than collective good arising out of self-interested action, it is only by acting collectively that an individual country’s self-interest can be achieved.
One obvious example is climate change. Cutting carbon emissions in an individual country cannot solve the problem while others pursue unchanged or opposite policies. Average temperatures are rising and so is the risk of more volatile agricultural output, more food and water insecurity, and more frequent natural disasters. All countries are vulnerable, and all countries must act collectively to tackle the issue.
The same is true for other problems that are now becoming more visible:
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Increasing income inequality is being felt hard from the U.S. to China. Too many people feel left out, too many people feel frustrated. If not addressed, these challenges could lead to serious breakdowns in social and political cohesion.
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There is the rising demand for better economic inclusion, hampered by gender inequality suffered by an estimated 865 million women who are being held back – ironically, in economies that need new productive forces.
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There is also sheer demographics: aging populations in some regions and huge bulges of young people in others. Some numbers: there were one billion people in Africa four years ago; that number could rise to 2.7 billion by 2050. Where will all the jobs come from? For the first time in history, the world will have more over 65 year olds than 5 year olds. Who will pay the pensions?
These are sobering issues in a world that is changing in so many other ways. Global supply chains and cross-border finance draw us closer day by day. A communications revolution connects billions and transports us instantly from Tahrir Square to trading floors and back.
Meanwhile, new centrifugal forces are at work: sectarian divisions, underground operations, non-state actors, shifting centers of power. How do we conduct economic diplomacy with a multitude of voices insisting on being heard – and at 140 characters a time?
Frankly, I am not sure how we will manage all these challenges. But I am sure that we can only do it by listening to each other, dreaming together, getting real together, and working together.
What might a “new multilateralism” look like?
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It needs to build on the institutions of cooperation that have already demonstrated their efficiency, credibility and representativeness – but these institutions must progress to constantly mirror changing global dynamics.
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It needs to harness the various dimensions of global solutions through cooperation between these institutions, without division, without turf battles, but with a true sense of partnership.
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It needs to find a way to include important new networks of influence that are bringing their voices to bear on major global issues – from inequality, to inclusion, to transparency, to the environment; it needs to do so without losing its efficiency.
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It needs, above all, to instill a broader sense of “civic responsibility” on the part of all players in the modern global economy, including the private sector, and specifically financial sector players. What I am talking about here is a renewed commitment to the global public good. What I am talking about here is the ability to define and identify the mutual interest and solutions that will serve the global public good.
Conclusion: Responsibility and Commitment
In concluding, I would like to remind us all of a responsibility – and a commitment – that can only be addressed in this very city.
You may have heard this before, but please bear in mind a line by the late Richard Holbrooke:
“Diplomacy is like jazz: endless variations on a theme.”
So here it goes:
The international community has agreed to reform the IMF to increase the representation of the emerging market countries – more in line with their increased role in the global economy. The reforms would also help sustain the Fund’s capacity to meet the challenges ahead.
Once again, therefore, I would like to add my voice to that of virtually the entire IMF membership in calling upon the U.S. Congress to approve the 2010 quota and governance reforms. By this simple act of international solidarity, the U.S. will demonstrate the global leadership that it displayed so amply seventy years ago, and should continue to display.
On that note, it is fitting to recall the words of John Maynard Keynes at Bretton Woods. By constructing a new international world order at the end of World War II, he declared:
“The brotherhood of man will have become more than a phrase.”
We must avoid another “nightmare” and strive toward a better sisterhood – of man. I am a multilateralist by upbringing, conviction, and profession, and I am convinced that we cannot let those visions and expectations vanish and be squandered.
Once again, I thank you for this honor, and I look forward to working with all of you in the future.
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How to promote food security through better discipline on export restrictions?
Countries intervening to restrict their exports are not among the main causes of food insecurity of the poor in the developing world. Nevertheless, export restrictions have proved to significantly contribute to exacerbating negative effects on food security when an unexpected, rapid increase of food staple prices occurs and a food crisis develops.
Agricultural export restrictions are a policy area which remained ‘underregulated’ in the Uruguay Round agreement; current provisions are weak and largely ignored. It was not until the severe food price spike of 2007/08 that concerns about export restrictions gained visibility in on-going multilateral negotiations. A country restricting its exports in order to reduce the transmission to the domestic market of raising international prices makes prices in other countries increase further. Food security at home is pursued at the expense of food security of the poor elsewhere. As we can expect severe price spikes to occur again, having in place an improved, multilaterally agreed regulatory framework to reduce the negative effects of export restrictions on food security would certainly be useful. However, despite the widely shared concern that has emerged in recent years on the need to introduce more stringent WTO disciplines on export restrictions, so far no agreement has been reached.
The current legal framework
WTO law on export restrictions is an area of evident ‘underregulation’ or ‘regulatory deficiency’, as it neither properly defines the circumstances under which quantitative restrictions can be used, nor regulates export taxes.* This leaves countries with ample space for policy decision-making on export restrictions, a space which they do not have when it comes to restricting imports. In fact, while export restrictions are very weakly regulated, with the Uruguay Round Agreement on Agriculture (AoA) all import restrictions for agricultural goods different from tariffs had to be reverted to tariffs, all tariffs were bound and reduction commitments introduced. This means a clear asymmetry exists in how country policy interventions limiting exports and imports are treated in the WTO.
While WTO members decided not to impose any tangible constraint on their own policies restricting exports, they have forced acceding countries to accept significant limitations on their ability to do so. China, Mongolia, Russia, Saudi Arabia, Ukraine and Vietnam had to accept obligations which go beyond, to different extents, existing WTO rules. Export restrictions are often regulated in Regional Trade Agreements (RTAs), including bilateral ones, and in this case as well provisions often go well beyond those in the WTO.
