EAC in crisis once again as funding model splits partner states

An impasse has hit the East African Community once again, with Kenya being accused of taking a hardline stance on a proposal that would see contributions from partner states based on gross domestic product (GDP).

The EAC Finance and Administration Committee has raised the red flag over remittance arrears amounting to $50 million, a situation that has left the Secretariat and its organs almost in limbo.

Denis Namara, chairperson of the East African Legislative Assembly’s General Purpose Committee, which is responsible for the budget, told The EastAfrican that the EAC integration agenda is suffering due to unreliable funding by partner states, partly blamed on an impasse on the formula for funding.

“I hear it is Kenya that has delayed that mechanism,” said Mr Namara.

But Kenya, which is the current EAC chair and the region’s largest economy, distanced itself from the blame, stating that member countries must fulfil their financial obligations to the bloc that’s the problem. Nairobi has cleared its dues.

The EAC budget for the fiscal year 2021/22 is $91.7 million. If paid, the arrears would cover more than half of the budget. According to the EAC Council of Ministers, $54.1 million (59 percent) was to be contributed by partner states or raised as other internal revenues and $37.6 million (41 percent) from development partners.

The 12th Meeting of Sectoral Council on Finance and Economic Affairs held on the May 7, 2021 proposed hybrid model in which partner states would contribute 50 percent of the budget on equal ratios and the remaining 50 percent would be assessed based on GDP per capita to cover 40 percent, then intra-EAC trade would cover five percent and imports from outside EAC five percent.

The Council later approved a model that stipulated that 65 percent be contributed by partner states on equal ratios and 35 percent be assessed based on partner states’ nominal GDP per capita for the past five years, as done by the World Bank.

But Kenya called for further consultations. Kenya’s Cabinet Secretary for National Treasury and Planning Ukur Yatani, who chaired a Finance Ministers meeting in Mombasa late last year, said the proposal was under review.

This week, Principal Secretary in charge of the Ministry of EAC and Regional Development Dr Kevit Desai said the review was still under review.

“There is a need to adopt a model that is sensitive to principles of equity, solidarity, equality and the size of the partner states’ economies,” the minister said late last year. “Having considered the divergent views, the Sectoral Council on Finance and Economic Affairs directed the EAC Secretariat to convene a dedicated session of EAC Ministers of Finance and Central Bank governors to consider the proposed hybrid model and finalise the matter.”

Dr Desai, the chairperson of the EAC Permanent Secretaries Council, said the decision to endorse the proposed formula has to be made by the National Assembly.

“The formula is under review and we are trying to find fair ground,” the PS said. He acknowledged that the funding delays have impacted compliance with the EAC Treaty rules and decisions.

“We have an equal responsibility to make decisions and equal responsibility to implement them. For example, if we agree that there shall be free movement of people, it is the responsibility of each partner state to implement it. It is important that we create a funding system that is not only based on who pays the most but on an equal basis, and then we must all bear that responsibility,” the Dr Desai said.

Kenya argues that it is not the formula that will make partner states pay but rather each partner state’s commitment. It says there is lack of goodwill to implement decisions of the EAC Council and Heads of State.

“If commitment is lacking, it doesn’t matter whether you amend the laws and rules. The funding mechanism may not be solution without commitment from each country,” said Dr Desai.

Mr Namara, a Ugandan EALA legislator, said activities of the EAC are not being implemented “because some partner states have decided not to pay.”

“The alternative financing mechanism, where they charge a percentage on imports at the point of entry — may be at five percent — are charged from a single Customs territory, and once that is done, partner states cannot default,” he said. “It is the only solution. But I hear it is Kenya that has delayed that mechanism.”

A Finance and Administration Committee meeting held in February in Arusha noted that partners are in arrears. South Sudan and Burundi owe the bloc $48,660,319, or over 95 percent of the outstanding amount, according to the latest data seen by The EastAfrican.

“The last Council meeting agreed but Kenya asked for more time to consider the proposal. They are delaying this process,” said Mr Namara, adding that theie are concerns that the entry of DR Congo necessitates the expansion of institutions and “without an alternative funding mechanism, the EAC cannot move.”

Kenya rejected the formula because it would be expected to contribute more but with no veto power.

An Assessment of the EAC partner states’ contributions to the EAC budget based on the GDP would see Kenya contribute 23.8 percent, Tanzania 17.8 percent, Uganda 16.7 percent, Rwanda 16.2 percent, South Sudan 13 percent and Burundi 12.7 percent.

Burundi and South Sudan were yet to disburse $7.44 million and $27.4 million respectively by February 2022.

But Burundi’s financial calendar is different from the rest of the EAC partner states. Its fiscal year begins on January 1. In December last year at the close of the financial year, Burundi paid $1,528,663, of which $917,198 was a contribution for the 2021/2022 financial year and the balance as settlement of arrears.

