ASSESSING THE VIABILITY OF

SOMALIA’S INTEGRATION INTO THE

EAST AFRICAN COMMUNITY

National Economic Council

Afgoye Road, Wadajir District, Working Paper
Mogadishu - Somalia October, 2023
kamaludin@nec.gov.so
https://nec.gov.so
 National Economic Council

The National Economic Council (NEC) was

established in July 2018 under Presidential
Degree (No. 89) and reformed in November
2022 under Presidential Degrees (No. 61 &
62). It is the platform for formulating national
economic policies and plans, where relevant
regional and international economic issues
and cooperation are discussed. NEC is set up
to promote inclusive and sustainable
economic growth for Somalia through
achievable strategies and favorable policies
that encourage economic growth.

The NEC advisory is a key component of the

Office of the President responsible for
providing advisory services on economic
PFM & Macroeconomic Policies
matters. The NEC is chaired by the President
of the Federal Government of Somalia (FGS),
Financial Sector Development
with the Prime Minister serving as deputy.
The membership of the Council is composed
Trade and Regional Economic Integration
of the economic sub-committee of the
Cabinet of the FGS, the Governor of the
Governance Reforms and enablers
Central Bank of Somalia, Federal Member
States, and nine (9) national economic Enterprise and Development
experts. The National Economic Advisers
(NEA) support the national leadership in Extractive and Productive sector
conducting evidence-based research and
providing advisory services on the nation's Built environment and Climate Change
economic and social issues. The NEA and a
Secretariat Unit form the technical arm of the Centennial Vision 2060 & Presidential Initiatives
NEC.
Table Of Contents
List of Acronym
AFRREO Africa Regional Economic Outlook
CBS Central Bank of Somalia
CET Common External Tariff
DRC Democratic Republic of the Congo
EAC East African Community
EAMU East African Community Monetary Union Protocol
FDI Foreign Direct Investment
FRS Federal Republic of Somalia
FTA Free Trade Area
HIPC Heavily Indebted Poor Countries
IMF International Monetary Fund
MAC Monetary Affairs Committee
MSMEs Micro, Small, and Medium Enterprises
OCA Optimum Currency Area
PTA Preferential Trade Area
SICPA Somali Institute of Certified Public Accountants
SSA Sub-Saharan Africa
VAT Value-Added Tax
WB World Bank
 Executive summary

In today's business world, regional integration is acknowledged as a strong force for

promoting social and economic growth. Developed and developing economies alike adopt
policies and initiatives for regional integration to achieve mutual economic, social, and
political development goals. Federal Republic of Somalia (FRS) applied to join the East
African Community (EAC). In August 2022, the president appointed a special envoy to the
EAC, who has made significant progress within a short span. On June 6th, 2023, the EAC
Heads of States Summit adopted the verification report of Somalia to join the EAC.
Negotiation teams from Somalia and the EAC met from 22nd to 30th August 2023 in
Nairobi, Kenya, to negotiate Somalia's admission into the EAC as directed by the Summit
of EAC Heads of States. The final decision regarding Somalia’s admission into the EAC will
be discussed at the Summit of Heads of States, which is scheduled for November 2023.

This study investigated the readiness and the viability of Somalia’s Integration to join the
EAC. It adopted a descriptive approach using secondary data collected from the EAC
open data for Africa, World Economic Outlook Database – IMF, Africa Regional Economic
Outlook – IMF, the World Bank, the Ministry of Finance of Somalia, and the Central Bank
of Somalia from 2015-2022. The variables assessed are GDP growth, inflation rate, public
debt, reserve cover, government revenue and expenditure as a percentage of GDP,
external grants, total tax as a percentage of GDP, trade openness, foreign direct
investment (FDI), & exports & imports.

According to the findings, most EAC partner states have struggled to meet the
macroeconomic convergence requirements. Somalia has performed relatively better in
number of the macroeconomic convergence criteria than EAC partner states. Regarding
fiscal policy performance, the EAC is doing better compared to Somalia. Somalia's
domestic income comes mainly from customs taxes. Therefore, Somalia must diversify its
revenue sources and avoid heavy dependence on customs duties. It must raise taxes on
goods and services (VAT), income, profits, and capital gains (corporate tax), and property
taxes, etc. Somalia has shown an increasing trend in FDI attraction. For the intra-regional
trade data, all EAC countries have shown an increasing trend in intra-regional trade, but it
remains low. The inter-trade between Somalia and the EAC is insignificant and needs to
be addressed. This study recommends that Somalia establish some key institutions
required to coordinate and implement aspects of the EAC integration process.

National Economic Council | 01 nec.gov.so

 Acknowledgements

The preparation of the report was led and coordinated by Dr. Kamaladin Ahmed Sheikh, a National
Economic Advisor (NEA) and member of the National Economic Council of Somalia, with a team of
National Economic Advisors (NEAs) and senior research economists at the National Economic Council
namely Mohamed Abdurrahman Mohamed, Mohamed Nur Sharif, Dr. Mustafe Abdi, Dr. Mohamed
Osman (NEA) and Dr. Abdisalam Mohamed (NEA).

Dr. Kamaladin was the project’s lead investigator and was in charge of designing the research protocol,
overseeing the study, and writing the manuscript. Dr. Mohamed Osman (NEA) contributed to section
one of the report while Mohamed Abdurrahman led the preparation of section two, focusing on the
macroeconomic convergence criteria, and also contributed to various sections of the report.
Mohamed Nur Sharif and Dr. Mustafe Abdi led the drafting of section three (Fiscal Analysis and Tax
Structure) and section four (Trade and Investment of EAC Countries), respectively.

The report was peer-reviewed by external consultants, Dr. Aues Scek, a Senior Research Economist at
the African Centre for Economic Transformation, and Dr. Abdul-Aziz Iddrisu, an associate professor in
finance at Kumasi Technical University and economic planning specialist at African Center for
Economic Transformation (ACET). Meanwhile, Dr Abdisalam Mohamed, National Economic Advisor and
member of the National Economic Council provided invaluable contributions throughout various faces
of the study preparation. The data used in the report was compiled from various sources, including the
World Economic Outlook Database - IMF, Africa Regional Economic Outlook - IMF, the World Bank, the
Ministry of Finance of Somalia, and the Central Bank of Somalia.