The recent food crises, the policy reactions by some of the main exporters, the implications of their decisions on the food insecurity of the poor in net food-importing developing countries and the negative effects of what happened on the reputation of international markets as a reliable source of food in national food security strategies, make for a different environment with respect to the one at the time of the Uruguay Round negotiations.
Still, reaching an agreement for the introduction of a multilaterally agreed more stringent discipline on export restrictions is a particularly complex process. In the negotiations since 1999, both in the WTO and in other international fora, exporting countries have proved as strong as importing ones in defending every single square inch of their policy space.
Options to promote food security
This article presents six alternative options for an agreement to modify current disciplines on the use, on a temporary basis, of export restrictions for agricultural goods in the event of suddenly and rapidly soaring international prices. The options are presented in increasing order of ‘ambition’ in terms of their capacity to limit the policy space currently available to exporting countries. The options are additive, in the sense that, in general, not only they are not mutually exclusive, but, quite the contrary, each of them should include the relevant provisions of the less ambitious ones.
(a) Exempting from the imposition of export restrictions food purchases by international organizations to be distributed as food aid.
Starting from the lowest level of ambition, the first option is an agreement to exempt from the imposition of export restrictions and export taxes food purchased by international organizations, to be distributed on a non-commercial basis for humanitarian purposes. Less restrictive disciplines would call for the prohibition to be imposed on extraordinary export taxes only, rather than on export taxes altogether, and for it to apply only to purchases made by selected international organizations, such as the World Food Program (WFP). Were this option to be implemented, its impact on volumes traded and market prices would be marginal. However, the benefits in terms of the amount of food humanitarian organizations would be able to distribute under their relatively rigid financial constraints would be sizeable, as it would prevent the imposition of an additional cost on the purchase and distribution of food for humanitarian purposes when this is needed the most but hardest to access.
(b) Improving the enforceability of existing disciplines.
The second option considered does not modify current WTO disciplines, rather it aims at making them enforceable by clarifying some of the terms used, adopting a transparent, unambiguous language. Under this option export taxes would remain a policy instrument countries may use; only the conditions to allow the use of export restrictions different from a tax would be clarified. This is a necessary condition to make it legally possible to identify agricultural export restrictions different from an export tax contrary to Article XI of GATT 1994, and, subsequently, to challenge such restrictions within the WTO dispute settlement framework. Also, the procedures to be followed to implement an export restriction, including consultation and notification obligations, would be strengthened. Implementation rules similar to those suggested under this option are included in several RTAs.
This option would be a significant step forward with respect to the existing discipline, as it would improve the transparency and predictability of the use of export restrictions and, hence, reduce information asymmetries and transaction costs for traders and investors and the uncertainty about world markets as a source of food when this is most needed.
The impact of this option on the quantities traded and prices would be very small, as countries could always opt for an export tax instead of the now more transparent export restrictions. However, the higher institutional cost of introducing export restrictions may deter some countries from implementing export restrictions and reduce the probability of ‘panic’ policy reactions, such as the sudden introduction of an export ban.
(c) Limiting the impact of export taxes and restrictions on world markets, rather than imposing a discipline on export taxes and restrictions directly.
This option involves a completely different approach to disciplining export restrictions. Rather than tightening the discipline on export taxes and quantitative restrictions, it imposes a constraint on their effects on world markets. Current disciplines would be left unchanged (but for what is foreseen in options (a) and (b) above), but their use would be made conditional on exporting country- and product-specific constraints on the volume exported. In order to be allowed to use policies limiting exports, countries will have to maintain unchanged with respect to the recent past the share of domestic production of the specific product which is exported. This approach can be found in some of the initial negotiation proposals on agriculture post-Uruguay Round. Provisions similar to those considered here are included in the North America Free Trade Agreement (NAFTA) and in the Canada-Costa Rica and Canada-Chile RTAs. This option would make it possible for the exporter to limit the increase in the domestic price, while allowing, at the same time, domestic producers to accrue at least some of the benefits deriving from higher international prices (depending on the policy instrument used). It also has the advantage that it would not need any negotiation of the details defining the exceptional circumstances under which a country could use export restrictions.
(d) Prohibiting the use of export restrictions, other than export taxes, on exports directed towards poor net food importing countries.
This option goes beyond strengthening the existing discipline on export restrictions as it involves making illegal the use of export restrictions on staple food exports directed towards those countries who will be more severely affected, i.e. poor net food importing countries. However, under this option too – as was the case under options (a) and (b) – the use of export taxes would remain unrestricted. The provisions should include the definition of the set of poor net food importing countries whose imports cannot be subject to export restrictions, and the list of the staple foods which would be subject to the prohibition.
(e) Introducing stricter disciplines for export restrictions as well as export taxes.
The ambition of this option lies in the stricter disciplines it would impose on the use of export restrictions and on the fact that the same restrictions would now apply to export taxes. However, the provisions under this option would not go as far as imposing limitations on policies restricting exports analogous to those currently imposed on policies which restrict imports. Essentially under this option export restrictions and export taxes would be declared illegal and then exceptions defined under which this prohibition would not apply. The exceptions could relate to the countries that would be allowed to intervene to restrict their exports, the staple food products which cannot be subject to export restrictions and the trigger mechanism which would allow a country to restrict its exports. These exceptions need to be defined in a simple and transparent way, resulting in ‘automatic’ and easy to verify, legally enforceable rules. Export restrictions and taxes would now be treated equally. This approach is common to the vast majority of RTAs.
(f) Full ‘symmetry’ in regulating import and export restrictions.
