East Africa Advances Plan to Integrate Stock Exchanges

Plans are going ahead to integrate the three major exchanges within the East Africa region, namely the Dar es Salaam stock exchange, the Nairobi stock exchange and the Uganda securities exchange, plus the stock exchange in Burundi.

The actions are being taken despite Tanzania’s resistance to cross-border investment, a position that contradicts the East African Community Customs Management Act.

The act stipulates that residents of the original East African Community states -- Kenya, Tanzania and Uganda -- should treat each other’s nationals as locals when it comes to investment opportunities in their respective countries.

Contrary to the act, the Tanzanian government barred non-citizens from participating in the initial public offer when it sold its 21 percent stake in the National Microfinance Bank last August. When Safaricom, a Kenyan mobile telephone provider and east Africa’s most profitable company, issued its IPO this March, Tanzania blocked its citizens from participating in the investment.

However, when Stanbic Uganda, a subsidiary of South Africa’s Standard Bank Group, offered its IPO in January 2007, Tanzanian and Kenyan nationals, including non-East Africans, took part.

"When you are small, you need to keep all the wealth in the country. That must be why Tanzania decided to lock out foreigners in IPOs taking place in their country," said James Murigu, a director of Suntra Investment Bank, a leading Kenyan firm. Chris Mwebesa, outgoing CEO of the Nairobi stock exchange, thinks the new initiative will not be hindered by the foreign exchange regimes in individual countries. His counterpart in Tanzania, Jonathan Njau, tends to agree.

"The restrictions put forth by the Tanzanian government are political." But, reveals Njau, the Tanzanian government is considering "liberalizing its market so that Tanzanians could freely invest in other countries in the near future".

According to Simon Rutega, chief executive officer of the Uganda Securities Exchange, Uganda fully supports the proposed integration of stock markets in east Africa. According to the privately owned Monitor newspaper of Uganda, the initiative should be backed by all three the east African countries.

Early last September honchos from east Africa’s capital market authorities held a consultative meeting here in Nairobi that was attended by chief executives of the Burundi, Tanzanian, Kenyan and Ugandan stock exchanges.

The meeting proposed integration of the trading platforms of the four exchanges and agreed to adopt software that will link all stock brokers across the region. Under the new initiative, whose implementation deadline has been set for this December, securities will be traded anywhere in the region, using the local currency.

Rutega thinks the initiative will "demystify" cross-border investment across the region, encourage more co-operation and investment and expedite the economic integration agenda of the east African region.

According to Mwebesa, who also doubles as the head of the East African Stock Exchange Association (EASE), the project implementation will take less than six months.

"The integration of the exchanges will benefit the east African region through consolidation of market liquidity and increasing visibility of the East Africa Community’s capital markets to foreign investors, hence attracting capital flows," Mwebesa said.

Rutega argues that it would "increase economies of scale and reduce the costs of managing the trading, clearing and settlement infrastructure of the bourses in the region. When our markets integrate, we shall be able to share licenses and the maintenance costs of information technology hardware. Investors will also have more financial instruments at their disposal to invest across the region".

Consultancy firm Ernst and Young in a recent study proposed that integration of the regional stock exchanges will be effective if there is a fair degree of regional economic integration. This includes the harmonization of financial rules and regulations among the countries.

According to Ernst and Young, the exchanges would need a common business language, culture and legal systems and excellent communications and technology solutions to integrate. An obstacle would be the fact that Uganda and Kenya have different operational methods. The latter relies on an electronic central depository system while the former relies on physical share certificates to carry out transactions.

The exchanges also need to have internationally acceptable rules and regulations regarding capital adequacy, listing standards, insider trading and sound trading infrastructure. Another key requirement would be that individual stock exchanges be restructured and converted from mutual entities to profit companies.

"Regional governments should harmonize the regional capital account convertibility, the regional clearing and settlement systems, taxes and the legal and regulatory framework within the region," Ernst and Young states in its report. For now the integration of the region’s stock exchanges remains a work in progress.

Splintering of African Block Complicates Trade Talks With EU

By Aileen Kwa / IPS
  
Ministers of the East and Southern African trade bloc are set to gather in Brussels, Belgium, to negotiate with European Union leaders about the finalization of an economic partnership agreement.

It remains to be seen whether talks will stall and be carried over to next year, or whether the sides may agree on an interim agreement covering development, as well as market access in goods.