The report also acknowledges the contribution of Dr. Abdisalan Omar Hadliye, the Special Envoy of the
President of the Federal Republic of Somalia for the East African Community, for providing important
information and advice. Finally, Dr. Hassan Adan Hosow, the Executive Director of the National
Economic Council and Chief Economic Advisor to the President of Somalia is acknowledged for
providing a critical review of this study and for his unwavering support and constant advice.

National Economic Council | 02 nec.gov.so

Introduction
 Introduction
1.1 Background
The Federal Republic of Somalia first made its
first attempt to join the East African
Community (EAC) in 2012. The application
was denied for several reasons. In 2019,
Somalia resubmitted its application for
membership in the EAC; however, it was put
on hold as the country was going through
political transition that culminated in the
election of Dr. Hassan Sheikh Mohamoud as
president on May 15, 2022.
Over the years, Somalia has made good
progress on multiple fronts. Macroeconomic
stability has been maintained; the Heavily
Indebted Poor Countries (HIPC) initiative has
served as a policy instrument to implement
reforms and ensure debt relief is achieved to
free the country from unsustainable level of
external debt; and several sector laws were
passed and vital institutions were set up in
the meantime. Somalia has been advancing
its foreign trade policy through accession to
regional and international economic blocs. In
an effort to facilitate Somalia’s bid to join the
regional block and strengthen diplomatic ties
with the East African Community, a special
envoy was appointed by the President in
August of 2022. The envoy has made
exceptional progress in a relatively brief
period.
To move Somalia’s application forward, an
EAC delegation led by Peter Muthiki paid a
visit to Somalia on 25 October 2022. His visit
was followed by the EAC dispatching a
verification mission to Somalia on January
25th, 2023 to determine if the country was
ready to join the Community. The verification
team consisted of experts from the EAC
Partner States, with a mandate to assess
whether the country met the standards for
accepting new members, as per the
specifications in the EAC Treaty.
National Economic Council | 04 nec.gov.so
On June 6th, 2023, the East African
Community Heads of States meeting in
Bujumbura, Burundi, approved the Report of
the Verification Team on the Application of the
Somalia to Join EAC. A delegation from
Somalia and the EAC met from 22nd to 30th
August 2023 in Nairobi, Kenya, to negotiate
the Somalia's admission into the EAC as
directed by the Summit of EAC Heads of
States. The final decision regarding Somalia’s
admission into the EAC will be discussed in
the Summit of Heads of States, which is
scheduled for November 2023.
Somalia has faced several socio-political
challenges and periods of instability,
impacting its economic potential. However,
since 2012, Somalia has been getting back on
its feet after a decade of civil war and unrest.
Today, it has one of the most active
private-sector led economies in Sub-Saharan
Africa. Somalia has steadily improved its
democratic credentials by adopting a form of
federalism with two levels of government -
National and Federal Member State levels -
that include regional government and
parliaments with significant latitude for
self-government and application of
universally acceptable principles of good
governance, democracy, the rule of law,
human rights, and social justice. The country
is seeing tangible progress in prudent public
financial management. This has been
commended by multilateral institutions such
as the IMF, World Bank, and AfDB. To
strengthen these achievements and
contribute to the rebuilding effort, the Federal
Republic of Somalia is embarking on a
journey to see the country further integrated
into the region and create greater trade and
commerce opportunities by joining the EAC.
 Introduction

1.2 Potential Benefits for the EAC from Somalia’s Membership

The Somali community is known for its trade Overall, the Somali community in East Africa
and active enterprise. Somalis have a long demonstrates a robust entrepreneurial spirit
history of engaging in and promoting various and active participation in various economic
cross-regional business enterprise, including activities, making significant contributions to
trade, and remittance-based economies. the regional economy.
Trade has been a central part of Somali
culture for centuries, with major cities like Somalia can potentially make a significant
Mogadishu and Hargeisa serving as contribution to the East African Community
important commercial hubs. The Somali (EAC) if it joins the bloc. The following
people have traditionally been involved in economic factors indicate the economic
cross-border trade, with Somalia's strategic importance of Somalia to the region:
location along the Red Sea and the Indian
Ocean facilitating regional commerce.
Entrepreneurship is another crucial aspect of
the Somali community's economic activity.
Somalis are known for their business
awareness and ability to establish thriving
domestic and international enterprises. They
are involved in diverse sectors such as
telecommunications, money transfer
services, the food and restaurant industry,
import-export businesses, and the hospitality
industry.

Somali people already live and work in all EAC

member states, already contributing to the
region's social and economic development.
They started integrating with the EAC region
long before the request to formalize the
decision to join the EAC. According to the
latest report from the auditing firm KPMG,
Somalis living in Kenya alone contributed
about $2 billion to the economy (Garowe
Online, 2023). This finding leads us to assert
that given the considerable economic
capabilities demonstrated by our citizens
residing throughout the East African region,
we can stand in a better position to generate
growth within the region and create
employment possibilities for the enormous
number of young people who live there.

National Economic Council | 05 nec.gov.so

 Introduction

1 3

Strategic Location Crops

Somalia is a highly dynamic and growing Despite facing challenges like drought and
economy strategically located in the Horn of limited infrastructure, crop production
Africa and borders some of the remains essential in Somalia. The country has
fastest-growing countries in the world, fertile land, particularly in riverine areas,
including those in East African Community supporting the cultivation of crops like
such as Kenya and Ethiopia. Somalia has bananas, maize, and sorghum. Crop
access to key international shipping routes, production contributes to local food security
connecting the Red Sea with the Arabian and rural livelihoods.
Peninsula, which the region will tap into to
increase intra-regional trade. This location
has historically attracted commercial and
military interests from various countries due
to its proximity to major trade routes and
potential for natural resources.

Fisheries
Somalia has the longest mainland coastline
(over 3,300 km) in Africa, making it
well-positioned for fisheries. The Somali
2 waters are rich in fish and other marine
resources, which support the livelihoods of
Livestock coastal communities and contribute to the
Somalia has one of the largest livestock country's export earnings.
populations in Africa, mainly consisting of
camels, goats, and sheep. Livestock
production plays a crucial role in the
country's economy, providing livelihoods to
many Somalis and contributing to exports of
meat, hides, and skins.