The feasible option with the highest ambition is that of extending to export restrictions, mutatis mutandis, the provisions for import restrictions currently in place. These provisions should be integrated with those in options (a), (b), (c) and (e) above, as appropriate. Bindings for export taxes and the prohibition on introducing new ones are included in the accession protocols of some of the countries which became members of the WTO since the Uruguay Round as well as in many RTAs. If an agreement were to be found to conclude the Doha Round, this would certainly include revised disciplines for market access; in this case these new provisions would be those to be extended, mutatis mutandis, to export restrictions. The effectiveness of this option in expanding volumes traded and reducing price increases in the event of a price rise initially due to an exogenous shock would be substantial.
Fighting food insecurity is a complex challenge, involving numerous factors
Six possible options for a WTO agreement on export restrictions have been identified and discussed, with different levels of ambition in terms of their capacity to limit the use of temporary export restrictions aimed at preventing the transmission to the domestic market of soaring international prices.
* The key legal text regarding the discipline of export restrictions in the WTO is Article XI (General Elimination of Quantitative Restrictions) of GATT 1994; as far as export restrictions in agriculture are concerned, they are also dealt with in Article 12 (Disciplines on Export Prohibitions and Restrictions) of the 1994 Agreement on Agriculture (AoA).
Giovanni Anania is Professor in the Department of Economics, Statistics and Finance at the University of Calabria, Italy.
This article is published under Bridges Africa, Volume 3 - Number 9 by the International Centre for Trade and Sustainable Development.
This article is based on a research paper produced by ICTSD: Giovanni Anania, Agricultural Export Restrictions and the WTO: What Options do Policy-Makers Have for Promoting Food Security?, Issue Paper No. 50, 15 November 2013. This paper seeks to provide an evidence-based analysis of the likely trade, food security and development implications of various options for disciplining agricultural export restrictions.
Slowdown in emerging markets to affect growth in EAC economies
Slowing growth and deflationary pressures in emerging markets including China and other major developed economies could derail expected robust economic growth in East Africa in the coming year.
In its latest Regional Economic Outlook for Sub-Saharan Africa released last week, the International Monetary Fund projects that strong growth in the majority of sub-Saharan Africa’s economies underpinned by a robust regional expansion in 2014 and 2015.
In East Africa, real gross domestic product (GDP) growth is expected to pick up across the region led by Tanzania with a real GDP growth of 7.2 per cent in 2015, followed by Rwanda with 6.7 per cent and Kenya with 6.2 per cent respectively, according to the report. Uganda is projected at 6.3 per cent next year while Burundi is trailing with 4.8 per cent next year.
On average, the economic projections for this year are higher than registered last year, whereby Tanzania led the growth with 7.0 per cent, followed by Uganda with 5.8 per cent, Rwanda with 4.7 per cent, Kenya with 4.6 per cent and Burundi with 4.5 per cent.
Overall real GDP for sub-Saharan Africa is projected to expand from 5 per cent to 5.75 per cent in 2015.
However, this overall positive outlook could be undermined by an expected slowdown in emerging markets, particularly the ongoing rebalancing of Chinese demand towards private consumption.
These trends could soften global demand for key sub-Saharan exports, including commodities, according to the Fund. This is because during the past decade, growing links with emerging markets have not only supported the region’s expansion and economic diversification but have also increased its vulnerability to external shocks.
“Overall, slower global growth is of course less than helpful for sub-Saharan Africa. Still, it is important to note that what we are seeing is lower global growth than what was expected earlier in the year. But in relation to last year, it is not a slowdown. There should not be any extra drag for sub-Saharan Africa from this forecast. Nonetheless, a global environment that is not robust also means that growth in sub-Saharan Africa will not be much higher,” said Abebe Selassie, IMF African department deputy director said.
Mr Selassie observed that the situation in large emerging markets like China, Brazil, and India also poses risks to the region.
“I think slower growth in these countries is probably the bigger source of concern for policy makers in the region. We have seen considerable softness in commodity prices related to this, even as export volumes remain strong,” he said.
But in recent years, a number of emerging economies have begun to play a growing role in financing of infrastructure in the region. In addition, regional states have resorted to scouring international debt markets as well as negotiating for concessionary loans from friendly countries – with a focus on China, Japan, Brazil and India – due to huge recurrent expenditures, a narrow tax base and poorly developed capital markets.
The above combined with an increase in foreign direct investment makes the region vulnerable should the ongoing slowdown in emerging markets continue.
Even increased global integration makes the region more vulnerable. While rising global economic and financial ties have been a boon for the region, vulnerabilities to external shocks have increased according to the IMF report. As a result of these strengthening ties, many sub-Saharan African economies increasingly move in sync with other economies outside the region, especially China and also Europe, which remains an important trading partner.
For instance, in East Africa, Kenya is currently a major exporter of cut flowers and vegetables to the European Union. Kenya exports flowers to the EU worth Ksh46.3 billion ($537 million) and vegetables worth more than Ksh26.5 billion ($307 million) annually. The EU takes about 40 per cent of Kenya’s fresh produce exports.
The report notes that lower or higher growth in either advanced or emerging markets translates over time about one to one into lower or higher growth in sub-Saharan Africa.
“This means as growth slows down in emerging markets and only gradually strengthens in advanced economies, especially Europe, the external sector is likely to be less supportive for many sub-Saharan African countries,” the report cautions.
For instance, globally, commodity prices are projected to decline further in 2014 as aggregate demand in China is expected to fall. In addition, there are signs of better agricultural production except for coffee expected to decrease particularly in Brazil, the biggest producer.
