Uganda's President Yoweri Museveni (C) arrives at Munyonyo resort Hotel in Kampala on Nov. 30, to attend the 15th Ordinary Summit of the East African Community Heads of State. (ISAAC KASAMANI/AFP/Getty Images)
Summary
Kenya is positioning itself to become the dominant power in the emerging East African Community, which includes Uganda, Tanzania, Rwanda and Burundi in addition to Kenya itself. On Nov. 30, the heads of state of the five member countries signed a monetary union protocol, the third of four steps that could lead to a politically unified East African Federation. As a regional export and financial hub, Kenya has been fundamental to this process. However, Nairobi wants to reinforce its position as a gateway into East Africa and wield greater political power within the community -- and ultimately, the federation.
Analysis
For the East African Community, a common currency makes sense, especially for Uganda and Kenya. Both countries are net importers, but there is an imbalance between them. Kenya is the dominant regional exporter, while Uganda is the dominant regional importer. This means that relative to one another, the Kenyan shilling consistently strengthens against the Ugandan shilling, making Kenyan goods more expensive in Uganda.
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In addition, Uganda and its southern neighbor Tanzania are emerging as potentially large oil and natural gas producers, putting their currencies at risk of the "Dutch disease" phenomenon, in which rapid foreign investment causes a dramatic appreciation of a country's currency. This would undermine both countries' status as PC-16 states and potential beneficiaries of investment in low-end manufacturing. The adoption of a common currency would help mitigate these risks. Of course, as seen in the eurozone, a single currency makes it difficult for individual countries to deal with their own problems, since monetary policy will become the responsibility of the East African Central Bank.
The East African monetary union will be slow to develop. Implementation will take place over the next 10 years as its member states harmonize their financial systems and institute the necessary reforms to support a common currency. This will not be an easy process; the five countries have dramatically different fiscal and pecuniary policies. For instance, the monetary union protocol ratified Nov. 30 requires that signatories maintain a 25 percent tax-to-gross domestic product ratio, but Uganda's and Rwanda's ratios are only half that. Because many businesses and commercial dealings in these areas are informal, the two countries will need to implement institutional reforms in order to collect more taxes.
Kenya's Status in the Community
The heart of the East African Community is the dynamic relationship between Uganda and Kenya. The cores of the two countries are adjacent to one another: Kenya's nucleus lies in its western highlands, while Uganda's is on the northern shores of Lake Victoria. This means that the two nations are inherently linked and form a somewhat unified economy. While some commercial sectors overlap, the two countries complement each other. Uganda's traditional economy is agricultural, while Kenya strives to be the region's industrial and manufacturing hub. The East African Community's other members are only an extension of this relationship. The most visible sign of this exclusive connection has been further infrastructure development that primarily connects Uganda to Kenya.
Uganda is Kenya's largest export partner, receiving more goods and commodities from its neighbor than to the rest of the bloc combined. By comparison, Tanzania's total exports to Uganda were a mere $103 million in 2012, or less than 2 percent of Kenya's equivalent exports for the same period. The relationship between Uganda and Kenya will only deepen as transportation costs dwindle as a result of improving intermodal infrastructure. This improved connectivity, along with Uganda's emergence as a likely focal point for oil and as a potential exporter of petroleum products, will see Uganda's exports to Kenya increase substantially.
As well as increasing opportunities for trade, improved fiscal integration will enhance Nairobi's status as a financial nexus and gateway to the East African Community. Compared to its regional neighbors, Kenya has by far the most developed financial and banking system. Indeed, the private Kenya Commercial Bank is one of Africa's leading investment institutions and a significant financier to Tanzania and Rwanda. Kenya's banks are also expanding their physical presence in neighboring countries, and international banks use Nairobi as a base from which they provide services to the East African region. The Nairobi Securities Exchange is easily the largest exchange in the region, ensuring that as the rest of the East African Community members develop their financial systems, Kenya will continue to hold a key position among them.
Geopolitical Rivals: Tanzania and Kenya
Kenya's emergence as the most powerful exporter in the region, with an expansive transportation network that provides vital supply chains into the Great Lakes region of Africa, has not gone unnoticed. Coupled with Nairobi's primacy as the hub of the regional financial industry, this has made Tanzania, Kenya's natural rival in the East African Community, uneasy. Tanzania harbors the same aspirations as Kenya but does not have the geographic advantage or developed financial system to truly compete. Its business orientation has also differed from Kenya's, which was a waypoint for regional trade routes dating back to colonial times. By comparison, Tanzania is traditionally more oriented toward internal activities, with poorer infrastructure linkages and a limited strategic emphasis on liberal economic development.
Furthermore, the geographic realities of economic expansion have polarized regional investment, which necessarily focuses on the area either north or south of Lake Victoria. Activity north of the lake feeds into the Kenyan economy, while activity to the south benefits Tanzania. This polarization has caused friction as the northern countries in the East African Community (Kenya, Uganda and Rwanda) have at times cooperated in order to advance projects without the involvement of Tanzania.
While this selective affiliation has created an image of fragmentation within the East African Community, the separate pursuits of the northern and southern countries are simply a territorial fact. The results of any geographic or economic quarrels have been limited to what is best described as a diplomatic entente. Tanzania has not at any point objected to or refused to advance toward the common goals of the East African Community. Likewise, Kenya has made no attempt to exclude its southern confederate. Despite the two countries' differences, Tanzania recognizes the value of greater social, political and economic integration, so while it might bluster, it will not obstruct progress because it still stands to make significant gains.
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