National Economic Council | 06 nec.gov.so

 Introduction

5 7

Diaspora Trade
Somalia has a vast diaspora willing to invest Somalia is strategically located near major
in the country. Somalia diaspora is a major trade routes, and its main ports facilitate
investor in the country and provides 80% of regional and international trade. Imports and
start-up capital for small and medium exports of goods, including livestock, fish,
enterprises. Remittance-based economies crops, and traditional handicrafts, contribute
significantly contribute to the economic to the country's economy.
development of Somalia and other East
African countries with Somali diaspora
communities. Somalis living abroad send
significant amounts of money to support their
families and invest in local businesses. The
remittance flows are crucial in stabilizing the
economy and providing financial support for
education, healthcare, and other essential
needs.

Natural resources
Somalia is rich in natural resources, including
oil, natural gas, minerals, fishing stocks, and
abundant renewable energy sources.
Developing these resources could drive
economic growth in Somalia and contribute
6 to regional economic development.

Telecommunications
Somalia has witnessed a telecommunications
revolution over the past decade. Mobile
money services and the widespread use of
mobile phones transformed the country's
financial system and facilitated economic
activities, especially in urban areas.

National Economic Council | 07 nec.gov.so

 Introduction
1.3 Potential Benefits for Somalia Joining the EAC
Global nature and increasing
inter-dependence of the world economy push
countries to get together and create a
regional integration. It is increasingly difficult
for a small open economy to compete against
large ones because of the small size of its
market and its small economies of scale.
Moreover, regional integration is essential for
changing and growing the economy. It can
help people access bigger markets and boost
growth to enhance the fortunes of the
country. The potential advantages that
Somalia could derive from its membership in
the East African Community (EAC) are as
follows:
1 Increased Market Access
By joining the EAC, Somalia will gain access
to a larger market, with a combined
population of nearly 300 million people. This
can provide new opportunities for Somali
businesses to expand and increase their sales
by accessing a more extensive customer
base. Collaborative efforts in sectors like
agriculture, manufacturing, and tourism can
drive Somalia’s economic growth and attract
investment.
2 Free Movement of People and Goods
Membership in the EAC would allow for the
free movement of people, goods, and services
across borders. Somali citizens would have
the opportunity to travel, work, and study in
other EAC countries, fostering regional
integration and promoting cultural exchange.
National Economic Council | 08 nec.gov.so
3 Regional Infrastructure Development
The EAC significantly emphasizes developing
regional infrastructure, such as transport
networks, energy grids, and communication
systems. Somalia could benefit from these
infrastructure projects, contributing to
enhanced connectivity, trade facilitation, and
regional economic integration.
4 Increased Foreign Direct Investment
The EAC has a strong and growing economy,
which can attract investment from both
domestic and foreign investors. This can
benefit businesses by accessing expanded
capital sources, new technologies, and new
markets. Overall, Somalia joining the EAC has
the potential to create a more favorable
business environment for the private sector
by providing increased access to new
markets, improved infrastructure, and a more
favorable business climate. By leveraging
these benefits, the private sector in Somalia
can grow and succeed, helping to drive
economic growth and development.
5 Collaboration on Security and Stability
As an EAC member, Somalia would have the
opportunity to collaborate with other
member states to address common security
challenges, such as terrorism, piracy, and
cross-border crimes. This would enhance
regional security and stability, benefiting
Somalia's security situation.
6 Shared Resources and Knowledge
Member states can pool resources, expertise,
and research efforts to tackle common
challenges, such as healthcare, education,
and sustainable development.
 Introduction

1.4 Challenges Somalia Might Face in the Process of Joining EAC

While Somalia's potential membership in the

East African Community (EAC) could offer
various benefits, there are several challenges
that the country may face in the process:

1 Security concerns 5 Political stability and regional relations

Somalia has been grappling with ongoing
conflict and instability, including the threat of
terrorism from extremist groups like
Al-Shabaab. Its security situation may raise
concerns among EAC member states, as
stability and peace are essential for regional
integration.
2 Institutional capacity
Somalia's governance structures and
institutions are still being strengthened and
rebuilt after years of civil war. It may need
help aligning its legal and regulatory
frameworks with EAC standards and
effectively implementing regional policies.
Maintaining political stability within Somalia
and fostering positive regional relations are
crucial for EAC membership. Addressing
political tensions and collaborating with
neighbouring countries will be vital for
Somalia's successful integration. While these
challenges exist, the EAC and Somalia can
work collaboratively to overcome them
through supportive frameworks, technical
assistance, and shared interests in regional
development and stability.

3 Economic disparities

Somalia's economy, primarily based on

agriculture and remittances, could be less
developed than other EAC member states.
Wide income disparities and limited
infrastructure could impede its integration
into the EAC's common market.

4 Trade barriers and competition

Joining the EAC would involve removing

trade barriers and adopting common
standards and regulations. Somalia might
face difficulties adjusting its economy to
regional competition and complying with the
EAC's trade protocols.