Non fuel commodity prices are expected to continue falling in 2014 – down 1.7 per cent, from a drop of 1.2 per cent in 2013, whereas metal prices are projected to further drop in 2014 by 6.8 per cent, from a decline of 3.5 per cent and 14.3 per cent in 2013 and 2012 respectively, figures from National Bank of Rwanda show.
This week, China announced that its GDP had increased by 7.3 per cent in the third quarter, the lowest quarterly growth since the depths of the financial crisis in 2009, compared with 7.5 per cent in the previous quarter, adding to concerns that it could become a drag on global growth.
One factor that could affect some sub-Saharan African economies much more abruptly would be a reversal in the market sentiment, according to the report.
A market reversal could happen especially if trade partner growth and demand for regional exports weakens more than expected, or if investments become more sensitive to domestic vulnerabilities, according to the report.
“In such an environment countries where significant external financing needs have been increasingly filled by tapping international markets could find it difficult to continue in that way. Funding conditions would likely deteriorate with potential renewed pressures on external reserves and exchange rates forcing an immediate fiscal policy adjustment including public investment cutbacks,” the IMF report cautions.
“The demand boost from investment would be reduced, along with the positive supply effects over the longer term. This, in turn, would lower growth expectations and could further reduce investors’ appetite,” the report says.
Infrastructure deficit
The report also underscores the need for countries in the region to expand their infrastructure, where the existing gap could potentially undermine growth prospects.
“The challenge for countries like Kenya, Tanzania, Uganda, Rwanda and Ethiopia is to sustain this economic growth further. This will require addressing potential bottlenecks to growth. A good example of potential bottlenecks is infrastructure. There is a significant shortage of electricity in the region. Roads and ports are also congested in many cases. Addressing this is going to be very important going forward,” Mr Selassie said.
But the report points out that the major obstacle to addressing the continent’s infrastructure deficit does not generally appear to be a lack of financing, but rather capacity constraints in developing and implementing projects.
“Countries should seek to make the most of new financing instruments and flows by improving their absorptive capacity and removing remaining regulatory constraints, while controlling fiscal risks and maintaining debt sustainability,” the report says.
The report recommends that countries strengthen their public financial management capacity by upgrading their ability to plan, execute, and monitor public investment.
There is also a need for strengthening their project appraisal procedures, and adopting a medium-term budgetary framework that includes adequate provisions for the cost of operation and maintenance. This is in addition to exploring public-private partnerships that can be an effective tool to upgrade infrastructure.
This, however, needs to be underpinned by an appropriate institutional and legal framework, and to be carefully monitored to minimise fiscal risks, according to the report.
The report also warns that tightening financial conditions – stemming from a faster-than-expected normalisation of US monetary policy, adverse geopolitical developments, or a worsening of the countries’ fundamentals – could also result in lower and more expensive access to external funding and a scaling down of foreign direct investment.
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Obama’s Power Africa and the continent's Energy problems
Power Africa, an initiative started by President Barack Obama, looks to all resources to meet high energy demands.
The initiative looks to increase the number of people who have access to power in sub-Saharan Africa.
Lai Yahaya, team leader for President Obama’s Power Africa Senior Advisors Group, says following the Africa Leaders’ Summit, held in Washington DC, he is positive at the fact that African countries are intensifying efforts to reform and to liberalise environments.
“What Power Africa is trying to do is bringing together the support available from a number of US agencies. But in a sense really it’s just recognising the importance of power sector development,” said Yahaya to CNBC Africa.
One of the major hindrances that the continent faces is not being able to meet the energy demands of the rapidly growing population.
“The biggest challenge is ‘how do you reach rural populations?’ So it’s not just meeting the demands of the youth budge, it’s how do you meet rural populations in a way in which is cost effective for private sector operations to be able to provide electricity,” he said.
Yahaya says there is a lot of talk about various kinds of energy resources and which is best but at the end of the day the continent just needs a sustainable source of energy.
“The concern I have about some of the discussion about renewables or non-renewables or solar and various things is that. Frankly because of the demand we need to use whatever resources we have.”
Moving forward, Yahaya says that with all the new technology developments the cost of providing solar-powered energy has decrease, making it more affordable for the masses.
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Swaziland in SACU funds shocker
The ministry of finance says member states revenue shares for 2015/16 will be concluded in December after South Africa, being the manager of the pool has provided the forecast of the size of the pool for the next (2015/16) financial year and has provided the audited size of the pool for the previous year (2013/14)
Revenue receipts from the Southern African Customs Union (SACU) for the next financial year (2015/16) might drop.
They are expected to fall below the E7.4 billion that the government received during the current financial year, the ministry of finance has reported.
This could spell disaster for the country as it is likely to relive challenges the country faced in 2011 when it had to freeze salary increases for it to cope with the cash-flow problems the country faced.
The possible SACU money drop is according to the second quarter performance report for the ministry tabled by Minister Martin Dlamini in Parliament on Monday.
The second quarter of the government financial year covers three months, from July to September.
The major cause for concern is the performance of the economy of South Africa, being the major contributor into the Southern African Customs Union revenue pool. The ministry of finance says member states revenue shares for 2015/16 will be concluded in December after South Africa, being the manager of the pool has provided the forecast of the size of the pool for the next (2015/16) financial year and has provided the audited size of the pool for the previous year (2013/14).
The ministry further stated that the modest growth of the South African economy of 1.9 percent in 2013 from 2.5 perecnt in 2012, the protracted mining sector strikes and a decline in that country’s manufacturing sector output remained a cause for concern as they may translate to a decline in extra-SACU imports. Such could lead to a reduction in the size of the revenue pool.
The ministry further noted that recent estimates put the 2014 South African Growth Domestic Product (GDP) growth at 1.4 percent and if the audited size of the revenue pool is below the forecast which was provided in 2012, then, the country would be required to pay more money back into the pool.
