III Regional Trade Trends and Policies
Author: Ms. Sena Eken, Mr. John F. Laker1, and Mr. Shailendra J. Anjaria
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
Language:
English
Keywords:
OP; trade; Kenya; PTA arrangement; fund staff visit; EAC trade; trade information; border trade; Pta export; statistics yearbook; Kenya-Tanzania border; Trade balance; Manufacturing; Trade policy; Africa
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Abstract

Intraregional trade among the PTA countries is small in absolute terms and of limited importance to most of them. In 1973, intraregional trade (exports plus imports) amounted to $575 million, or almost 7 per cent of total trade.6 In 1980, mutual trade is estimated to have reached some $1 billion, which implies a fall in its share of total trade over this period. In 1980, the share of intraregional exports in total exports was 4.5 per cent (5 per cent including Zimbabwe) and the share of intraregional imports was 3.8 per cent (4.1 per cent including Zimbabwe)(see Table 11 in the Appendix).

Structure of Global and Regional Trade

Intraregional trade among the PTA countries is small in absolute terms and of limited importance to most of them. In 1973, intraregional trade (exports plus imports) amounted to $575 million, or almost 7 per cent of total trade.6 In 1980, mutual trade is estimated to have reached some $1 billion, which implies a fall in its share of total trade over this period. In 1980, the share of intraregional exports in total exports was 4.5 per cent (5 per cent including Zimbabwe) and the share of intraregional imports was 3.8 per cent (4.1 per cent including Zimbabwe)(see Table 11 in the Appendix).

The major trading countries in the region are Kenya, Uganda, and Tanzania—the former members of the East African Community. Together, they account for roughly two thirds of all intraregional trade (Table 2). Kenya’s intraregional trade has amounted to about $200 million annually, or about one third of intraregional trade. The other key countries in intraregional trade are Zambia, Ethiopia, Djibouti, and Mozambique, whose combined intraregional trade approaches $120 million annually. The remaining ten countries’ combined intraregional trade amounts to substantially less than $100 million annually.7

The significance of intraregional trade for the different countries varies widely, although its share of total trade has rarely exceeded one fifth for any country (Table 2 in the text and Table 10 in the Appendix). Exports to regional partners are especially important for Kenya and Tanzania. Uganda depends heavily on the region’s suppliers, which accounted for about two fifths of its total imports in 1980 (Table 11 in the Appendix). Imports from the region are also of some importance for the small economies of the Comoros, Djibouti, and Seychelles, although no more than 15 per cent of their imports come from within the region. The varying importance of regional trade for PTA countries is reflected in the shares shown in Table 2. In recent years, intraregional trade has represented 5 per cent or less of total trade for 11 countries in the region.

Table 1.

Preferential Trade Area: Trends in Total and Intraregional Trade, 1974–801

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Source: Table 10 in the Appendix.

Zimbabwe’s exports and imports are included in intraregional trade only to the extent they are shown separately in partner country statistics. This distorts the data to some extent, particularly following regional partners’ 1980 normalization of trading relations with Zimbabwe.

Preliminary estimates.

Table 2.

Preferential Trade Area Countries: Involvement in Intraregional Trade, Annual Average 1973–79

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Sources: International Monetary Fund, Direction of Trade Statistics Yearbook, 1980 and 1981; data provided by national authorities; and Fund staff estimates

Regional trade flows are highly unbalanced, and a few countries—particularly Kenya—are major net exporters. The predominance of certain countries as net exporters in the region implies that bilateral trade surpluses are by and large not offset by bilateral trade deficits. Table 3 illustrates this for 1979. Kenya’s exports to Uganda accounted for almost two thirds of its regional exports, and Kenya ran a substantial surplus in its trade with Uganda. Kenya also had bilateral trade surpluses with virtually all other countries in the region. To some extent, this pattern also holds for Tanzania—the second largest exporter in the region in 1979—which had trade surpluses with Mozambique, Uganda, and Zambia and only a relatively small trade deficit with Kenya. Similarly, the regional trade deficits of Uganda with Kenya, of Zambia with Tanzania, of Djibouti with Ethiopia, of Mozambique with Tanzania, and of the remaining countries in the region with Kenya were not offset to any significant extent by trade surpluses with other regional trading partners.

Table 3.

