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IMF Working Paper Summaries (WP/95/1 - WP/95/61)
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Summary of WP/95/23: “Regional Integration in Eastern and Southern Africa: The Cross-Border Initiative and its Fiscal Implications”

Author(s):
International Monetary Fund
Published Date:
August 1995
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Attempts at regional integration in independent Africa can be traced back to the early 1960s. Recently, efforts at building or strengthening regional integration were renewed, reflecting not only a growing regionalism in the world economy in general, but also a strong commitment by policymakers to reverse the trend of poor growth performance through the design and implementation of regional arrangements and robust adjustment programs. New initiatives are being undertaken in West and central Africa. Similarly, countries in east and southern Africa have recently launched the Cross-Border Initiative (CBI) for promoting trade, investments, and payments in eastern and southern Africa.

The move to economic regional integration, if pursued in a spirit of mutual benefit, stimulates trade by freeing it from restrictions and barriers, promotes growth through economies of scale, improves the institutional environment, strengthens the external discipline that sustains appropriate policies, and allows for timely responses to changing circumstances. The move to integration also entails temporary costs, although these can be minimized and/or absorbed if trade liberalization is supported by adequate macroeconomic, structural, and social policies. One such cost would be the reduction in government revenue from customs duties following regional integration, A sound fiscal policy response, including tax system reforms, could help ensure that short-term pressures on revenue are addressed adequately.

The main objectives of this paper are (1) to assess the gains that Burundi, Kenya, Tanzania, and Uganda could achieve by participating in the current regional integration process; (2) to analyze the fiscal implications of the tariff reform for these countries, within the framework of the CBI, by providing quantitative estimates of government revenue losses that would stem from changes in tariffs--through elimination (for intraregional trade) and reduction (for extraregional trade)--as well as estimates of the additional fiscal efforts needed to maintain the same overall fiscal policy stance despite the move to regional integration; and (3) to suggest possible fiscal policy responses for the short term, such as adjusting sales tax rates, and for the medium term. The latter include improving the management of fiscal exemptions and tax smuggling, adopting a value-added tax (VAT), and increasing indirect taxes under the destination principle to make up for revenue forgone and to comply with the tax harmonization process induced by the regional integration.

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