It says such a situation could further diminish revenue for the next financial year (2015/16).
“Considering all the above factors, particularly the level of intra-SACU imports for Swaziland and the economic performance of the South African economy, SACU receipts for the country for 2015/16 might fall below the 2014/15 level of E7.4billion,” the ministry reported.
In September, finance ministers from the union’s member states participated in the SACU Task Team on Trade Data reconciliation.
The purpose of the meeting was to finalise the process of reconciling intra-SACU trade data for 2012/13 which would be used to determine their revenue shares for the next financial year (2015/16).
In the meeting, member states further presented and confirmed their GDP and population data for 2012, in line with the SACU Agreement which requires member states to submit their data GDP, population and intra SACU imports and exports for the most recent financial year for purposes of sharing.
This finalised intra-SACU trade data for 2012/13, GDP and population levels would be used to determine revenue shares for 2015/16.
Revenue receipts from SACU finance about 60 percent of the national budget.
Last week, South Africa’s Finance Minister Nhlanhla Nene announced that his country’s economic growth was much slower than anticipated.
According to a report from SAPA, the minister said the GDP growth was expected to be half of what was forecast in February, at 1.4 percent. Nene warned that South Africa has reached an economic turning point.
He announced firm measures to check South Africa’s worsening debt outlook, warning that the country had reached an economic turning point. Nene said GDP growth was now anticipated to be 1.4 percent this year (2014/15), almost half of the 2.7 percent forecast in February. He said growth was expected to reach three percent in 2017.
Expenditures growing twice more than revenue
Government expenditures are growing more than twice as fast as revenues.
This has been the trend from the last financial year, 2013/14 and the situation is still the same even in this financial year.
During the 2013/14 financial year, revenue grew around E700 million while expenditures increased by E2.3billion. This financial year, expenditure is projected to increase by E2.2 billion while revenues are projected to grow by only El billion. The finance ministry said this is despite an outstanding revenue collection performance on the part of the Swaziland Revenue Authority (SRA). It said the recent expenditure-revenue divergence will affect available financing over the medium term. The finance ministry further stated that line ministries are failing to mitigate high expenditures in the medium to long term. However, the ministry is positive that in the next two quarters, budget execution would materialise as planned.
It says over-expenditures related to the wage bill and other unbudgeted decisions may or may not be contained under the existing 2014/15 budget.
The intra-SACU trade data for the countries was presented as follows:
Member states’ presentations of GDP and Population levels:
What it would mean if SACU money drops
It would be not the first time Swaziland is faced with such woes with the SACU money drop.
Swaziland’s SACU receipts dropped to E1.9billion in 2011. This followed a global economic meltdown which hit the world hard around 2010. Swaziland encountered serious financial challenges then.
Recap of 2011 challenges
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Government could not cope with some of its responsibilities. It struggled to pay civil servants’ salaries which accounted for over 40% of its expenditure.
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In light of the low SACU revenue, the International Monetary Fund (IMF) proposed various fiscal adjustment strategies for the government.
One of the key recommendations for Swaziland was to reduce the huge public sector wage bill.
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Government announced that 7 000 public service jobs would be cut in 2011 a move that was expected to save money but also came with fears that such could compromise public service delivery and further contribute to an unemployment rate that already stood at 40 percent at the time.
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Government suspended new recruitments into the civil service, froze salary increases and short-term borrowing.
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The IMF predicted that if government did nothing to confront its economic problems, public debt would hike from 19 percent of GDP in 2010 to 31 percent in 2011, eventually constituting 75 percent of GDP by 2015. However, the public debt stock currently stands at E6.9billion, which amounts to 16.7 percent of GDP.
SD granted E8m from COMESA
Swaziland has been granted E8million for funding of national programmes related to regional integration.
However, the ministry of finance is required to submit projects that are regional integration related to be considered for the funding.
While the country gets the funding offer, it has still not been able to adopt any COMESA harmosined standards.
The ministry of finance says this is due to inconsistency in the procedures for harmonisation between COMESA and the Southern African Development Community (SADC) as Swaziland is affiliated to both regional organisations.
It says the situation has historically put the country in a position where it can only focus on standards harmo0nisation under SADC given her deeper integration within SADC and her stronger industrial and economic ties to South Africa.
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Minister pours cold water on World Bank Ease of Doing Business report
The government has dismissed a new report by the World Bank showing that Kenya has made a slight improvement in its business regulatory environment.
The 2015 Ease of Doing Business index report fails to capture recent developments, according to Industrialisation and Enterprise Development Cabinet Secretary Adan Mohamed.
The study was released by the global lender on Tuesday and shows that the country edged to position 136 this year from last year’s position 137 in the global competitiveness ranking.
Mr Mohamed said on Wednesday that the survey did not include reforms undertaken by the government in the last one year and, therefore, did not reflect the current situation in the country.
“These latest results do not capture the reforms undertaken by the government in the last 12 months. We see an improving business climate as a result of the reforms that various government agencies have undertaken, but more needs to be done,” Mr Mohamed said.
The Kenya Private Sector Alliance (Kepsa) backed the government’s position.
The minister cited the reduction of the period taken to register a company from 32 days a year ago to a day, the introduction of an electronic tax payment system (iTax) by the Kenya Revenue Authority and decentralisation of Huduma Centres as some of the initiatives by the government to improve the business environment but which were omitted in the survey.
NOT REPRESENTATIVE
At the meeting, Kepsa said the survey included responses from as low as two participants in some categories, a situation they said was not representative of the entire country.
“Kenya has recently become the leading destination for global-scale investments with major companies choosing to locate their African operations through their headquarters in the country, an achievement we are proud of,” Kepsa chief executive Carole Kariuki said.