Trade Flows of Major PTA Trading Countries, 19791

(In millions of U.S. dollars)

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Sources: International Monetary Fund, Direction of Trade Statistics Yearbook, 1980; data provided by national authorities; and Fund staff estimates.

Preliminary estimates. Data from different sources are sometimes inconsistent. For certain countries (especially Botswana, Lesotho, Swaziland, the Comoros, and Djibouti) estimates of intraregional trade may be subject to significant error.

The low volume and uneven pattern of intraregional trade is in large part owing to the lack of complementarity in the production structures of the different economies. The general pattern of production and trade in the region is similar to that of many other developing regions; for most countries, exports consist mainly of agricultural or mineral products and imports mainly of foodstuffs and manufactured capital and consumer goods. The percentage of total export earnings generated by a single primary product ranges from 23 per cent of total exports in Kenya (coffee) to 88 per cent in Zambia (copper) and 98 per cent in Uganda (coffee)(see Table 12 in the Appendix). One, or at most two, commodities accounted for at least half of export earnings for 11 of the 17 countries for which data are available. Although Zimbabwe has a relatively diversified production base, primary products remain important in virtually all other countries, including Kenya and Tanzania. Coffee and tea together represent a third of Kenya’s exports, and coffee and cotton together account for a similar proportion of Tanzania’s exports. Exports from Djibouti consist of live animals and hides and skins.

As a result of this production structure, the principal markets for the region’s exports are in Europe and North America. For some countries, the European Economic Community (EEC) has become an increasingly important export market, partly as a result of tariff preferences granted under the Lome Convention. For example, the share of Kenya’s exports going to the EEC rose from 31 per cent to 49 per cent, while the share of Tanzania’s exports going to the EEC rose from 27 per cent to 48 per cent between 1973 and 1979. During the same period, the share of Uganda’s exports going to the EEC decreased while the share going to Japan increased (see Table 13 in the Appendix).

As might be expected, the industrial countries are the major source of imports to the region, particularly imports of capital goods. This reflects the limited development of manufacturing capacity within the region, its traditional economic ties with former metropolitan countries, and the availability of financing in the industrial centers. South Africa has been an important supplier to countries in the southern part of the region. The greater part of the import needs of Botswana, Lesotho, and Swaziland (the BLS countries) are met by South Africa, which is the dominant member of a customs union between the four countries. In the last three years, imports from South Africa have accounted for almost two fifths of total imports in Malawi; 12–14 per cent of imports in Angola, Mauritius. and Mozambique; and 5 per cent of imports in Zambia. Except for Mozambique and Zambia, these shares have increased since 1973, particularly for Malawi.8 In the first eight months of 1981, South Africa supplied about one fourth of Zimbabwe’s imports.

An important obstacle to intraregional trade has been the absence of effective transportation and communications networks within the region. For the landlocked countries (particularly Malawi, Uganda, Zambia, and the BLS countries), the main transportation priority has been to obtain the most direct access to the sea; transportation links with neighboring countries not on such routes have been given less attention. Roads constitute the major transport network within the region, but their condition varies widely; an all-weather road link between Kenya and Ethiopia, for example, has only recently been completed. The rail network is not extensive, despite the completion of the Tanzania-Zambia Railway (TAZARA) in 1976. Limited inland water transport facilities have discouraged trade between countries separated by Lake Victoria and Lake Malawi. Land transport links have been vulnerable to security problems and political disturbances in the region, such as the breakup of the EAC, the conflict in the Ogaden region, and the independence movement in Zimbabwe. One result of such disturbances has been the growing use of airfreighting in intraregional trade, which has considerably increased transportation costs. Coastal and island economies have been better placed for intraregional trade, although reportedly coastal trade has been hindered by congestion and delays at two of the major ports, Dar es Salaam (Tanzania) and Maputo (Mozambique). The island economies have also been handicapped by the lack of regular shipping services, which is partly attributable to the low volume of their trade.

Another important barrier to intraregional trade in the countries visited by the staff team is the irregular nature of some intraregional trade, particularly trade in basic foodstuffs. Climatic, transport, or other difficulties occasionally force countries to turn to surplus producers in the region to satisfy domestic demands; but these needs are often temporary and do not necessarily lead to regular trading arrangements. The sparse network of trade information and contacts within the region also impedes trade.