National Economic Council | 09 nec.gov.so

 Introduction
1.5 Current Updates About EAC
East African Community (EAC) is a regional
intergovernmental organization in Eastern
Africa, consisting of seven member states:
Kenya, Tanzania, Uganda, Rwanda, Burundi,
South Sudan, and the Democratic Republic of
the Congo (DRC). The EAC promotes regional
cooperation and integration in various
sectors, including trade, infrastructure,
investment, and socio-economic
development. Their objective is to enhance
collaboration in the domains of economics,
politics, social dynamics, and cultural affairs
among the constituent nations of the EAC
(EAC, 2023). According to Article 6 of the
Treaty, the fundamental principles governing
and guiding the attainment of the objectives
of the EAC are: mutual trust, political will, and
sovereign equality; peaceful co-existence
and good neighbourliness; peaceful
settlement of disputes; good governance-
democracy, rule of law, accountability,
transparency, gender equality, and protection
of human rights; equitable distribution of
benefits; and cooperation for mutual benefit.
The EAC has an estimated population of
around 283.7 million individuals, with more
than 30% residing in metropolitan areas. The
land surface area of the EAC is estimated to
be 4.8 million square kilometers and a
combined Gross Domestic Product of US$
305.3 billion. The EAC is experiencing rapid
growth as a regional economic bloc, and it is
actively expanding and strengthening
collaboration among its Partner States in
numerous significant areas to promote
mutual advantages. The realms mentioned
above encompass political, economic, and
social dimensions. Currently, the EAC has
made significant progress towards
establishing an economic union. They formed
a preferential trade area (PTA) in 1993 and a
free trade area (FTA) in 1996.
National Economic Council | 10
In 2005, they established the Customs Union,
as Article 75 of the Treaty stipulated for
establishing the East African Community. The
Partner States reached a consensus to
establish a system of free trade wherein no
duties will be applied to products and services
exchanged among themselves.
Additionally, they agreed to implement a
common external tariff (CET), which ensures
that imports from countries outside the EAC
zone are subjected to identical tariffs when
sold to any EAC Partner States (Attri, 2017).
On June 30th, 2010, EAC member states
officially introduced the Common Market
Protocol. This protocol facilitates the
unrestricted movement of commodities,
services, capital, and labor throughout the
regional bloc. According to projections, the
complete implementation of the common
market was anticipated by December 2015.
The established date was not adhered to;
however, there have been notable
advancements made in the pursuit of
implementing a single market (EAC, 2023).
In November 2013, the heads of states and
governments signed the East African
Community Monetary Union Protocol
(EAMU). EAMU is expected to be established
in 2031. They agreed to coordinate the
following policy harmonization: 1) fiscal
policy, 2) monetary and exchange rate policy,
3) statistics, 4) coordination of financial
markets, 5) banking oversight and financial
stability, 6) payment and settlement systems,
and 7) accounting and financial standards
that are consistent (Pan African Chamber of
Commerce and Industry, 2023).
nec.gov.so
 Introduction

The attainment of a Political Federation
represents the final goal of the EAC Regional
Integration process, constituting the fourth
phase after establishing the Customs Union,
Common Market, and Monetary Union. Article
5(2) of the Treaty for the establishment of the
East African Community stipulates the
provision of a framework that is built upon
three fundamental pillars: unified foreign and
security policies, strong governance, and the
efficient execution of preceding phases of
Regional Integration (Kitimo, 2023).
Section two looks into the macroeconomic
convergence criteria for EAC countries. It
covers GDP growth rates, inflation rate, and
budget deficit. Section three sheds light on
the fiscal analysis and tax structures of EAC
to assess the performance of partner states.
Section four delves into the trade and
investment of EAC countries. Topics covered
in this section include an analysis of exports
and imports, foreign direct investment, and
degree of openness. Finally, section five
presents recommendations based on the
findings of the study.

1.6 Research Objective & Methodology

This study's main objective is to investigate

the Federal Republic of Somalia's (FRS)
readiness to join the East African Community
(EAC). It adopted a descriptive approach. This
study is based on secondary data collected
from the EAC open data for Africa, World
Economic Outlook Database – IMF, Africa
Regional Economic Outlook – IMF, the World
Bank, the Ministry of Finance of Somalia, and
the Central Bank of Somalia from 2015-2022.
The variables assessed are GDP growth,
inflation rate, public debt, reserve cover,
government revenue and expenditure as a
percent of GDP, external grants, total tax as
percent of GDP, trade openness, foreign direct
investment (FDI), and exports and imports.

This study is divided into five sections:

Section one is examines the general
background of Somalia’s journey of joining
the block, how EAC can benefit from
Somalia’s membership, potential benefits for
Somalia from joining the EAC, and finally, a
review of recent developments of the East
African Community.

National Economic Council | 11 nec.gov.so

Macroeconomic
Convergence Criteria
 Macroeconomic Convergence Criteria

2.1 Background

Macroeconomic convergence (as defined by A) Primary Criteria

the EAC regulations) refers to the process by
which different regional economies strive to
achieve similar macroeconomic outcomes,
such as economic growth, inflation rates,
budget deficits, and minimal public debt.
Macroeconomic convergence is crucial in
maintaining stability within the regional
economy, effectively mitigating the impact of
external influences, and preventing excessive
volatility. This stability, in turn, helps
economic development because it makes
business and investment setting stable and
appealing. The Maastricht Treaty established
the main convergence criteria in the 1992
European Union. Articles 83 and 84 of the
Treaty establishing the East African
Community (EAC) stipulates the requirement
for convergence of macroeconomic policies.
These articles lay the basis for
macroeconomic coordination and monetary
and fiscal policy harmonization within the
EAC.
2.2 Convergence Criteria Set by EAC
In late 2007, the Monetary Affairs Committee
(MAC) of EAC, comprising of Central Bank
Governors, convened in Entebbe, Uganda.
The meeting aimed to formulate a roadmap
and strategic framework to speed up the
development of a monetary union within the
EAC. They had agreed on the following
macroeconomic convergence criteria, which
can be divided into primary and secondary
criteria.
The member nations of the EAC have reached
a consensus on four fundamental
convergence criteria to promote economic
convergence. These criteria must be achieved
and sustained for a minimum duration of
three years before accession to the monetary
union
A ceiling on headline inflation of 8%.
A ceiling on fiscal deficit, including
grants of 3% of Gross Domestic Product
A ceiling on gross public debt of 50 %
of Gross Domestic Product in Net
Present Value terms.
Reserve cover of
4.5 months of imports.
B) Secondary Criteria
Implementing these macroeconomic
convergence criteria aims to address any
existing macroeconomic disharmonies
among the member states of the East African
Community (EAC) that may have arisen due
to the pursuit of diverse macroeconomic
policies.
A ceiling on core inflation of 5%;
A ceiling on fiscal deficit
excluding grants of 6% of GDP;
A floor on tax to GDP ratio of 25.