The government now plans to carry out periodic surveys to audit progress of reforms in business regulation.
Mr Mohamed said a team of 40 individuals drawn from government agencies, the private sector and leading business schools in the country had been identified to carry out the exercise.
“We are optimistic that going forward and given the Business Environment Delivery Unit launched recently, we will see our country ranked even higher in coming years,” he said.
The World Bank report shows that sub-Saharan Africa had the highest number of reforms last year with 74 per cent of the region’s economies improving their business regulatory environment for local entrepreneurs.
In the East Africa, Rwanda and Burundi were cited as having made significant multiple improvements in the past five years, alongside Cape Verde and Ivory Coast.
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The Continental Free Trade Area: What’s going on?
Regional integration has been a core element of African countries’ development strategies since independence.
The Africa-wide development agenda, as championed by the African Union (AU), is based on regional integration and the formation of an African Economic Community (AEC). This was laid out in the 1980 Lagos Plan of Action for the Economic Development of Africa and the Abuja Treaty of 1991.
The Africa regional integration roadmap considers the Regional Economic Communities (RECs) as the building blocks of the AEC. The AEC is to be formed in six phases over 34 years, as outlined below:
At its 18th Ordinary Session in January 2012 in Addis Ababa, on the theme “Boosting Intra-African Trade,” the Assembly of Heads of State and Government of the AU adopted a decision and a declaration that reflected the strong political commitment of African leaders to accelerate and deepen the continent’s market integration. The Heads of State and Government agreed on a roadmap for establishing a Continental Free Trade Area (CFTA) by the indicative date of 2017.
As highlighted in the roadmap, the CFTA is set to build on the Tripartite FTA negotiations, which would create a free trade area among the 26 countries of the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC). Since the formal launch of the negotiations in 2011, significant progress has been made, and leaders have expressed confidence that the negotiations will be successfully concluded by the end of 2014, with the agreement to be fully implemented by 2016. The 26 Tripartite countries represent close to 60 percent of the AU’s GDP and population, and an FTA among them would constitute a fundamental building block for the CFTA.
The 18th AU Summit in early 2012 opened the discussions on a second bloc of combined RECs (ECOWAS, ECCAS, CEN-SAD, and AMU) to emulate the TFTA. Initial consultations took place in April 2013, and the first negotiation meeting on the second bloc occurred in December 2013. A formal Memorandum of Understanding outlining how decisions will be made and establishing coordination mechanisms still needs to be signed, along with the launching of work on technical studies and key institutional preparatory work on the formation of this second bloc.
Rationale for a CFTA
During its 19th Ordinary Session in July 2012, the AU adopted a decision that highlighted the gains from the CFTA for intra-African trade, through the High-Level African Trade Committee and the consultations of the Committee of Seven Heads of State and Government, which addresses the challenges of intra-African trade, infrastructure and productive capacities.
The creation of a single continental market for goods and services, with free movement of business people and investments, would help bring closer the Continental Customs Union and the African Common Market envisaged in phases 4 and 5 and turn the 54 single African economies into a more coherent, larger market. The larger, more viable economic space would allow African markets to function better and promote competition, as well as resolve the challenge of multiple and overlapping RECs, helping thereby to boost inter-REC trade. Moreover, the sheer size of the single market would provide a more conducive environment for industrial diversification and regional complementarities than what is viable under existing individual country approaches to development.
The United Nations Economic Commission for Africa (UNECA) calculates that the CFTA could increase intra-African trade by as much as $35 billion per year, or 52 percent above the baseline, by 2022. Imports from outside of the continent would decrease by $10 billion per year, and agricultural and industrial exports would increase by $4 billion (7 percent) and $21 billion (5 percent) above the baseline, respectively. If coupled with complimentary trade facilitation measures to boost the speed and reduce the cost of customs procedures and port handling, the share of intra-African trade would more than double over the baseline, to 22 percent of total trade by 2022.
Looking at the potential impact on the EAC for instance, one can see the potential for significant gains from a CFTA. Despite significant increases in intra-community trade within the EAC, the levels of trade between the EAC and other African countries, particularly those outside of the Tripartite area, remains limited. There has been renewed interest in expanding trade and investment links further afield. For example, Nigeria – which officially became the largest economy in Africa in 2014 – and the ECOWAS sub-region could present a significant export market for EAC businesses. In 2012, EAC exports to ECOWAS amounted to $132 million, for a market of close to 300 million people. West Africa currently relies on extra-African imports of coffee and tea, and the EAC could be in a position to tap into this market, if high tariffs and weak transport links can be addressed. In May 2014, Kenya and Nigeria signed trade pacts aimed at deepening trade ties, following high-level political meetings and several large Nigerian business delegation visits to East Africa. Trade with neighbouring Central African States (ECCAS) has shown significant growth, with exports to the region expanding by close to 40 percent between 2010 and 2012, from $1.2 billion to almost $1.7 billion. The CFTA would further open doors to West and Central Africa, through the reduction and eventual elimination of tariffs and improved trade facilitation and infrastructure.
Current Status of the CFTA
The January 2014 AU Heads of State meeting reaffirmed the commitment to the CFTA roadmap, and highlighted the need to launch the CFTA negotiations in 2015.
The second meeting of the Continental Task Force on the CFTA took place in Addis Ababa in early April 2014. The meeting put forward draft objectives and guiding principles for negotiating the CFTA, which were presented to the Extraordinary Session of the Conference of AU Ministers of Trade (CAMOT) in Addis Ababa between April 23 and 28 this year. The session was attended by officials from member states, six RECs (including the EAC), and private sector organisations (East African Buisness Council, CBC, Federation of West African Chambers of Commerce).