Evolution of Intraregional Trade

Intraregional trade is influenced not only by the general factors discussed previously but also by some key economic and institutional factors that have varied in importance across different groups of countries. It is convenient, for expositional purposes, to consider these influences separately for: the three former EAC members; a second group of countries (Djibouti, Ethiopia, Malawi, Mauritius, Mozambique, Somalia, and Zambia) with certain features that distinguish them from the first group; and the remaining seven countries in the region, which account for a relatively limited share of intraregional trade.

East African Community (EAC) Countries

The most significant influence on the size and direction of trade in the region has been the development and subsequent demise of the EAC, which consisted of Kenya, Tanzania, and Uganda. The EAC was established in 1967. By 1976, intra-EAC trade had grown to US$384 million (compared with US$250 million in the EAC’s first year of operation in 1968), which was some three fifths of trade within the PTA region. This growth was the result of comprehensive, far-reaching efforts aimed at achieving regional integration that included the removal of trade and exchange restrictions on intra-EAC trade, some harmonization of monetary and fiscal policies, coordination of economic planning efforts, and specific measures to promote balanced industrial development. Intra-EAC trade was also facilitated by the use of local currencies, freely exchangeable at par, for invoicing and settlement; a close network of banking relations, including correspondent accounts among the commercial banks and reciprocal accounts among the central banks; the operation of several common institutions, particularly in transport and communications; and the frequent consultations and contacts among the national authorities at several levels.

The growth of intra-EAC trade until 1976, however, was not accompanied by a reduction in the persistent trade imbalances between the partner states, despite attempts to harmonize regional development. In 1976, Kenya’s trade surpluses with Uganda (US$78 million) and with Tanzania (US$50 million) were the largest recorded since the Community came into operation. (By that time, trade between Tanzania and Uganda had virtually ceased.) This reflected Kenya’s relatively greater self-sufficiency in agricultural production and its success in developing a broadly based manufacturing sector capable in many cases of supplying both its own needs and those of its partner states. In 1976, Kenya’s imports of agricultural products were less than 5 per cent of its total imports. Because of the strong competitiveness in the community’s agricultural production structure, only a quarter of these agricultural imports were supplied by Tanzania and Uganda, both of which were major agricultural exporters. The Community provided an important outlet for much of Kenya’s manufacturing production, absorbing more than 40 per cent of its manufacturing exports and more than a third of its exports of petroleum products in 1976. This Community trade represented 6 per cent and 10 per cent, respectively, of Kenya’s total exports in that year.

The large trade imbalances, dissimilarities among the partners’ respective levels of development, the partners’ inability to agree on the distribution of the costs and benefits of Community involvement, and other problems led to the breakup of the EAC in July 1977, following Tanzania’s closure of its border with Kenya in February of that year. As a result, intra-EAC trade fell sharply, to an estimated US$266 million in 1979 (which, nonetheless, represented more than 40 per cent of total intraregional trade). The breakup has also led to shifts in markets and sources of supply for the three countries.

Kenya9

Kenya’s exports to Tanzania have declined dramatically following Tanzania’s virtual ban on imports from Kenya. In contrast, Kenya’s exports to Uganda, about half of which are petroleum products, have continued to increase in nominal terms, although their share in total exports slipped somewhat between 1976 and 1979. Kenya has attempted to develop new outlets for its manufacturing activities elsewhere in Africa.10 However, a number of constraints to the further growth of Kenya’s exports were identified in the discussions with the staff team. These included the inability of many relatively high-cost industries developed behind the Community’s protective barriers to compete in other markets; the shrinking import capacity of some neighboring countries (especially Zaire, Zambia, and Sudan) resulting from their own balance of payments difficulties; and the physical difficulties involved in transshipping Kenyan goods southward through Tanzania.

