Download History of cooperation in East Africa cont`d..

REGIONAL INTEGRATION OF
THE CAPITAL MARKETS AND
REGULATION OF CROSS
BORDER INVESTMENTS
-East Africa’s Experience
Presented at the
Regional Workshop on NonBank Financial Institutions in
Africa
Mauritius
9 – 11 November 2003
by
Japheth Katto
Chief Executive Officer
Capital Markets Authority, Uganda
Presentation Outline
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Introduction
Benefits of integration
History of cooperation
The East African currency board
The (first) East African Community
The collapse of the EAC
Revival of the East African Community
EAC convergence criteria
Progressive performance
The journey towards capital markets
integration
EASRA’s and CMDC’s mandates
Snapshot of the regional market
Progress on market integration
Other regional initiatives BVRM,
CISNA, ASEA
Challenges and stumbling blocks
Conclusion
References
Introduction
“There is a strong view among various observers and
stakeholders that effort should be made to
promote an integrated regional capital market
given that, on an individual country basis, the
investor base is too narrow and small to support
the emergence of a truly dynamic capital market
in any of the three countries.
..……. even a regional capital market will continue to
be small in the short to medium term and would
benefit from linkages with other markets in
Africa and beyond that are experiencing rapid
growth.
There is, on the other hand, an opposing view that
favours the development of free standing
national capital markets. Proponents of this view
argue that disparities in the levels of
development of the capital markets in the three
countries and differences in their regulatory
framework render the pursuit of market
integration meaningless and unattainable. ”
Mr. Godfrey Tumusiime,
Director General, East African Development Bank
7th November 2003
Introduction
Benefits of integration
 Economies of scale (larger
and deeper market, cheaper
to serve, more liquid, higher
absorption capacity)
 Economies of scope (savings
from shared costs of central
services (e.g. CDS)
 Faster growth (cross border
activity)
 Shorter learning curve
(shared experience)
 Regionally & globally
competitive as block
Introduction
History of cooperation in East
Africa
 1917 Customs Union between
Kenya and Uganda,
Tanganyika joins later in
1922
 1919 East African Currency
Board
 1948 High Commission
 1961 Common Services
Organisation
 1961 Tanzania independence
 1962 Uganda Independence
 1963 Kenya Independence
 1967 EAC Treaty Signed
 1971
Idi Amin coup in Uganda
Introduction
History of cooperation in East Africa
cont’d..
 1977
EAC Collapses
 1986
NRM Government in
Uganda
 1993
Permanent Tripartite
Commission for East
Africa Cooperation
 1999
Revived EAC Treaty is
signed
 2000 Entry into force of the
Treaty
 2002 NARC Government in
Kenya
 2004 January, EAC
Customs Union
protocol to be signed
The East African Currency
Board
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Established in 1919 and started
issuing legal tender of Kenya,
Tanganyika and Uganda in 1920
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Par value of £1=Shs 20 EA
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Ultimate aim was to anticipate
and to pave the way for the
creation an East African Central
Bank
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June 1965 – Ministers of Finance
announce
in
their
budget
speeches that separate currencies
and national central banks would
be created in 1966.
The East African Currency
Board cont’d……
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Tanzania was of the view that an
EA central bank could only work
effectively under a political
federation
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Uganda
preferred
semiautonomous national banks linked
to a central reserve bank directing
certain functions
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Kenya preferred one central bank
responsible for the common
currency
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The limitations imposed on
national economic policies and
ambitions
soon
after
independence
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No previous experience of one
central bank serving two or more
independent states
The East African Community
1967-1977
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Signed in Kampala in June 1967
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Focus was mainly on commercial
exchanges, open inter-territorial
trade,
balanced
industrial
development and taxation policy in a
common market system
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First provision was for the free
exchange of the national currencies
and these actually traded at par for a
couple of years
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Partner States were required to
“harmonise their monetary policies
to the extent required for the proper
functioning of the common market.”
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EAC collapsed in 1977, when the
Finance Council failed to approve the
1977/78 EAC budget
Why did the first EAC
collapse
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Intra-community
differences
political
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Differences in the sharing of
benefits from the jointly owned
common services and lack of
policy for redress
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The then East-West divide
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Low private sector and civil
society input in the community
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Lack of a shared vision
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NO POLITICAL WILL
Revival of the East African
Community
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30.11.93
Permanent Trip’tite
Commission for EA
Cooperation established
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14.03.96
Cooperation Secretariat
established - the
executive arm
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30.11.99
EAC Treaty signed in
Arusha
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07.07.00 Entry into force of EAC
Treaty
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30.11.01
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Jan 2004 Signing of the EAC
Customs Union Protocol
Inauguration of the
EALA and EA Court of
Justice
NEW EAC PEOPLE CENTRTED, PRIVATE
SECTOR DRIVEN
EAC Convergence Criteria
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Maintenance of low underlying
annual inflation of less than 5
percent.
