The East African Community member states face an uphill task in meeting key economic convergence targets, which seek to harmonise growth and budgeting in the region, new data shows.

The new convergence targets, which must be met by 2014, a year before the scheduled implementation of the EAC monetary Union, require members states to maintain annual GDP rates of seven per cent, budget deficits of less than five per cent per year excluding grants and minimum foreign reserves cover equivalent to six months of imports.

The targets also set an annual inflation rate of less than five per cent and national savings rate of more than 20 per cent of gross domestic product (GDP) per year. Members are also expected to have achieved stable exchange rates, maintenance of market based interest rate regimes and implementation of twenty five core banking principles required for harmonisation of bank supervision practices.

Though convergence targets on quality of bank supervision practices are not quantified, visible progress has apparently been registered in harmonisation of minimum capital requirements, enforcement of high liquidity ratios and reduction of non-performing loans. Non-performing loan ratios in EAC member states are estimated at less than 15 per cent in respective banking sectors.

However, limited access to credit, which is partly driven by high interest rates has constrained the expansion of banking services among the poor. Faced with narrow tax bases and high revenue losses driven by corruption, most of the EAC member states are likely to miss the five per cent budget deficit target, a near repeat of the dismal results experienced under the previous target of six per cent, according to findings compiled by Uganda’s Economic Policy Research Centre (EPRC), a policy think tank based at Makerere University.

Although Kenya’s tax to GDP ratio remains the highest in the region at 22 per cent, while Uganda has the lowest tax to GDP ratio of 12.5 per cent, both these figures fall below the sub-Saharan average of 24 per cent — a clear indicator of minimal local resources.
“Despite fears linked to economic integration, the steep targets are expected to create more resilient economies capable of withstanding future external shocks during tough global conditions,” said Jared Osoro senior research economist at the East African Development Bank in Kampala.

Weak economic forecasts within several member states could hamper the achievement of the high growth target.

Currently, most of the member states are confronted with growth projections of less than 5 per cent this year, according to International Monetary Fund statistics, a situation that reflects weak potential in meeting the high growth targets.

Under the previous target regime, Uganda and Rwanda fared better than their peers while Burundi fell below the mark for the entire assessment period.

While Burundi failed to meet the previous target of six per cent, while other states failed to beat the deficit target in 2009 and 2010, a reflection of serious fiscal challenges within the region.
By close of 2010, Burundi’s budget deficit to GDP excluding grants stood at 15.6 per cent, while Uganda, Kenya and Rwanda’s deficit ratios were estimated at 7.9 per cent, 8.8 per cent and 13.7 per cent respectively, according to statistics obtained from the EAC secretariat. Tanzania’s budget deficit ratio in the same period was estimated at 10 per cent. Further fluctuations in budget deficits could also ignite tensions over sovereignty rights enjoyed by poorer member states.

“Whenever economic performance among member states remains uneven, then bigger economies will be obliged to share resources with smaller ones and this sometimes raises a lot of sensitive sovereignty questions that disrupt regional integration. Entrenched economic imbalances among member states in regional blocs could eventually kill the monetary union in a manner similar to what is happening in the European Union where countries with smaller tax bases like Greece have proved a nightmare against the future of the European bloc,” said Annette Kuteesa, a Senior Research Fellow at EPRC.

Whereas the GDP growth rate was kept at more than seven per cent per year, weak economic forecasts within several member states could hamper achievement of the steep growth target. Currently, most of the member states are confronted with growth projections of less than 5 per cent this year, according to International Monetary Fund (IMF) statistics, a situation that reflects weak potential in meeting high growth targets. Under the previous target regime, Uganda and Rwanda fared better than their peers while Burundi fell below the mark for the entire assessment period.