Despite these problems, there was some shift in Kenya’s trade in favor of neighboring countries, mainly those outside the PTA group, although the PTA region remains a major market for Kenyan manufactures. Outside the PTA region, Kenya found growing markets for its exports in Rwanda (mainly petroleum products and cement), Burundi (petroleum products and cigarettes), and Sudan (petroleum products, steel parts, and paper). This shift, however, was insignificant compared with the loss of the Tanzanian market, and Kenya’s dependence on export markets outside Africa increased from 68 per cent of total exports in 1976 to 77 per cent in 1979. The breakup of the EAC has also led to greater dependence on non-African sources for Kenya’s imports. In 1979, Kenya still accounted for 28 per cent of total intraregional trade. By then, however, Rwanda had become Kenya’s second most important export market in Africa and its most important supplier (mainly of tea) in Africa. In 1980, Kenya’s exports to Uganda increased sharply, but it is too early to judge whether this represents a lasting reversal of the declining trend that had been evident since 1977.

Tanzania11

Since the EAC breakup, Tanzania has looked outside Africa for new sources of import supply and, at the same time, has pursued an active import substitution policy designed to overcome its previous reliance on Kenya, particularly as a source of basic manufactures. As a result, Tanzania’s imports from African countries have declined even in nominal terms, while imports from industrial countries, especially EEC members, have increased sharply. To the extent that imports from Kenya could not be replaced by domestically produced substitutes, they were replaced by imports from non-African countries. For example, during 1976–79, Tanzania’s imports from Kenya declined from US$80million to US$10 million, but its imports from all other African countries increased only from US$3 million to US$11 million.

In contrast, Tanzania’s exports appear to have begun recovering from the loss of the previously important Kenyan market; exports to PTA countries other than Kenya increased from 1.4 per cent of total exports in 1976 to 6.8 per cent in 1979. Tanzania supplies a smaller share of its exports of basic manufactures to the PTA region than Kenya does. Much of Tanzania’s improved export performance in the region appears to be based on its special relationship with Mozambique under the terms of a bilateral trade agreement. The main items exported to Mozambique have been foodstuffs and basic manufactures. In 1979–80, Tanzania accounted for less than 10 per cent of regional trade. As far as African markets outside the PTA region are concerned, Tanzania exports mainly refined petroleum products to Burundi, Rwanda, and Zaire

Uganda

Uganda’s involvement in intraregional trade has been confined largely to its trading links with Kenya (see Table 20 in the Appendix). In the early years of the EAC, Kenya provided an important market for Uganda’s exports of basic manufactures, particularly cotton products and building construction materials, but this trade has virtually disappeared because of the steady deterioration in Uganda’s manufacturing capacity in recent years. Uganda’s main exports to the region are tea and electrical energy. In 1975, Sudan replaced Kenya as the most important export market within Africa, and since then Uganda’s exports to that country alone have exceeded its total exports to the PTA region. Still, Kenya remains Uganda’s largest single supplier of imports; in fact, this dependence on Kenya has increased sharply in recent years. In four of the five years since 1976 (except 1978), Kenya has met from two-fifths to one-half of Uganda’s import needs, compared with just over a third before 1976. Petroleum products, a wide range of manufactured goods, and some basic foodstuffs are the major items imported. In 1979–80, Uganda accounted for about 20 per cent of total intraregional trade.

Other Significant Trading Countries

Other countries whose intraregional trade averaged more than US$15 million annually between 1973 and 1979 were Zambia, Ethiopia, Djibouti, Mozambique, Malawi, Mauritius, and Somalia. In 1973, these countries accounted for 26 per cent of intraregional trade; and by 1979, the proportion had risen to 34 per cent. Except for Djibouti, however, this trade accounts for no more than 5 per cent of each country’s total trade.

Among the group, Zambia has the most extensive trading relationships in the PTA region. Its major regional export markets—mainly for metal alloys, cement, and tobacco—are Kenya, Malawi, and Tanzania, but these markets have accounted for an average of less than 2 per cent of Zambia’s total exports (see Tables 21 and 22 in the Appendix). This low proportion reflects Zambia’s heavy dependence on copper exports, for which only very small markets (amounting to less than 1 per cent) exist in Africa. Among African countries outside the PTA region, Zaire has been an important buyer of crude minerals (gravel) and petroleum products. Zambia’s dependence on neighboring markets for imports is relatively limited and has decreased from previous levels. This pattern reflects the heavy weighting of sophisticated intermediate goods—particularly for the mining sector—in Zambia’s import requirements and the vulnerability of Zambia’s transportation links. Zambia’s import capacity has also been under considerable strain since 1976. Kenya has been the major regional supplier to Zambia, particularly for lubricants, paper, and basic manufactures (see Table 23 in the Appendix). However, Kenya’s share of total imports has fallen since the closure of the Kenya-Tanzania border, which has forced Kenyan exporters to use air freight or the longer route via the port of Dar es Salaam (Tanzania).

