EAC needs to diversify financing mechanisms

The Treaty establishing the  EAC provides that; “The budget of the Community shall be funded by equal contributions by the Partner States and receipts from regional and international donations and any other sources as may be determined by the Council.”
Nathan Gashayija
Nathan Gashayija

The Treaty establishing the  EAC provides that; “The budget of the Community shall be funded by equal contributions by the Partner States and receipts from regional and international donations and any other sources as may be determined by the Council.”

Currently, the budget of the regional bloc (excluding assistance from development partners) is shared equally between Burundi, Kenya, Rwanda, Tanzania and the Republic of Uganda.

Although there has been a steady increase in the budget of the community from US$ 2.44 million in 1999/2000 to $122 million in 2011/12, the increase has not been enough to fund all the planned projects and programmes during the period.

The bloc is currently implementing the 4th EAC Development Strategy (2011-2016), to deepen and accelerate the integration process.

This strategy focuses on consolidating the benefits of a fully-fledged Customs Union, full implementation of the Common Market and laying the foundations for the Monetary Union and the Political Federation.

This implies it will require additional funding which may not be realized through the current financing arrangement.

What is the practice in other Regional Economic Communities?

Various RECs apply different modes of budget financing. Contribution to the budget of the African, Caribbean and Pacific Group of States (ACP) is based on Member States’ capacity to pay as represented by GDP, with a system of sanctions applicable in the event of default.

The Association of South East Asian Nations (ASEAN) applies “Equal Contribution” mode of budget financing, while COMESA’s budget is financed through the “Assessment Method” in accordance with a formula that is decided by the Council from time to time.

The formula incorporates a ceiling and floor mechanism. COMESA also imposes sanctions to secure fulfillment by the Member States of their obligations under COMESA’s Treaty.

The Economic Community of West African States (ECOWAS) funds it budget from a “Community Levy” and such other sources as may be determined by the Council. A special budget is made available through the recommendation of the Council to meet the extra-budgetary expenditure of the Community.

The European Union (EU)’s budget is funded mainly (99%) from EU’s own resources, supplemented by other sources of revenue.

In the defunct EAC revenue collected by the East African Income Tax Department and the East Africa Customs and Excise Department were paid into the General Fund of the Community.

The balance, after deducting the cost of collection, and other appropriations approved by the Assembly, would be remitted back to the Partner States based on an agreed formula, as provided for under Article 68 (7) of the Former EAC Treaty.

The budget of SADC is funded by financial contributions made by MemberStates, and such other sources as may be determined by the Council. Member States contribute to the budget based upon a formula agreed upon by the Summit.

Currently, the formula is based on a 5-year moving average GDP, with a ceiling and floor mechanism. The United Nations applies the “Assessment Method” based on GDP, with a ceiling of 22% and floor of 0.01%.

What should be the best option for EAC?

From the analysis of the various financing options practiced by the RECs, one would argue thatno single system of contribution or budget financing option offers a stand-alone framework on whose basis an alternative budget financing option for EAC can be formulated, as each option has its advantages and disadvantages.

It is important therefore to recommend borrowing from the above options, a hybrid of equal contribution (50%) and Assessed Contribution (50%) as the best option for financing the budget for the EAC.

The Assessed Contribution could be based on 5-year moving average of either intra-EAC exports or GDP.

While 50% of the EAC Budget is shared equally among Partner States, the remaining 50% should be distributed under the Assessed Contribution method, subject to the following:-

If any Partner State’s assessed contribution is more than 30%, then the Partner State’s share of the contribution is capped at 30%.

If the Partner State’s assessed contribution is less than 10%, then its share of the contribution is capped at 10%;

The balance of undistributed share of contributions is then proportionately shared among the Partner States paying less than 30% and more than 10%.

Partner States may decide otherwise, with its own pros and cons, may for example introduce a levy on imports from outside the region.

To ensure a sustainable mechanism in financing the budget of EAC, it is recommended that Partner States will explore more options and decide which way to go.

The writer is Head of Economic and Productive Sectors in the Ministry of EAC Affairs

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