Kenya, Uganda, Rwanda and Tanzania had fully paid their contributions of $7.3 million each as at February 24, 2022.

“From the Finance and Administration report, things are bad,” said Dr Desai. “This is a serious problem and we appeal to the partner states to understand our predicament in fully funding the EAC.”

On the contributions model, Kenya argues that the EAC should borrow a leaf from other regional bodies before considering the proposal. The 15-member Southern African Development Community (SADC), of which Tanzania is a member, is funded by assessed contributions from member states, based on a formula determined by the Council of Ministers. The current formula, which was passed in 2002, is based on the moving average of GDP for the five previous years by each partner state, and South Africa contributes more than the rest of the members.

In addition, annual contributions from each member state has a 20 percent ceiling and a floor of 5 percent of the total budget, with the exception of member states with a population of 500,000 or less, which would contribute 2 percent.

SADC follows an assessed contribution model based on the size of GDP. But member states have equal rights in decision-making and all other benefits of the Community.

COMESA member states’ contributions are assessed in accordance with a formula that is decided by the Council from time to time. The current formula is constituted by GDP (30 percent), imports from non-COMESA countries (30 percent), intra-COMESA exports (30 percent); GNP per capita (5 percent) and population (5 percent). The upper ceiling any country can pay is 13 percent while the lower limit is 1 percent.

Meanwhile the EAC has revised the budget for the 2022/23 fiscal year to $91,579,215. The proposal is before the EALA. Dr Desai said due to funding challenges, the bloc may cut various components of key integration pillars.

“For example, with respect to the Customs Union and Common Market, we are not able to fully fund capacity for service integration,” the Kenyan PS said. The EAC Finance and Administration Committee meeting held on February 24 in Arusha pointed out that the Secretariat had reprioritised its strategies on covid-19 recovery. The EAC Council of Ministers has called for a meeting to discuss the 2022/23 budget in Arusha ahead of the March 29 Extraordinary Heads of State Summit. Top on the agenda is staff recruitment, audit report and the Summit agenda. But it is not just the budget that is generating more heat than light in the bloc. Kenya, Uganda and Tanzania are engaged in a tussle over who should host the East African Community’s proposed Monetary Institute in the run-up to the implementation of the East African Monetary Union (EAMU).

The EAMI is one of the institutions expected to carry out the preparatory work for the implementation of the East African single currency expected to be in place by 2024.

The other three institutions proposed under the EAMU are the EAC Financial Services Commission, the EAC Surveillance, Compliance and Enforcement Commission and the EAC Statistics Commission.

The partner states, save for South Sudan, have placed bids to host the institute to the Regional Assessment and Evaluation Committee.

The scramble for the crucial institute has rekindled the debate on the need to put in place a legal framework for the equitable sharing of benefits and costs of EAC’s integration process.

Equitable Sharing

Kenya, which has been preparing to host the institute, is opposed to Tanzania and Uganda bidding, saying they host more EAC institutions. An EAC Secretariat report titled “Equitable Sharing of Benefits and Costs of EAC Integration Process” and dated May 29, 2019 shows that the distribution of the EAC organs and institutions is uneven among the six partner states. It will be even more so with the entry of the Democratic Republic of Congo.

Dr Desai said each country should be assessed based on what they offer in terms of capacity and infrastructure.

The criteria for hosting an EAC institute include capacity, availability of land, physical structures and financial systems. “We are very competitive because we have a very efficient financial system. Kenya already has put in place the Kenya Monetary Institute,” Dr Desai said.

Tanzania’s Minister for Finance and Planning Dr Mwigulu Nchemba says the country has always been ready to host the institution.

“We have always been ready to host the EAMI. The country has already prepared all the locations and required facilities towards ensuring the establishment and proper performance of the EAMI,” he said when he submitted the country’s bid to the Committee last week. “It is vital and logical for Tanzania to host the EAMI because it already hosts the three main organs of the EAC — the Secretariat, the Court and the Assembly,” he added. But Uganda says it’s Kampala’s. The First Deputy Prime Minister and Minister of EAC Affairs Rebecca Kadaga while addressing the members of the verification committee, called for objectivity in deciding the rightful home for the institute.

Uganda has promised to provide land and support the institute with funds to the tune of $5 million.

Kenyan officials say it is only fair for Kenya to host the institution as the EAC organs and institutions distribution is heavily skewed in favour Tanzania and Uganda. Tanzania hosts the Secretariat, East African Kiswahili Commission, and the Competition Authority. Arusha is the temporary seat of the East African Court of Justice and the East African Legislative Assembly until the Summit determines their permanent seat.

Uganda is host to four EAC institutions: the Inter-University Council for East Africa, the Lake Victoria Fisheries Organisation, the East African Development Bank, and the Civil Aviation Safety and Security Oversight Agency.

Kenya has the Lake Victoria Basin Commission, Rwanda the East African Science and Technology Commission and Burundi the East African Health Research Commission. South Sudan hosts none