Ethiopia’s main trading partner in the region is Djibouti, which, with its very narrow resource base, depends heavily on Ethiopian supplies of fresh vegetables, other foodstuffs, and kat, a narcotic leaf (see Tables 24, 25, and 26 in the Appendix). This trade declined sharply in 1977 and 1978 as a result of hostilities in the south that forced the closure of the rail link between the two countries, but it recovered strongly in 1979 when the link was reopened. Lack of regular coastal shipping services is reportedly an obstacle to increased exports of Ethiopian fruits and vegetables to countries in the immediate area. Except for Kenya, Ethiopia has very few sources of supply within the region, and since 1973 regional suppliers have met 3 per cent or less of Ethiopia’s import needs. (Recorded imports from Djibouti include a significant proportion of goods in transit). Until 1980, imports from Kenya—particularly of tea—kept pace with the growth of total imports, despite disruptions caused by the hostilities in the south, which led to a greater use of air and sea freight.

Mozambique’s intraregional trade dropped as a result of the economic dislocations associated with the achievement of independence in June 1975, but rebounded after 1978. Its major export markets—particularly for coal and cement—are Tanzania, Malawi, and Kenya. Since 1978, Tanzania has also become a substantial supplier of a wide range of basic foodstuffs and manufactures, primarily maize and cotton and other textile articles.

For Malawi, the importance of intraregional trade with regional partners except Zimbabwe has tended to decline steadily, with intraregional exports falling from 10.3 per cent of total exports in 1973 to 4.2 per cent in 1979, and the share of intraregional imports falling even more sharply, from 7.8 per cent to 2.4 per cent of total imports over the same period. In 1980, its trade with Zimbabwe tripled compared with the previous year, reaching US$22 million; however, this was still less than the annual trade of US$35 million attained in 1974–75. Malawi’s other major regional trading partner is Zambia, to which it exports fish, rice, and other foodstuffs and basic manufactures. It often exchanges these exports for tobacco, for which Malawi provides storage and shipping facilities. Mozambique has also been an important supply source, although the land trade links between the two countries have been subject to disruption in recent years.

The value of Mauritius’s trade with the PTA region has been rising slowly, although its contribution to total trade has remained very small. PTA exports have accounted for little more than 1 per cent of total exports since 1973; the main item is tea exported to the neighboring island economies of the Comoros, Madagascar, and Seychelles. Dependence on regional imports over the same period has been only slightly higher (3 per cent on average), the flow of which has consisted largely of cement and other basic manufactures from Kenya.

Somalia’s intraregional trade has grown steadily since 1973, despite the break in relations with Ethiopia, which was formerly an important trading partner, in the second half of 1977. Except for Djibouti, Somalia has the smallest export base of the seven countries in this group, and exports to the region averaged only US$1.2 million a year between 1973 and 1979 (about 1.5 per cent of total exports). The region supplies about 7 per cent of Somalia’s imports. Kenya is an important regional supplier, mainly of tea, cotton, and plastics. Recorded imports from Djibouti may include transit trade.

Countries with Limited Participation in Intraregional Trade

For the remaining countries in the PTA region (viz., Angola, Botswana, the Comoros, Lesotho, Madagascar, Seychelles, and Swaziland), intraregional trade is small in absolute terms, averaging less than US$9 million annually for each country between 1973 and 1979. In 1979, these countries accounted for some 7 per cent of intraregional trade, the same share as in 1973. Two of the island economies, however, depend heavily on the region for their import needs. Regional suppliers, principally Kenya, provide over 16 per cent of imports of Seychelles, although this share has been falling since 1976. In the Comoros, regional imports, mainly from Madagascar, represent almost one fifth of total imports.12 Both countries have very small regional export markets. In contrast, Madagascar appears to have very limited trading contacts in the PTA region.