Key recommendations from the ministers included the following:
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Further discussions on and refining of the Draft Objectives and Principles and the Draft Institutional Arrangements for the CFTA, should be undertaken and presented to the 9thSession of CAMOT (scheduled for early December 2014).
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The AU Commission should prepare Draft Terms of Reference of the CFTA-Negotiating Forum based on best practices in the RECs and/or the Tripartite FTA and submit a draft for discussion at the next meeting of senior trade officials.
During the June AU Heads of State Meeting in Malabo, the High Level African Trade Committee (HATC) called on member states to maintain the momentum in the CFTA time table, and authorised trade ministers to meet as often as needed to ensure the launch remains on track.
The Role of RECs
Even though member states have the sole mandate to negotiate and agree to international trade agreements, the RECs can play an important role in facilitating the negotiations and building national-level capacity and ownership, especially if the CFTA structure is to build on the Tripartite FTA as well as ECOWAS and ECCAS FTAs (CFTA acquis).
In terms of the implementation strategy for the broader Boosting Intra-African Trade (BIAT) initiative, the April Extraordinary Session of the CAMOT recommended the following:
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The AU Commission, REC Secretariats and UNECA should continue their consultations with all Member States in order to ensure ownership;
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There is need for more coordination between AUC and RECs including the exchange of information on integration so that regional processes will feed into continental processes;
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Member States and REC Secretariats should designate national and regional focal points and establish the technical working groups for the BIAT/CFTA in line with the July 2012 Summit Decision.
Opportunities and challenges
Negotiating an agreement of this magnitude will be an enormous undertaking, and will require the political will of leaders across the continent. Important issues to be considered include:
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The AU includes many smaller least-developed countries, as well as economic powerhouses such as Nigeria and South Africa. It will be important that the CFTA negotiating framework allows for all member states to effectively participate and the negotiations reflect the interests of the poorest countries on the continent. Capacity building on the key technical issues will be a vital component to ensure all countries can effectively engage.
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The TFTA negotiations included two phases, the first covering tariff liberalisation, rules of origin, customs procedures and simplification of customs documentation, transit procedures, non-tariff barriers, trade remedies and other technical barriers to trade and dispute resolution, and the second covering trade in services, facilitating movement of business people, competition policy and intellectual property. It may be more practical for the CFTA to cover all of these areas from the get-go, to conform to modern FTA structures.
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Constructive engagement with the private sector and civil society will be vital to generate the momentum to drive the process forward. The private sector must be engaged from the start, including via national and regional chambers of commerce, to understand the process and potential economic benefits from the agreement. In November 2013, the Pan-African Chamber of Commerce and Industry (PACCI), representing 35 national chambers, signed a Memorandum of Understanding with the African Union outlining its support to the CFTA process and highlighting the need to engage with the business community.
The way forward
The meeting of trade ministers in December will be a critical milestone as the AU Commission will present key negotiating principles for consideration prior to the January 2015 High Level African Trade Committee, currently chaired by the President of Ghana, John Dramani Mahama.
To ensure the successful launch of the negotiations by June 2015, there will be a need for further thinking on the key technical issues and structure for the negotiations, as well as a concerted drive to engage with the private sector and the public at large across the continent to ensure this will not be just another Addis-driven “top-down” political exercise.
Ilmari Soininen is a senior consultant with Saana Consulting and a grant officer with the DFID Trade Advocacy Fund.
This article is published under Bridges Africa, Volume 3 - Number 9 by the International Centre for Trade and Sustainable Development.
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Africa still attractive despite challenges
The confidence index for Africa among business leaders has remained unchanged over the third quarter of 2014, according to YPO Global Pulse.
The Young Presidents’ Organisation (YPO) Global Pulse Confidence Index for Africa released on Tuesday puts Africa at 61.9 points despite the Ebola outbreak that is rampaging West African states.
According to Paul Kavuma, CEO at Catalyst Principal Partners, business leaders in Africa maintained a cautious optimism.
“Any sort of confidence rating over 60 per cent still shows strong confidence and optimism in the economy. So generally Africa although it remains stagnant from one perspective, it is actually stagnant but at a high level and while it may have been stagnant because there are some economics that have been under more pressure while others have been really racing well and doing extremely well,” Kavuma said in a statement.
Slight alterations were seen in Africa’s one year outlooks for sales and capital spending. Employment confidence rose marginally by one-tenth of a point to 57.4.
“While there were increased geopolitical risks in the third quarter coming from both inside and outside the continent, they are not yet expected to be long-lived enough to counteract the economic tailwinds of infrastructure investment and strengthening services sector,” Paul Berman chair at YPO’s Africa region said in a statement.
The quarterly electronic survey conducted in the first two weeks of October with 2,431 CEO’s across the globe, including 152 in Africa saw variations in confidence at the country level. South Africa, the highest weighting in the index shaved off 1.3 points to read at 63.3 points while Africa biggest economy, Nigeria, rose marginally by 0.4 points to 56.7. Meanwhile, Kenya, East Africa’s largest economy climbed 3.7 poijnts to 68.7 over the third quarter.
“If you look at the macro environments, it is improving. We [East Africa] have got better governance, better accountability, more investment in infrastructure, better provision of services and the business community therefore is responding whereas if you look at our economy in East Africa 20 years we probably had very export orientated economy,” Kavuma explained.
Meanwhile globally, the YPO confidence index dropped by 0.8 points. Confidence in Asia declined by 1.8 points, Australia dipped 1.5 points, Canada shaved off 0.7 points despite it being the world most upbeat region, European Union was down 2.5 points and the United States also down by 0.6 points.