National Economic Council | 13 nec.gov.so

 Macroeconomic Convergence Criteria

2.3 Ceiling on Inflation Rate

Strategic management of inflation at a low members achieved single-digit inflation rate,

and stable level is crucial for regional
integration to succeed, and it is regarded as a
prerequisite for a monetary union to be put in
place. The EAC partner states agreed to
comply with the convergence criteria of a
ceiling of 8.0 percent headline inflation for at
least three consecutive years prior to the
establishment of monetary unification. The
convergence of inflation rates is generally
seen as a positive outcome as it promotes
economic stability and facilitates economic
integration. Low and stable inflation rates are
conducive to sustained economic growth,
price stability, and an improved investment
climate. However, it is essential to note that
the convergence process may vary across
economies and can take time depending on
various economic factors, institutional
frameworks, and policy decisions.
As shown in Table 1, from 2015 until 2022,
four of the seven current EAC
with Tanzania (4.4 percent) and Uganda (7.2
percent) recording the lowest average
inflation rate. Burundi failed to comply with
this criterion in 2017 and 2022, while Rwanda
had failed to comply with this criterion only in
2022, during which they had experienced
unusual inflation rate. On the other hand,
South Sudan has been facing high inflation
rates since it acceded to the EAC in 2016.
However, they significantly reduced inflation
from three-digits to a current rate of 6.7
percent as of 2022, which can be considered
a remarkable achievement. All other EAC
member states (DRC, Kenya, Tanzania, and
Uganda) recorded inflation rates below the
macroeconomic convergence criterion.
Somalia, a nation aspiring to become a
member of the East African Community, has
exhibited the most favorable inflation rates
compared to its counterparts in the EAC. The
inflation rates in Somalia fluctuated between
2.3% and 6.7% from 2016 to 2022.

Table 1: EAC macroeconomic convergence criteria, inflation rate target ≤ 8%

Inflation 2015 2016 2017 2018 2019 2020 2021 2022

Burundi 5.5 5.6 16.1 -2.8 -0.7 7.3 8.4 18.8

DRC 0.8 1.6 3.3 3.6 1.8 3.8 8.2 8.8

Kenya 6.6 6.3 8 4.7 5.2 5.4 6.1 7.7

Rwanda 2.5 7.2 8.3 -0.3 3.9 9.9 -0.4 17.7

South Sudan 52.8 380 189.9 83.5 87.2 29.7 10.5 -6.7

Tanzania 5.6 5.2 5.3 3.5 3.5 3.3 3.7 4.4

Uganda 5.6 5.7 5.2 2.6 2.9 3.3 2.2 7.2

Somalia 4.0 2.3 3.4 4.2 4.7 4.1 4.6 6.7

Source: EAC data portal and CBS 2022

National Economic Council | 14 nec.gov.so

 Macroeconomic Convergence Criteria

2.4 Ceiling on Fiscal Deficit

Before coming into force of the monetary
union, EAC member states should
demonstrate strong fiscal balance, as
evidenced by a ceiling on fiscal deficit,
including grants, of 3.0 percent of GDP. After
a single, supranational monetary policy is put
in place, the national fiscal policy remains one
of the main tools to deal with adverse
disturbances. This makes fiscal convergence
an essential part of monetary unification. If
there are significant differences in fiscal
policies and deficits in the monetary union,
much borrowing in the area could be a sign of
structural problems. It would be at the cost of
investments that would make the union more
productive (Kigabo, 2018).an essential part of
monetary unification. If there are significant
differences in fiscal policies and deficits in the
monetary union, much borrowing in the area
could be a sign of structural problems. It
would be at the cost of investments that
would make the union more productive
(Kigabo, 2018).
As indicated in Table 2, only DRC and
Tanzania complied with the criterion of low
fiscal deficit from 2015 until 2022, scoring an
average deficit of 0.68 and 2.3 percent,
respectively. Burundi and Kenya recorded
fiscal deficits significantly above the 3.0
percent threshold from 2015 until 2022, with
an average deficit of 5.3 percent and 7.1
percent of GDP, respectively. The fiscal
performance was mixed over the past years
for the remaining EAC member states
(Rwanda, South Sudan, and Uganda). The
overall fiscal balance of these three countries
was relatively stable, scoring an average
deficit of 4.7 percent in each country. South
Sudan had a high fiscal deficit significantly
above the 3.0 percent threshold in 2015 and
2016, but after its accession to EAC, they
significantly reduced their fiscal deficit. South
Sudan had a fiscal surplus in 2017 (6.8%),
2019 (1.4%) and 2022 (1.6%). The DRC also
recorded fiscal surplus, but only in 2017
(1.3%).

Table 2: Fiscal Balance, including Grants of EAC and Somalia (in % of GDP, 2015–2022)

Budget Deficit 2015 2016 2017 2018 2019 2020 2021 2022

Burundi -7 -6.5 -4.3 -5.1 -4.1 -3.4 -2.3 -9.5

DRC -0.4 -0.5 1.3 0 -2 -1.4 -0.9 -1.6

Kenya -6.7 -7.5 -7.4 -6.9 -7.4 -8.1 -7.1 -6

Rwanda -2.7 -2.3 -2.5 -2.6 -5.1 -9.5 -7 -6.5

South Sudan -15.7 -18 6.8 -0.2 1.4 -4.6 9.4 1.6

Tanzania -3.2 -2.1 -1.2 -1.9 -2 -2.5 -3.4

Uganda -2.5 -2.6 -3.6 -3 -4.8 -7.5 -7.5 -5.8

Somalia 0.4 0.3 0.2 -1.1 0.7

Source: EAC data portal and CBS 2022

National Economic Council | 15 nec.gov.so
 Macroeconomic Convergence Criteria
On the regional level, fiscal deficits have
increased in most EAC member states over
the past three years compared to the period
between 2015 and 2019. This might be due to
the COVID-19 pandemic, which has affected
most countries worldwide. FRS achieved
favorable score relative to the criterion of low
fiscal deficit as it had recorded almost zero
budget deficit for the last five years. Somalia
must continue its commitment to avoid a
budget deficit and replenish the fiscal buffer.
2.5 Ceiling on Gross Public Debt
The ceiling on gross public debt of 50.0
percent of GDP is another indicator of fiscal
convergence before establishing a single
currency in the East African region. EAC
partner states relatively maintained a gross
public debt within the threshold. For instance,
South Sudan, which became a full community
member in 2016, has reduced its gross
government debt from 125% of the GDP in
2016 to 42% in 2019.
Figure 1: EAC General Government Gross Debt, % GDP
Source: International Monetary Fund, World Economic Outlook Database, April 2023
National Economic Council | 16
Figure 1 below shows that most EAC member
states complied with this criterion by keeping
an upper limit on gross public debt of 50% of
GDP, except Burundi, Kenya, and Rwanda.
These three countries recorded a public debt
of around 65% of the GDP from 2020 to
2022. On the other hand, Somalia has
witnessed a debt relief process that
commenced back in 2016. In March 2020, the
country achieved HIPC decision point for IMF
debt relief through the Heavily Indebted Poor
Countries (HIPC) Initiative. As a result, its debt
stock decreased from 5.2 billion USD in
December 2018 to 3.7 billion USD. Moreover,
it is expected that the completion point will
be reached at the end of 2023, bringing the
gross public debt to $557 million, around 7%
of GDP.
nec.gov.so
 Macroeconomic Convergence Criteria

