Hurdles against movement of capital, goods in EAC reduce

According to the annual East Africa CSG (capital, services, and goods) report, the legal and regulatory environment affecting business across the region has considerably improved.

This year’s CSG report examined key regulatory measures taken by Uganda, Kenya, Tanzania, Rwanda, and South Sudan that impacted the movement of capital, goods, and services in 2022 and the first quarter of 2023.

Established in 2009, the EAC Common Market Protocol seeks to achieve free movement of capital, services, and goods across the region.

Veronica Nduuva the EAC secretary general, acknowledges the progress made on integration, especially on making laws, but notes: “We need to take a step further to implement, especially harmonised tax [regimes] .”

The report also indicates that new members such as DR Cong, South Sudan, and Somalia, are dealing with internal struggles, in addition to implementing different protocols.

Overall the report establishes that there are efforts on the part of member states to leverage regulatory measures in the financial markets to encourage foreign direct investment.

For instance, Uganda has prescribed securities as short-term debt instruments and depository receipts to facilitate trade in shares of foreign companies and other baskets of assets such as currencies and commodities.

The report further underscores deliberate efforts to promote digital economies and innovation ecosystems, such as Kenya, which has greenlighted crowd-funding and digital credits, paving the way for cross-border investment in the region and beyond.

The report also pushes for easing in licensing digital credit providers to open the door for new players beyond traditional providers such as banks, microfinance institutions, and Saccos, among others. 

Henry Onoria, the Alps EA knowledge partner, notes that “easing the legal framework governing the digital economy will spur new investment and ideas for the development of knowledge-based economies that East Africa trail the rest of the world”.

Additionally, member states largely depend on tax-related measures, primarily exemptions or reduced rates, to attract investment in securities and strategic economic sectors.

For instance, Rwanda waived income tax on proceeds from collective investment schemes, listed shares, and securities and reduced withholding tax from 15 percent to 5 percent on dividends and interest on listed securities to residents of Rwanda or beneficiaries from within EAC.

On the other hand, Tanzania reduced loyalties on mining of phosphate ore for fertilizer manufacture to 1 percent from 3 percent and zero-rated value-added tax for locally manufactured fertilizer.

However, despite the positive efforts in regulatory measures, restrictions in the form of residence and establishment requirements remain with procedures on licensing and documentation, often tied to stringent oversight by central banks.

Other challenges, Nduuva says are still recorded in payment systems due to the absence of a currency convergence or regional switch that allows seamless currency conversion

Movement of services

The regulatory measures adopted by partner states depict commitment to liberalise trade in services while using legal frameworks - primarily tax - to regulate services sectors.

Kenya, Tanzania, and Uganda, in their proposed bills - have ensured cross-border supply of digital and electronic services - while leveraging opportunities to tap into tax revenues through digital marketplaces of finance and tax regulatory measures, which included new options for tax registration and payment and ring-fencing local content.

For instance, Uganda’s local content bill ring-fences supply services that are available in the country to local companies, and where they are not available, priority is given to suppliers within the bloc, while Tanzania has eased restrictions in its mining sector for external suppliers, it has tied selection to meeting local content requirements.

However regulatory measures on the movement of services based on the presence of a natural person are still restricted to the employment of nationals in certain service sectors.

For instance, in Tanzania registration and licensing as a tax consultant is restricted to nationals, while in Rwanda practice as a technologist or technician is limited to Rwandans, and accreditation of an international audit firm is subject to a requirement that at least one signing partner is a national.

In Uganda, enrolment and practice in law are extended to both Ugandans and EAC residents with qualifications or enrolled in foreign (common law) jurisdictions, while Kenya restricts entry of services in respect of medical and dental professionals.

A mixed bag

In 2022 and the first quarter of 2023, partner states adopted regulatory measures to eliminate tariff and non-tariff barriers and mutually recognise certain trade standards.  However, the approach to free movement of goods has been a mixed bag.  

Whereas Uganda barely imposed restrictions on goods from the bloc, other states have closed their doors in one way or another.  

For instance, Kenya restricted export of poultry products (eggs) from Uganda by imposing a 25 percent excise duty, while the decision by South Sudan to increase exchange rates of the dollar to the South Sudan pound, saw customs and related duties, almost double. 

As regards to trade standards, partner states have made uniform standards by issuing compulsory standards and specifications for certain goods.

But while there is a trend towards adopting East African standards, national standards agencies continue to issue standards that restrict movement of goods across the region.

This was witnessed when Uganda and Kenya adopted conformity marks and certificates as a yardstick for cross-border trade.

Nonetheless, harmonisation and removal of certain restrictions speak to the broader efforts to ease movement of capital, services and goods, even as several regulatory measures, especially capital controls and central banks as well as a host of other regulators, remain. 

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