Nonetheless, the Middle East and North Africa were up with a reading of 65.8 points.
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Delays in mega projects bleed the nation
Three road projects, two dams and one hospital financed with public money have run short of time and price, consuming far more money than originally designed, hence pressure on public coffers, a new survey discovered.
The Adiremet-Dejen Dansha, Azezo-Gorgora, Mhal Meda-Alem Ketema road projects, the Ribb and Tendaho Kessem irrigation dam projects, as well as the Jimma University Teaching & Referral Hospital have taken time beyond original schedule and budgets, according to the report. These were half of the 16 government financed projects found to be failing to meet budget both in time and cost, Construction Sector Transparency Initiative (CoST) Ethiopia said.
CoST is a global initiative started in South Africa and the United Kingdom in October 2012, with the support of the World Bank. Ethiopia is one of the five African countries covered In the Initiative. Guatemala, the Philippines, and Vietnam are the other countries where CoST looks at major roads, water and building projects and their procuring entities as well as the way in which procurements are carried out.
“The aim of these surveys is to guarantee that government entities engaged in the construction of large projects have a transparent procuring system,” said Eyasu Yemer, country manager at CoST Ethiopia.
Close to 25 projects in Ethiopia – from roads to education, water and health sectors – were under the watchful eyes of CoST during its pilot phase five years ago before the official launch in 2012. It found at the time that “the feasibility and design stage as well as bid evaluation process and contract implementations,” are found to be a major cause of concern, according to CoST.
Its latest report was a result of its second scrutiny on Ethiopia, focusing on 16 projects. The findings were tabled two weeks ago to officials from the Federal Ethics & Anti-Corruption Commission (FEACC) and the construction as well as procurement agencies at the Elilly Hotel, on Guinea Conakry Street, near the United Nations compound in Kazanchis area.
The second phase of Adiremet-Dejena-Dansha project, a 97Km road construction in northwestern regions of Tigray Regional State, was reckoned to be finalised in February 2012. It was only three fourth of the projects that came to finalisation this month. The price of time lag on this has cost the federal roads authority an additional 274 million Br from the originally projected cost. Lack of transparency and prolonged procurement, design modification as well as limited capacity of the contractor, are attributed as major problems, according to the report.
Contracted out to the Chinese Hunan Huanda Road & Bridge Corporation (HHRBC), this road will connect, upon completion, areas in the Tigray Regional State to the Gondar-Humera road at Dansha Town.
Another project, a 72Km road from Mehal Meda to Alem Ketema, undertaken by Sunshine Construction Plc, remains under construction, although its deadline passed in September 2014, after three years of work. With a budget of 802 million Br, the project was only 30pc completed during site inspection by COST-Ethiopia in June 2014.
The delay was caused due to change in the first design, which took a year and a half, according to Samuel Tafesse, chairman of Sunshine Construction. Nonetheless, completion is now expected in February 2016, he told Fortune.
The construction of Ribb Irrigation Dam in South Gonder, in the Amhara Regional State, was projected to cost 1.3 billion Br upon completion two years ago. A redesign work carried out in October 2007 led to price escalation that nearly doubled the cost, which the Ministry of Water, Energy & Irrigation (MoWEI) hopes would develop 20,000ha of farm land. The project was 62pc complete in June 2014.
“We understand that there is a delay in the time of completion on these specific projects and a cost overrun,” said Bezuneh Tolcha, communication director at the Ministry. “This came about because of machinery and human resource shortages with the contractors.
The contractors are the state owned Water Works Design & Supervision Enterprise (WWDSE) and Water Works Construction Enterprise (WWCE).
Atakilt Teka, chief executive officer of WWCE, blames outdated cost valuation conducted in 2005.
“This in return made us short in finance, of which machinery could neither be bought nor rented,” Atakilt told Fortune. “There was also a shortage of inputs such as cement; we are running the project at a Negative cost.”
The response from the federal agencies responsible for these projects is quite cautious.
“We are yet to find out the details of the findings,” Samson Wendimu, communications manager of the Ethiopian Roads Authority (ERA), told Fortune. “We have already begun working with CoST-Ethiopia. We welcome their recommendations though.”
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Integration: Rwanda back to ECCAS
Since 2010, Rwanda withdrew itself from the Economic Community of Central African States (ECCAS). This absence within the biggest grouping of Central Africa will be for short-term according to the Rwandan Minister of Foreign Affairs. Participating on 27th October 2014 in a military operation including troops coming from eight countries of the community, Louise Mushikiwabo announced the return of his country into the big family.
“Rwanda is henceforth a country very far from tragedy (genocide of 1994), that stabilized itself and is ready to contribute to ECCAS, so at the next ECCAS summit that is going to take place in a few weeks, Rwanda is going to reinstate this organization”, indicated the Minister who explained the withdrawal of his country by the financial crisis that has shaken Rwanda since the genocide of 1994.
“We suspended our participation because, since the genocide of 1994, Rwanda has been a country in reconstruction. Thus, we thought that we could not completely contribute to ECCAS”, specified Louise Mushikiwabo.
Created in 1984, ECCAS has for mission “promotion and strengthening of harmonious cooperation and dynamic, well-balanced and self-maintained development in all domains of economic and social activity, particularly in the domains of industry, transport and communications, energy, agriculture, natural resources, business, customs, monetary and financial questions, human resources, tourism, education, culture, science and technology and movement of people in order to realize collective autonomy, raise the standard of living of populations …”
It includes at present ten countries: Angola, Burundi, Cameroon, Central Republic of Africa, Congo, Gabon, Equatorial Guinea, Democratic Republic of Congo, Sao Tome and Principe and Chad.