The trading relationships of the BLS countries are governed by their participation in the customs union with South Africa. The customs union’s natural advantages of a well-established transportation network and a diversified production base, combined with a common external tariff, explain the limited trade between the BLS countries and other African countries. Even so, Botswana has developed markets in the region for its leather and meat products (mainly in Zambia), although this trade was recently curtailed by the outbreak of foot-and-mouth disease in the Botswana herd; Swaziland has also obtained a market in Tanzania for its fertilizer industry. These markets are, however, very small in relation to the total exports of both countries. Lesotho does virtually no trade with the PTA region, largely because of its geographical isolation.

Reliable statistical data on the trade of Angola are difficult to obtain. There has probably been a decrease in Angola’s intraregional trade since 1976, following the eruption of civil war and the closure of the Lobito rail route, which provided Angola’s major transport link with the PTA region.

Unrecorded Trade

The main unrecorded trade flows are thought to take place along Kenya’s borders with Uganda, involving primarily the exchange of Kenyan textiles for Ugandan coffee, and with Somalia and Ethiopia, involving the exchange of Kenyan basic utensils for live cattle and hides and skins from both countries as well as cow peas from Ethiopia. Border trade also takes place along Zambia’s frontiers with Tanzania, Malawi, and Zimbabwe, and along Tanzania’s borders with Rwanda and Burundi; much of this is apparently associated with the purchase of basic foodstuffs. Some consumer goods (cigarettes and alcohol) are reportedly smuggled from Djibouti to Ethiopia. Some of this trade may be of considerable economic significance in the regions concerned, although little hard information is available and opinions differ as to its importance. There is also little information on unrecorded trade along other borders in the region.

One reason advanced for such trade during discussions with the Fund team was the existence of traditional cultural and other links between the same or related communities settled on two sides of a national frontier. Border trade may also be associated with movement of food supplies from surplus to deficit areas. Disparities in the availability of goods may also be more generally associated with differences in exchange control practices and exchange rates that may not reflect market forces. The trade may be paid for in banknotes exported (usually illegally) by residents of the country in which the unofficial exchange rate with the neighboring country is at a discount in relation to the official exchange rate; it may also take the form of barter transactions. The officials visited stressed the difficulty of adequately controlling the movement of goods or funds across long and largely unpatrolled frontiers, as well as the high cost of attempting to bring such transactions under official control. While border trade engaged in for traditional cultural reasons would almost certainly be difficult to control, effective elimination of parallel markets for goods or currencies would not be feasible in the absence of direct efforts to correct the causes of the imbalances that lead to such flows.

Trade Arrangements and Commercial Policies

Trade arrangements and commercial policies in the region have certain common features.13 First, most countries maintain relatively high tariff and nontariff barriers for the protection of local industry, with no regional preference. Djibouti, however, levies a customs duty of only 5 per cent on imports from non-EEC countries. The protection of manufacturing industry, which allows time for new industries to develop and encourages diversification, may result nevertheless in perpetuation of relatively high-cost domestic production that can discourage trade in general. The customs tariff also serves as an important revenue source for many of the countries. Excluding the BLS countries, the contribution of customs duties has ranged from about 10 per cent of government revenue, for Tanzania, Uganda, and Zambia, to as high as 50 percent, for the Comoros, Seychelles, and Somalia. In the BLS countries, trade arrangements and commercial policies are aligned in accordance with their membership in the customs union. There are generally no restrictions on goods moving between the four countries in the customs union, while imports into the union are subject to a common tariff. Customs union receipts have been a major, though variable, source of revenue in the BLS countries, averaging about 40 per cent of government revenues in Botswana, 50 per cent in Swaziland, and up to 75 per cent in Lesotho.

Second, many countries emphasize the promotion of exports as a matter of policy. The most active export promotion policy is pursued by Kenya, particularly since the emergence of surplus manufacturing capacity after the breakup of the EAC. An important element of this policy has been subsidies for certain manufactured exports. In the 1980/81 budget, the coverage of this scheme was considerably widened to include all but traditional exports; at the same time, the subsidy rate was doubled to 20 percent of the FOB value. Kenya is also planning to introduce an export credit insurance scheme for Kenyan exporters, which might be of particular benefit to exporters of manufactures. A number of other countries take active steps to encourage exports, usually by giving drawbacks on duties paid for imported raw materials or by disseminating information on prospective export markets both within the region and outside. Mauritius is also considering the institution of an export credit insurance scheme.

