Tanzania and Burundi have retained the highest number of restrictions to cross-border trade and flow of foreign direct investment in the East African region, a new assessment of the bloc shows.

This is affecting the free movement of capital, services and goods, and adding to the cost of doing business in the region, notes the scorecard released on Tuesday.

The East African Common Market Score Card 2014: Tracking EAC Compliance in the Movement of Capital, Services and Goods, reviews 683 laws and regulations, focusing on the level of conformity by each partner state to the Common Market Protocol that came into force in July 2010.

EAC Secretary General Richard Sezibera said this review is meant to foster peer learning and facilitate the adoption of best practices in the region.

“This will strengthen the regional market, grow the private sector and deliver benefits to consumers,” said Dr Sezibera.

Since the Common Market Protocol was implemented, Rwanda, Tanzania, and Uganda have introduced at least 10 restrictions on the movement of capital. In services, several new restrictions have been introduced or carried over from older laws.

And for the case of goods, since the enactment of the Customs Union Protocol on January 1, 2005, 51 non-tariff barriers (NTBs) arising from regulatory measures by governments were identified between 2008 and June 2013.

While the EAC partner states had in principle agreed to remove NTBs by December 2012, in the absence of a legally binding framework, action has depended largely on the willingness of countries.

READ: Cost of doing business in EA could come down as non-tariff barriers reduce

As a result, only two out of the 20 capital operations in the region are free of restrictions. These are external borrowing by residents and repatriation of proceeds from sale of assets. All other 18 operations have at least one partner state restricting the operation.

Kenya, which has 17 unrestricted operations, makes it easier for capital to move across the bloc. Burundi and Tanzania have only four unrestricted operations.

As a result, the East African partner states are still lagging behind in implementing the Common Market Protocol, just one-and-a-half years away from the deadline, mid next year.

Permanent Secretary at Tanzania’s Ministry of EAC Co-operation Joyce Mapunjo, pledged to review the laws within a year to conform to the EAC Common Market Protocol regime.

“Although changing a law in Tanzania is a lengthy process, one reason the country seems to be lagging behind others in aligning its laws with those of EAC Treaty, the process has started,” said Ms Mapunjo.

Tanzania embarked on amending four key laws in 2011 — land, labour and immigration and general business — to comply with the EAC Common Market Protocol.

Asheri Wimile, a member of the Tanzania Legal and Institutional Reforms Taskforce, is on record as saying that some of the laws on trading services will create a conducive environment for East African banks to extend their wings to Tanzania.

“For instance, the provisions favouring Tanzanian banks vis a vis other countries’ banks will be extended to East Africans to make the country more attractive for financial institutions,” he said.

While Article 24 of the Common Market Protocol prohibits partner states from introducing new restrictions on the movement of capital and payments connected with such movement, Article 25 offers a window.

It allows countries to restrict the movement of capital for reasons of prudential supervision, public policy, money laundering, and financial sanctions agreed to by partner states. Countries must, however, notify the EAC Secretariat and other partner states, and furnish proof that a restriction was reasonable and justified.

READ: Money laundering a key threat to EA financial systems

Bad for business

Business executives said besides delaying the region’s journey to full integration, the restrictions have also exposed the nationalistic biases that continue to haunt the bloc.

Firms have cited several forms of discrimination such as different fees charged for transactions and government services, ceilings on the value of transactions, limits on the type and length of projects for service providers, and higher taxes for foreign firms.

“Some restrictions remain during the life of the investment, favouring domestic investors. Uganda, for example, reserves a set of incentives available only to domestic investors,” said Andrew Luzze, the executive director of the East African Business Council.

“Capital controls, on the other hand, inhibit some residents from benefiting from the increased investment opportunities in the EAC that come with financial integration.”

The scorecard, developed over a period of 18 months, cites Tanzania, where the central bank issued a Foreign Exchange Circular in 1998 that allows citizens to acquire, sell or transfer to any person within or outside the country any security or coupon on which capital money, dividends or interest are paid in foreign currency, but only if the security or coupon was bought solely using externally acquired funds, and that the Bank of Tanzania must be notified.

Burundi’s Foreign Exchange Regulations issued in 2010 require residents to obtain central bank approval to buy foreign shares or securities, lend or invest abroad.

Foreigners in Tanzania are allowed to participate in the local stockmarket up to 60 per cent of shares of primary or secondary issues.  Kenya allows them to purchase a maximum of 75 per cent of shares, and defines a local investor as a citizen of the EAC.

There are no restrictions on non-residents purchasing primary or secondary issues in the stockmarket in Uganda and Rwanda.

The scorecard also indicates that while all five countries in the region have no restrictions on inward direct investment, some have restrictions on outward direct investment.

Tanzania does not allow outward direct investment, Kenyans and Ugandans are free to invest abroad but in Rwanda and Burundi, citizens require the central bank’s approval.

By Christabel Ligami and Adam Ihucha