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High and sustainable annual rate
of growth of real GDP of at least 7
percent per annum.
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Sustainable current
deficit to GDP ratio.
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Budget deficit to GDP ratio
(excluding grants) of less than
5%.
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National savings to GDP ratio of
at least 20 percent in the medium
term.
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Gross foreign exchange reserves
equivalent to at least 6 months of
imports in the medium term.
account
EAC Convergence Criteria
cont’d….
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Maintenance of low market
determined interest rates.
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Maintenance of stable market
determined exchange rates.
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Pursuit of debt reduction
initiatives to reduce both
domestic and foreign debt to
sustainable levels.
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Maintenance of prudential
norms of banking regulation,
strict supervision, improved
corporate governance and
transparency of all financial
transactions.
Progressive Performance
Average GDP growth rates in
Uganda and Tanzania at 5.0
percent but declining growth in
Kenya. Kenya trend has reversed
with NARC Government
Source: MD Sajjabi Presentation AACB Kla
Uganda
Kenya
2
20
0
0
20
0
8
19
9
6
Tanzani
a
19
9
9
8
7
6
5
4
3
2
1
0
-1
Progressive Performance
cont’d….
Inflation has been contained
within single digit levels in the
three countries
Source: MD Sajjabi Presentation AACB Kla
25
20
Uganda
15
Kenya
10
Tanzani
a
5
02
20
00
20
98
19
-5
19
96
0
Progressive Performance
cont’d….
Current account to GDP (exc.
grants) has declined to less than
5.0 percent in Kenya and Tanzania
but Uganda’s deficit remains high
at more that 13.0 percent.
- Trend of Budget deficit is similar.
Source: MD Sajjabi Presentation AACB Kla
-6
-8
02
20
00
20
-4
19
19
96
-2
98
0
Uganda
Kenya
-10
-12
-14
-16
-18
Tanzani
a
Capital markets integration
journey
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Nairobi Stock Exchange was the
bourse for all East African Companies
from 1954
1977 Collapse of EAC
Non- Kenyan companies de- listed
Capital Markets Authority (K) born
1990
Capital Markets and Securities
Authority born 1994
Dar es Salaam Stock Exchange born
1996
Capital Markets Authority (U) born in
1996
Uganda Securities Exchange born in
1997
MOU establishing EASRA in 1997
(East African Member States Securities Regulatory
Authorities)
Full stock exchange membership 1999
CMDC established April 2001
Capital Markets highlights
of the EAC Treaty
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Article 85
Implementation of capital
market development
program and creation of
conducive environment for
the movement of capital
within the Community
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Article 86
Develop, harmonize and
integrate financial systems
EASRA’s Mandate
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Develop common capital market
strategies
Harmonize laws and structures
Foster regional stock exchange
(with a trading floor in each
capital)
Facilitate cross-border trade &
issues
Facilitate national status for East
Africans
Development of market
infrastructure
Development of policy proposals
for capital markets incentives
Development of proposals for the
alleviation of impediments
Development of a common trading
system
CMDC’s Mandate
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Sectoral Committee of the
EAC
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Makes policy proposals to
the three member states
through the EAC secretariat
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Makes joint proposals with
the fiscal and monetary
affairs committee to EAC
Finance Ministers at annual
pre-budget meeting
Snapshot of the regional
market
Population
100
Popn In
Millions
50
-
Kenya Uganda Tanzani
31
Population
24
37
Total
92
Country
Population
Equity Listings
100
No. of
Listings
-
Keny Ugan Tanz Total
Equity Listings
50
5
6
Country
Equity Listings
61
Snapshot of the regional
market cont’d…..
Liste d Bonds
No of Listed Bonds
70
60
50
40
30
20
10
-
Kenya
Uganda
60
Government
4
Corporate
Tanzania
Total
-
3
63
2
2
8
Country
Government
Corporate
Market capitalization
as at 18th Nov. 2003
4,000.00
USD
2,000.00
Millions
Series1
Kenya
Uganda
Tanzania
3,467.00
661.60
680.24
Snapshot of regional
market cont’d…..
