Intraregional trade is limited, accounting for only some 4 per cent of the combined trade of the countries in the region. Although the share of intraregional trade in total trade varies across countries, it does not exceed one fifth in any country; for most, the proportion is 5 per cent or less. Intraregional trade is unbalanced, as evidenced by the persistent surpluses of one or two countries. As in many developing regions, the foreign trade of countries in this region is hampered by their reliance on exports of a few basic primary commodities, the lack of complementarity of the national ecomomies, transport and communications difficulties, and the paucity of trade information and contacts.
The East African Community (EAC)—which consisted of Kenya, Tanzania, and Uganda—had a significant influence on the size and direction of trade in the region until its demise in 1977. The three countries’ comprehensive effort at integration included the removal of trade and exchange restrictions on mutual trade. A close network of banking relations existed both among commercial banks and among central banks. Such arrangements, along with the operation of certain common institutions and the maintenance of close contacts and cooperation among traders, undoubtedly facilitated intra—EAC trade, which by 1976 encompassed some three fifths of trade in the PTA region.
Notwithstanding the significant accomplishments of the EAC, divergent economic performance and uneven trade expansion among the three members, as well as disputes over the distribution of costs and benefits of membership, led to its breakup in July 1977. Subsequently, there were important shifts in the pattern of participation in regional trade by the three countries. Broadly speaking, the breakup of the EAC led the former members to increase their trade with countries outside Africa; as a result, the ratio of intra-PTA trade to total trade declined. In this sense, the disintegration of the EAC represented an important setback for integration efforts in the region—a setback that the new PTA arrangements are aimed at overcoming.
Among the remaining countries, transport and communications problems are a particularly severe constraint on trade expansion for Zambia, Ethiopia, Djibouti, and Somalia, whereas the island economies—some of which rely heavily on goods supplied by the continental countries (especially Kenya)—by and large continue to find regional outlets limited to the neighboring island economies. The regional trade of Botswana, Lesotho, and Swaziland is, of course, strongly influenced by their participation in the customs union with South Africa.
Given the diversity of factors that have influenced trade patterns in the PTA region, assessment of the prospects for intraregional trade expansion is difficult. However, existing economic structures and physical barriers to intraregional trade would appear to rule out any pronounced shift in trade flows in the immediate future. In the longer term, the realization of the region’s export potential would depend upon its ability to pay for imports and the openness of partner countries’ markets. Recently, many of the countries have been facing balance of payments problems that in some cases have led to external payments arrears. Such delays in payment have harmed international confidence and regional-cooperation efforts. In many instances, trade or payments restrictions have been intensified recently to cope with pressures on the external sector. While the potential for trade expansion varies considerably among countries, intraregional trade expansion will in the future be constrained by many of the same factors that have constrained it in the past.
A main finding of this paper is that the present low volume of intraregional trade and its uncertain potential are not principally caused by the nature or application of trade and payments regulations in the region. Therefore, establishment of an alternative system for channeling intraregional settlements would not by itself lead to an expansion of intraregional trade. National trade and payments systems in the region are, with a few notable exceptions, restrictive and are generally directed toward protecting local industry and conserving foreign exchange. With two exceptions (Djibouti and Seychelles), all Fund members in the region avail themselves of the provisions of Article XIV, under which member countries may maintain and adapt to changing circumstances exchange restrictions that were in effect when they became members. In most cases, the trade and payments restrictions are nondiscriminatory and generally have not been used to influence the direction of trade and payments. Most intraregional payments are denominated in convertible currencies and are usually channeled through the commercial banking network of branches and correspondents, which is reportedly sufficiently widespread and flexible to accommodate present and expected future volumes of intraregional settlements. The general consensus of bankers, traders, and authorities visited by the staff team was that intraregional and other settlements for trade transactions take place efficiently, at relatively low cost, and on a timely basis (except in countries with payments arrears); this applies even when intraregional payments are channeled through banks in London or New York. Although the establishment of new clearing facilities could lead to more rapid and less costly settlements, the gains in efficiency or financial saving would probably be small. The resulting reduction in the size of convertible currency working balances needed for trade settlement purposes would probably also be insignificant.
Even so, the establishment of a new clearing facility may be justified on other grounds. A clearing facility would be based on regional institutions and would be useful as a means of promoting intraregional contacts and cooperation, particularly in the monetary area. Regional payments cooperation could lead to greater cooperation in other fields. Also, the formation of more flexible links among groups of developing countries following the establishment of a regional clearing facility could, if it occurs to a sufficient extent, usher in a further stage in the post-independence evolution of these countries’ financial and economic relationships. The facility itself should neither be a mechanism for balance of payments support nor restrict payments or create discriminatory currency arrangements. The specific features of a clearing facility, some of which are discussed in the final chapter, would need to be carefully considered to ensure that the facility would gain wide acceptance among national authorities, banks, and traders.
Finally, establishment of a clearing arrangement to support agreements in other economic fields would signal a willingness to maintain a certain degree of openness toward regional partners. Such a stance, however, could not be sustained over the longer term in the absence of (1) appropriate policies to overcome present financial difficulties and to promote economic growth and (2) a high degree of political commitment.