Third, all countries in the region—with the exception of Angola and Mozambique—are signatories to the Lomé II Convention between 58 African, Caribbean, and Pacific States (the ACP countries) and the EEC that covers the five-year period ending in February 1985. This Convention, which superseded the Lomé I Convention but continues its main provisions, guarantees duty-free access to the EEC market for almost all ACP countries’ agricultural exports and a specified list of manufactured exports meeting minimum local content requirements. The Convention also widened the coverage of the STABEX System, which provided for the stabilization of earnings from the more important agricultural exports. The new list does not, however, include tobacco—Malawi’s major export. A production stabilization scheme applying to minerals was also introduced in the Lomé II Convention.

Scope for Expansion of Intraregional Trade

The prospects for expansion of intraregional trade are difficult to assess. However, the staff team concluded—and this conclusion was shared by most officials and traders visited—that existing economic structures and physical barriers to intraregional trade militate against any pronounced shift in trade flows in the near future, despite the proposed tariff preferences of 10–70 per cent on a limited common list of imports. In particular, the dependence of most countries on one or two traditional exports sold in markets outside the region is likely to change only slowly. The scope for intraregional trade expansion may thus be largely confined to nontraditional products, particularly manufactures and basic foodstuffs.

For this reason, Kenya, with its installed manufacturing capacity already geared to producing for the regional market, would appear to be poised for export expansion, a conclusion supported by the range of Kenyan exports included in the proposed common list for tariff reductions. Of the 102 items on this list, Kenya has expressed an interest in exporting some 44; for almost all of these, it has already established markets within the region. Thirty-two of these goods are nonagricultural products, about half the total of such products on the common list. Kenya’s proposed export credit insurance scheme may also serve to facilitate trade with the region, in particular by making it feasible for a trader to resume or commence exports to countries subject to unusual uncertainties or trade risks. Tanzania and Zimbabwe, both of which have relatively diversified production structures, could also benefit from the opening up of regional markets. Tanzania’s export interest in the proposed common list covers 39 items, divided almost evenly between agricultural and nonagricultural products. (The trade interests of Zimbabwe, which joined the PTA negotiations only in June 1980, had not yet been taken into account in the proposed common list.)

For most of the PTA countries, however, rapid expansion of PTA exports does not appear feasible. This is particularly so for the smaller economies in the region, which have only limited resource bases; Djibouti’s export interest in the common list was confined to 7 items, and that of the Comoros to only 3 items. Nevertheless, in a few countries, selected industries may be in favorable positions for expansion; however, the analysis required to identify such prospects lies outside the scope of this report.

The realization of any export potential depends on the openness of partner countries’ markets and their ability to pay for imports. In this respect, measures designed to encourage economic growth and diversification will play a key role. Policies designed to resolve pressing balance of payments problems and promote the production of exportables will encourage countries to open markets to regional producers and give confidence to importers that supplies will be available on a regular and secure basis. A very important barrier to the future expansion of intraregional trade, which was emphasized in the staff team’s discussions in the countries visited, is the lack of competitiveness with outside suppliers of many of the goods made by regional producers. An appropriate exchange rate policy can play a key role in correcting the lack of export competitiveness arising from currency overvaluation.

Over the longer term, the degree of industrial cooperation will have a major bearing on the rate of which new industries develop in response to larger regional markets. The importance of industrial cooperation has been recognized in the PTA negotiations, and the need for it is evidenced by the existing duplication of production capacity within the region, especially in footwear, clothing, cement, and furniture. However, regional industrial cooperation may impinge on national import substitution policies, and considerable goodwill will be required to resolve any potential conflicts. Until confidence in countries’ access to regional markets is established, any increase in intraregional trade—even the probable increase following the introduction of the proposed tariff preferences—will remain largely confined to items for which there are established markets in the region.

Within Same Series

Other IMF Content

Other Publishers Content

Cover Payments Arrangements and the Expansion of Trade in Eastern and Southern Africa
Payments Arrangements and the Expansion of Trade in Eastern and Southern Africa
Author: Ms. Sena Eken, Mr. John F. Laker, and Mr. Shailendra J. Anjaria
ISBN:
9781557750792
ISSN:
0251-6365
Publication Date:
08 Jul 1982
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557750792.084
Pages:
59

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