GDP US$ Billions
GDP at current market price (US$ Billions)
14
12
11.5
9.2
10
8
GDP at current market
price(US$ Billions)
5.8
6
4
2
0
Kenya
Uganda
Country
Tanzania
Progress on Market Integration
 Legal and Regulatory
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Common English Law system
Harmonization of legal framework (ongoing)
Harmonization of disclosure
requirements (on-going)
Harmonized trading rules and
procedures
Corporate governance guidelines
Framework for dispute resolutions
Framework for Collective Investment
Schemes
Guidelines on the issue of corporate
debt
Cross border listing requirements
regulations
CDS Legislation (on-going)
Progress on Market Integration
cont’d….
 Structural/Institutional
 Common market structure
(3-tier)
 Establishment of a
regional CDS (on-going)
 Development of websites
 Training and study tours
 Regional certification
program (on-going)
 Regional studies
 Cross border listings
Progress on Market Integration
cont’d….
 Policy
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According all East Africans
domestic investor status
(ongoing)
Regulatory consolidation
(discussions)
Harmonization of tax rates
and tax incidences
Provision of tax incentives
Pension sector reform
Other regional integration
initiatives in Africa
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The West African Stock
Exchange (BVRM)
BVRM
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-
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Created; 18th December 1996
Activities started; 16th
September 1998
Member countries; Niger,
Mali, Burkina Faso, Benin,
Togo, Cote D’Ivoire, Senegal,
Guinea Bissau
Population:74.30 million
GDP; US$ 26.17 billion(40%
for Cote D’Ivoire)
Growth Rate: 2.6% (2002)
Inflation Rate; 3.1% (2002)
BVRM Cont’d….
No. of listed companies
Burkina faso
0%4%
4% 2% 5%
Benin
Cote D'Ivoire
Guinea Bissau
Mali
Niger
85%
Senegal
Togo
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Burkina Faso – 1
Benin - 2
Cote D’Ivioire - 38
Guinea Bissau - 0
Mali - 0
Niger – 0
Senegal – 2
Togo - 2
BVRM Impacts
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Increase in savings rate
- 1996 = 12.90%
- 2000 = 16.05%
Mobilization of long term capital
-Treasury bonds of Cote D’Ivoire
<-> US$98.46million
- Bonds of Chemical industry of Senegal
<-> (=US$ 23.08 million
- Bonds of Telecommunication Company of
Senegal <-> US$ 18.46 Million
- Bonds of Bank of Africa of Benin
<-> US$7.69 Million
Other regional integration
initiatives in Africa
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Southern African
Development
Cooperation’s (SADC) –
Committee for Insurance
Securities and Non bank
financial Authorities
(CISNA)
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African Stock Exchanges
Association (ASEA)
Challenges and stumbling
blocks
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Macro economic stability
Policies not fully harmonized
(e.g. foreign investment
restrictions)
No free movement of people,
capital and investments
No single currency
Low level of awareness
High poverty levels
Poor savings culture
Different paces towards
liberalization
Tax policies not fully
harmonised
Not single investment area
Challenges and
stumbling blocks cont’d…
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Lack of depth and liquidity
Information asymmetry
Regulation arbitrage
Underdeveloped and
unliberalised pension sector
Development of long term
insurance sector
Raising more savings to
finance investments
Multiplicity of regional
blocks (map illustrates)
Conclusion
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No integration will succeed
without political will
Regional integration is a way
forward if Africa’s capital
markets are to compete in the
global market
Explore regional stock
exchanges. BVRM good
example. Alliances can be a
good first step
African Union and NEPAD
should provide backbone
EAC made significant progress
towards integration/single
market
Quote…
“ ‘Emerging Markets’ may be a
euphemism but it is also a
declaration of hope and faith.
Although some of the stock
markets of developing nations
may sometime seem
‘submerged’, they are
generally emerging into bigger
and better things”
Mark Mobius, Investment
Manager, Templeton Emerging
Markets Group
References

Capital Market Integration in the East
African Community, the World Bank,
December 2002
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East African Community Treaty
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Achieving market integration; Scott
McCleskey 2003 (Elsevier Butterworth
Heinaman)

Sub-regional monetary integration:
challenges and prospects. The case of the
East African Community (EAC). Presented
at the 27th annual assembly of the
Association of African Central Banks
(AACB) by M.D Sajjabi ,
Economist (fiscal and monetary) East
African Community secretariat; 18th August
2003, Kampala, Uganda
For more information
contact
Capital Markets Authority
76/78 William Street
Bank of Uganda Building
P. O. Box 24565
Kampala
Tel: + 256 041 342788
Fax: +256 041 342803
Email: [email protected]
Website: www.cmauganda.co.ug
THANK
YOU