2.6 Reserve Cover

To be safeguarded against external Since the collapse of the central government

disruptions, the member countries of the East
African Community (EAC) made the
collective decision to maintain foreign
exchange reserves that would be sufficient to
cover a minimum of 4.5 months' worth of
imports. Nations possessing sufficient
reserves typically managed to mitigate
substantial economic output and
consumption declines when confronted with
external shocks, including trade disruptions,
volatile aid inflows, fluctuations in foreign
direct investment, and decreased remittance
flows. Reserves are "external assets that are
readily available to and within the period
2015-2022. In South Sudan, DRC, and
Burundi, the average level of coverage
fluctuated around 1 to 2 months. In Rwanda,
the average is around four months.
in 1991, the Central Bank of Somalia (CBS) has
not issued legal tender banknotes. The Bank
controls neither the supply of the Somali
Shilling nor the exchange rates. However,
CBS, in cooperation with MoF, is working on
currency reform. Once a new legal tender is
issued, Somalia will formulate monetary and
exchange rate policies. Somalia needs
sufficient reserves for monetary policy
interventions and foreign exchange
management. Moreover, the CBS should hold
sufficient international reserves to mitigate
financial risks.

Figure 2 below reveals that between 2015 and

2022, most EAC member states did not
comply with the criterion.

Figure 2: EAC total reserves in months of import, 2015-2022

Source: World Bank, 2023

National Economic Council | 17 nec.gov.so

 Macroeconomic Convergence Criteria

2.7 Conclusion

In summary, most EAC partner states have

struggled to meet the macroeconomic
convergence requirements. This is partly
because they have had to spend more on
infrastructure development and spending to
help the economy recover from the COVID-19
pandemic. EAC countries still need to
strengthen their convergence before
implementing a single currency in the region.
Based on formal membership criteria, the
EAC is currently not significantly less
prepared for a single currency than the
eleven founding members of the euro area in
the run-up to 1999. Somalia, a country
seeking membership in the East African
Community, has demonstrated a better
performance in three of the four
macroeconomic convergence criteria, i.e.,
inflation rate, fiscal deficit, and gross public
debt. The only macroeconomic convergence
criteria that Somalia still needs to meet is the
reserve cover of 4.5 months of imports. For
the rest of the macroeconomic convergence
criteria, Somalia is in a better position than
the EAC partner states.

Besides macroeconomic convergence

criteria, there are other broad prerequisites
to be achieved ahead of the establishment of
the East African Monetary Union. These
include the harmonization of monetary &
fiscal policies; harmonization of statistics;
harmonization of legal frameworks;
establishment of the East African Monetary
Institute, and East African Statistics Bureau;
East African Surveillance, Compliance, and
Enforcement Commission; and East African
Financial Services Commission. The
establishment and implementation of these
institutions and policies are lagging, partly
due to delays in finalizing required legal
instruments and a lack of resources.

National Economic Council | 18 nec.gov.so

Fiscal Analysis
and Tax Structure
 Fiscal Analysis and Tax Struature

3.1 Background

For a union to work well, it needs to keep a such as infrastructure, education, healthcare,
closer eye on the fiscal policies of its and social welfare. Numerous research
members. The relationship between fiscal studies show that investments in
policy and regional integration is significant. infrastructure development are crucial for
Fiscal policy coordination can be vital for regional connectivity and trade facilitation.
regional integration as it helps reduce Equally important is the debt burden issues in
economic disparities, promotes trade and the region. Effective debt management is
investment flows, and enhances overall essential for fiscal stability. Member states
regional economic stability. Furthermore, by strive to maintain sustainable debt levels,
aligning fiscal policies, countries can address monitor debt indicators, and implement
common economic challenges collectively prudent borrowing practices.
and enhance their competitiveness globally.
3.2 Fiscal Analysis of EAC member
Article 4 of the EAC Common Monetary Union
stipulates the formulation of similar countries
regulations in the economic and financial
Currently, the available data on government
affairs to reinforce similarities and coordinate
revenue as a percentage of GDP in EAC
many factors of fiscal and social policies.
member states show that most countries
maintained relatively the same percentage
Each member state has its own fiscal and tax
between 2015 and 2021, except Burundi.
structure, but there are efforts to harmonize
Revenue receipts in Burundi increased from
and coordinate these policies within the EAC
15.6% of GDP in 2015 to 24.6% in 2021.
framework. The EAC member states have
Regarding the overall budget revenue to GDP,
made progress in harmonizing their fiscal
Rwanda was the leading country in EAC in the
policies to promote economic integration.
past eight years, with an average score of
They have established common principles for
24.2%. In contrast, Uganda and Tanzania
budget formulation, revenue collection, and
recorded an average rate of 13.3% and 14.2%,
expenditure management. Regarding
respectively, whereas Kenya witnessed a
budgeting, each member state prepares its
drop-down from 17.1% in 2015 to 16.8% in
annual budget, outlining government revenue
2021. In sum, the average rate of government
and expenditure plans. Fiscal policies aim to
revenue to GDP in these five EAC partner
promote economic stability, investment, and
states stood at 18.7% in 2021, a decent
social development.
percentage surpassing the Sub-Saharan
Africa (SSA) average of 16.6% in 2021. This
Considering revenue mobilization in the
paints a positive picture of the EAC member
community, member states rely on various
state’s performance.
sources of revenue, including taxes, customs
duties, and non-tax revenue. There are
ongoing efforts to enhance revenue
collection systems and reduce dependence
on external aid. Similarly, in public
expenditure, member states allocate
resources to different sectors

National Economic Council | 21 nec.gov.so

 Fiscal Analysis and Tax Struature

Figure 3: Government revenue as a percent of GDP in EAC, 2015-2021

Source: IMF, Africa Regional Economic Outlook (AFRREO), 2023

Regarding government expenditure as a Contrarily, the accelerating growth rate in

percentage of GDP, there is a mix of increase
and decline among member countries of the
community. Out of the seven states, only two
nations, Kenya and South Sudan, succeeded
in reducing their public expenditure by a
small percentage from 2015 to 2022.
Burundi's government revenue has translated
into a dramatic increase in government
expenditure, which reached 39% of GDP in
2022, up from 23.2% in 2015. Similarly, the
remaining countries such as Rwanda,
Uganda, Tanzania, and DRC, expanded their
public spending at varying rates.

