The leaders of the five members of the East Africa Community – Burundi, Kenya, Rwanda, Tanzania and Uganda – recently signed an agreement to form a single regional currency. This is an important move to integrate the region’s markets.

Following the establishment of the Customs Union in 2005, and then the Common Market in 2010, on 30 November 2013 five East African countries reached the agreement on the Monetary Union Protocol, which is the next step in regionalising the economy. Deepening regional integration in East Africa is critical to maintaining economic competitiveness as powerhouses Nigeria and South Africa increasingly attract foreign investment flows to the continent and push for further integration in their respective regions. Cross-border policies establishing the frameworks necessary to facilitate integration are critical but the successful development of regional market mechanisms driven by the private sector are equally important.

With a total population of about 135 million people, East Africa is attracting a dramatic increase in foreign investment, due primarily to natural-gas and oil discoveries of the East African coast. While Uganda and Kenya have discovered huge amounts of oil, Tanzania has massive natural-gas reserves. Global oil and gas companies have already begun exploration and the region is poised to become the next major energy hub in Sub-Saharan Africa.

In the 11 years since it was established, the EAC has achieved a great deal more than other regional organisations in Africa, which has begun to pay tangible dividends. For example, the region’s combined GDP has risen to $75 billion, up from $20 billion in 1999. Buoyed by this success, the Democratic Republic of the Congo and South Sudan have indicated interest in joining, primarily based on their critical need for access to ports in Tanzania and Kenya in order to realise the value of their energy and mineral endowments.

The current members’ reinvestment in the EAC comes at a critical time. In October 2013, Uganda, Kenya and Rwanda signed a Single Customs Territory deal, allowing the free movement of goods and services across their borders. Tanzania viewed this as a threat to their sovereignty but the real concern was the development of an export corridor through rival Kenya at the expense of Tanzania’s gateway to the sea. Adding to this tension are the number of regional infrastructure deals established such as cross-border oil pipelines and railway lines that leave Tanzania and Burundi behind.

The establishment of “hard” connections such as physical infrastructure is essential but so too is the development of regional markets that reply upon “soft” infrastructure. The best example of this is the East African Commodities Exchange (EAX), which seeks to form a single market through a combination of commodity trading, warehouse infrastructure and access to agricultural financing. The EAX strives to realise marketing efficiencies in commodity supply chains by providing a platform for transparent sales, promoting institutional developments, encouraging adherence to standards, and supporting the development of innovative financing models.

The EAX, which is the first of its kind on the continent, was formed entirely by the private sector: Nigeria businessman Tony Elumelu’s Heirs Holdings, Berggruen Holdings and 50 Ventures. On 5 November 2013, the exchange closed its inaugural transaction for 50 metric tons of maize between a Rwandan buyer, where the exchange is headquartered, and a Ugandan buyer. The initial success of EAX is a positive sign in the further integration of capital markets in East Africa, which is critical if the region is to stay competitive with other rapidly growing African economies.

To forward its integration agenda, the East African Securities Regulatory Authorities group is seeking to create a harmonised licensing framework for the region for brokers and dealers, and has also approved draft regulations on book-building for adoption by its members. Key policy initiatives under this scheme include:

• Ensuring strong, broad-based growth in community countries – Apart from the important ingredient of sound macroeconomic management, this raised questions of how to effectively implement the community’s customs union and common market to promote regional investment and trade.
• Promoting closer integration of the community’s financial markets – Electronic banking has been an area of success but the more traditional banking and capital markets remain segmented.
• Establishing budget management and drawing lessons from the euro zone on the fiscal requirements for effective monetary union.
• Harmonising monetary and exchange rate policies during the transition to monetary union.

The changes are part of ongoing efforts to standardise capital market regulations across East Africa to make it easier for businesses to tap into regional capital markets. Despite the region’s recent success in attracting FDI, even through the global financial crisis of 2008, regionalization of financial markets is essential to maintaining its standing as a investment destination.