There is chaos at two levels. Firstly, the 16-country East and Southern African bloc is, at this late stage, splitting into two parts, throwing talks into confusion. The East African Community -- consisting of Kenya, Tanzania, Uganda, Burundi and Rwanda -- has a common customs union and has decided to sign their own economic partnership agreement (EPA) with the EU.

The Indian Ocean states -- Mauritius, Seychelles, Madagascar and Comoros -- have also decided to negotiate a separate EPA. These countries have spent the last two years negotiating with the EU from a joint East and Southern African text. It is unclear how new texts will be stitched together within the short time available before the end-of-year deadline.

The shifting configuration of country groupings for the negotiations, however, is not even the main problem. There are still major differences between the EU and East and Southern African countries on very basic issues.

First and foremost, there has been no meeting of minds about what constitutes "development". Both the EU and African countries have agreed that "development" sits at the heart of the EPA negotiations. Yet both sides are worlds apart in terms of translating what this means in practical terms.

The East and Southern African countries, defining development as the strengthening of their industrial and agricultural production base, have pushed hard for the EU to commit to a list of development projects, with financial commitments attached.

The EU has not been enthusiastic and has apparently tried to sidestep such conditions. The EU has been successful in persuading the East and Southern African bloc to downgrade its demands.

The implementation portion of the "development chapter" in the EPA text has been converted into a "development matrix." Now that the matrix has been worked out by the East and Southern African countries, both sides are quarrelling over where to put it.

The East and Southern African bloc wants it appended to the EPA text to ensure that it is legally binding on the EU. The EU has declined, indicating that it will only make a reference to it in the text. Now, the EU is backtracking even further. It is unclear whether such a reference will even be made in the "development matrix."

In any case, the EU side has vehemently insisted that they cannot provide financial assistance in the EPA.

According to Jane Nalunga of the nongovernmental Southern and Eastern African Trade Information and Negotiations Institute, "When we came up with the negotiating draft, we put in a chapter on development. The EU said, ‘No, let us remove it.’”

"They didn’t say right from the beginning, ‘We won’t consider it.’ They said, ‘Remove it and put it in a development matrix. We will make a reference to it in the text.’ Now that we have done that, they say, ‘This is a Christmas shopping list.’ They don’t even want a reference to be made to the matrix in the text."

Nathan Irumba, the executive director of the trade institute, said "the whole problem is that the EU has lured countries into EPAs by promising them that there would be development programs. That is a lie from the beginning -- there will be no development programs. There is only the [European Development Fund] -- and there is no new money there."

The East and Southern African countries are still angling for a firm commitment from the EU to provide development funding. As one Kenyan trade ministry official noted, "We need support to improve our competitiveness so that we will be able to withstand the liberalization commitments."

Disagreement over the much-vaunted "development" dimension of the EPAs could bring the talks to a grinding halt in the coming days.

There is also no agreement on the scope of products that can be exempted from tariff elimination. The East and Southern African countries had initially asked for 57 percent of their tariff lines to be protected. The European Commission refused to accept the list and have asked the East and Southern African bloc to shorten it.

Now the European Commission is insisting that the exception list be limited to only 10 percent, while the East and Southern African countries are aiming for 30 percent. According to Nalunga, "In Kenya, with all its tribal sensitivities -- different regions and tribes wanting to protect different crops -- it will be politically sensitive limiting the protection to only 10 percent."

A previous assessment by the United Nations Economic Commission for Africa showed that unless the East and Southern African countries protect up to 40 percent of their trade with the EU, it is likely that their industries will be negatively impacted.

In addition, there is also no agreement on the very important issue of the time frame for tariff elimination. All agricultural and industrial products that are not in the sensitive list will have their tariffs eliminated over time. The EU is insisting on a maximum of 12 years, while the East and Southern African countries have asked for 25 years.

Domestic support and export subsidies in agriculture are another area of contention. East and Southern African countries have expressed the fear that their agricultural producers will be displaced by unfair imports of subsidized EU agricultural goods. IPS has learned that the Europeans have flatly refused to even discuss this. These issues, they say, are an internal affair.

The two sides have also struggled over the issues of review and benchmarking. Both sides agree that there should be an in-built mechanism for review in the EPA text. The East and Southern African countries have identified certain development benchmarks.

They want their liberalization commitments to be pegged to these benchmarks. If the development benchmarks have not yet been attained by the time of the review, they want to be able to go back on the liberalization timetable.

The EU has been dismissive of this position, insisting that a mechanism for review should be aimed at expanding the scope of liberalization and should not allow backtracking on those commitments.