Figure 4: Government expenditure as a percent of GDP in EAC

Source: IMF, Africa Regional Economic Outlook (AFRREO), 2023

National Economic Council | 22 nec.gov.so

 Fiscal Analysis and Tax Struature

3.3 Fiscal Analysis In somalia

In recent years, Somalia's fiscal situation has Overall revenue climbed to $721.9 million in
improved, particularly following revenue 2022, which is 91.7% more than the amount
reforms related to the IMF program. The collected in 2021. While most of the revenue
primary indices for assessing the sources performed above the target, the
development of the fiscal sector have shown domestic revenue recorded a 14.4% increase
some modest progress, albeit still falling compared to the previous year.
short of the necessary standards. Somalia's
primary revenue sources are internal revenue The narrow tax base, which is primarily made
(taxes and fees), multilateral and bilateral up of the informal sector, and institutional
organizations, and international trade taxes. limitations make it difficult to institute a
Table 3: Revenue, expenditure, and budget robust fiscal policy. Nonetheless, the federal
balance, 2019-2022, Somalia government is putting in place measures to
Fiscal Accounts (% of GDP)
cut spending obligations, particularly for
non-priority items. The domestic revenue
2019 2020 2021 2022
performance has improved in the last two
Total revenue 4.9 7.2 4.9 8.9 years. In 2022, domestic revenues increased
Total Expenditure 4.5 6.9 6.0 8.9 to 3.2% of GDP from 3% in 2021. However, the
proportion of tax and non-tax revenue to total
Overall, Balance 0.4 0.4 -1.1 0.0
revenue decreased in 2020 due to COVID-19,
which significantly impacted revenue
Source: MoF, Somalia, and IMF, 2023.
mobilization.

Figure 5: Revenue Composition and Total Expenditure Dynamics, Somalia

Source: MoF, Somalia.

National Economic Council | 23 nec.gov.so

 Fiscal Analysis and Tax Struature

In 2020, budgetary spending climbed by 54% Figure 6: Grants (Percent of GDP), Somalia
to reach US$485.3 million. Much of the recent
growth came from staff salaries, which in
2020 accounted for 47% of total spending at
USD 227 million. The years 2020 and 2021
saw a 13% fall in capital expenditures
(non-financial assets) to US$18.6 million and
US$16.6 million, respectively. However,
compared to the fiscal balances for 2018,
2019, and 2020, which saw total income Source: Author’s calculation based on IMF data, 2023.
exceed total expenditures, FY2021 was
marked by lower revenue and higher In Somalia, donor revenues account for 70%
spending. External grants accounted for a of the 2023 budget. Grants are estimated to
sizable portion of the budget, at about 31.1% be US$ 159 million, whereas project support
in 2021. Nonetheless, Consideration should is expected to reach US$ 505.4 million. Donor
be given to broadening the revenue base and revenue has almost doubled in 2020
boosting domestic tax collection in the light compared to the previous year 2019, from
of Somalia's economy's anticipated enhanced US$108.2 million to US$ 285.6 million
growth and expected gradual increase in respectively.
expenditures.
This is due to a surge in donor spending,
3.4 External Grants of EAC member particularly in the COVID-19 response plan
countries and locust emergency response programs.
We have utilized available data from IMF’s However, external grants fell significantly in
Africa Regional Economic Outlook (AFRREO) the following year, 2021, due to the political
to calculate external grants in the public deadlock caused by the delays in
budgets of EAC member states as a parliamentary and presidential elections.
percentage of GDP. The results indicate that Consequently, donors withheld their budget
Rwanda and Burundi have the highest support from the second half of 2021 until the
reliance on external grants in their budgets. first half of 2022. In the fiscal year 2022,
external grants bounced back after the
Although Rwanda’s reliance on external conclusion of elections and stood at $459.2
grants has slightly declined in the past couple million, a 212.5% increase from
of years, the ratio is still high compared to
other EAC countries (from 6.1% of GDP in
2015 to 5.5% in 2021). Likewise, Tanzania and
Uganda showed a modest slowdown in this
fiscal account in the period between 2015 and
2021. However, Burundi has experienced a
surge in this ratio in recent years (3.5 of GDP
in 2015 to 4.7 in 2021), whereas Kenya
maintained a ratio of 0.4% or less throughout
the period.
National Economic Council | 24 nec.gov.so
 Fiscal Analysis and Tax Struature

Figure 7: Donor Revenue in the Government Budget, US

Source: 2023 budget and End-Year Budget Fiscal Performance Report for Fiscal Year 2022.

3.5 Comparing Custom Dependency of EAC Member Countries

Customs dependence refers to the reliance of a country's government revenue on customs duties and
tariffs collected at its borders. It indicates the extent to which a country's budget is dependent on
revenues generated from imports and international trade.

Figure 8: Custom Dependence in EAC & Somalia

Source: eac.opendataforafrica.org & Ministry of Finance for Somalia

Source: eac.opendataforafrica.org & Ministry of Finance for Somalia

National Economic Council | 25 nec.gov.so

 Fiscal Analysis and Tax Struature
Recent macroeconomic data of the EAC
countries show that customs dependence
varies among the EAC member states due to
differences in their economic structures,
trade policies, and levels of development. For
instance, Kenya has a relatively diversified
economy with significant trade ties. Its
customs dependence is moderate due to a
mix of revenue sources, including
value-added tax (VAT) and other taxes. The
country's strategic location and the Port of
Mombasa's significance as a regional trade
hub impact its customs revenue. Similarly,
Tanzania has been working on diversifying its
revenue sources, but customs duties still play
a significant role due to its trade activities
through the Port of Dar es Salaam and other
entry points. However, policy shifts and the
development of other sectors might have
influenced customs dependence.
Uganda's economy is less diversified, and
customs dependence could be higher due to
its reliance on imports and trade revenue.
Efforts to expand revenue sources through
taxes like VAT have been ongoing. In contrast,
Rwanda has proactively reduced customs
dependence by focusing on domestic revenue
mobilization and economic diversification.
The country has emphasized improving its
business climate and reducing trade barriers.
Although data limitations exist in Burundi,
South Sudan, and theCongo, contemporary
literature reviews and country case reports
from various Institutions demonstrate that
Burundi's economy is generally
characterized by its reliance on agriculture.
Democratic Republic of Congo, contemporary
literature reviews and country case reports
from various Institutions demonstrate that
Burundi's economy is generally
characterized by its reliance on agriculture.
National Economic Council | 26
Trade is important, but customs dependence
might be less pronounced than more
trade-oriented economies. Economic
challenges, including reliance on oil exports
and political instability, may influence DRC
and South Sudan's customs dependence.
Somalia, which is heavily reliant on customs
revenues, recording 67% as of the 2020 fiscal
year. It is also important to note that Somalia
has made substantial progress since 2015 in
reducing its dependence on customs. It is,
therefore, necessary for Somalia to diversify
its economy, create a business climate
conducive for growth, and implement sound
macroeconomic policies.
Figure 9: Custom Dependence in EAC & Somalia (2020-2021)
Source: eac.opendataforafrica.org & Ministry of
Finance for Somalia
As shown in Figure 9 customs dependence in EAC
is relatively smaller, and it accounts for less than
10% of government revenue as compared to
Somalia, which is heavily reliant on customs
revenues, recording 67% as of the 2020 fiscal
year. It is also important to note that Somalia has
made substantial progress since 2015 in reducing
its dependence on customs. It is, therefore,
necessary for Somalia to diversify its economy,
create a business climate conducive for growth,
and implement sound macroeconomic policies.
nec.gov.so
 Fiscal Analysis and Tax Struature

3.6 Factors Influencing Customs Dependence

Several factors contribute to customs affect trade volumes, impacting customs

dependence in EAC economies, albeit all
other things held constant. Scholars and
policymakers argue that economies with
higher trade volumes and a larger share of
imports will likely be more customs
dependent. Second, countries with diverse
economies are often less customs dependent
as they have additional revenue sources.
Third, membership in trade blocs and
agreements can influence customs
dependence. The EAC member states'
participation in regional trade arrangements
affects customs revenues. Fourth, efforts to
diversify revenue sources through taxation of
income, consumption, and other activities
impact customs dependence. Fifth, efficient
transportation and trade infrastructure
revenues. Sixth, as economies develop, they
may become less reliant on customs duties as
their revenue base broadens.
In a nutshell, high customs dependence can
indicate vulnerability to external shocks and
changes in trade dynamics. As for the case of
Somalia prospecting to join EAC economies,
nevertheless, it should strive for revenue
diversification by promoting domestic
revenue mobilization, enhancing trade
facilitation measures, improving tax
collection systems, and fostering economic
diversification.

Figure 10: Total tax as % of GDP and Tax structures (% of total tax revenue, 2020)

Source: World Bank Development Indicators

National Economic Council | 27 nec.gov.so

 Fiscal Analysis and Tax Struature

The tax-to-GDP ratio refers to the ratio of
total tax revenue collected by a government
to its Gross Domestic Product (GDP). It is an
essential indicator of a country's fiscal health
and ability to generate revenue for public
services and development.
As the macroeconomic data of EAC
Economies portray, due to regional viability,
tax-to-GDP ratios differ significantly among
the EAC member states due to differences in
their economic structures, tax policies, and
levels of economic development. More
established economies within the EAC have
higher tax-to-GDP ratios as they have a more
extensive tax base and can implement more
efficient tax collection systems. On the other
hand, less developed economies depict lower
ratios due to a smaller formal sector and
weaker tax administration. Nevertheless, the
efficiency and effectiveness of tax collection
systems play a crucial role in determining the
tax-to-GDP ratio. Countries with better tax
administration and enforcement mechanisms
tend to have higher ratios.
The mix of different types of taxes (e.g.,
income tax, value-added tax, corporate tax)
also affects the tax-to-GDP ratio. Some taxes
contribute more significantly to the ratio than
others. Somalia's narrow revenue base needs
to be broadened and resources mobilized
with sound economic policies.
As a result, shocks, such as those caused by
external factors like global recessions or
internal factors like political instability, can
impact a country's ability to collect taxes and,
consequently, the tax-to-GDP ratio. However,
tax policy changes and reforms can have
short-term and long-term effects on the
tax-to-GDP ratio. Changes in tax rates,
exemptions, and incentives can influence
revenue collection.

The prevalence of the informal economy can

impact the tax-to-GDP ratio. In economies
where a significant portion of economic
activities is informal and not captured in
official records, the tax base may be smaller,
leading to lower ratios. Such is the case of
Somalia and many African economies whose
Tax-to-GDP ratios lie between 3% and less
than 12%. Nonetheless, Government
priorities and spending patterns also
influence the tax-to-GDP ratio. Countries with
higher public expenditure needs, such as
infrastructure or social services, might aim for
higher ratios to support these expenditures.

National Economic Council | 28 nec.gov.so

3.7 Conclusion

The section outlined fiscal policy

performance in EAC partner states. The
community has made progress in
harmonizing its fiscal policies by establishing
common principles for budget formulation,
revenue collection, and expenditure
management. Hence, the fiscal performance
in the bloc is doing well compared to peers.
For instance, the average percentage of
government revenue to GDP in the EAC
partner states stood at 18.7% in 2021, a
decent rate surpassing the Sub-Saharan
Africa (SSA) average of 16.6% in 2021. This
paints a positive picture of the EAC member
states’ performance.

With regard to the reliance of the public

budget on external grants, the majority of the
EAC countries received around 1% of GDP in
donor revenues to support their budgets.
Although the Somali budget has been heavily
dependent on grants, the domestic revenue
has been performing well in recent years and
is expected to grow considerably in the
coming years. Somalia’s domestic revenue
heavily depends on customs taxes. It needs to
reduce dependency on revenue from customs
and increase taxes on goods and services
(VAT), increase taxes on income, profit, and
capital gain (corporate tax), property taxes
and other taxes. FRS needs to harmonize its
customs and inland revenue administrations.

National Economic Council | 29 nec.gov.so

Trade and
Investment
 Trade and Investment

4.1 Introduction
The EAC member countries have established
Promoting economic openness facilitates the
trade and investment agreements within the
elimination of trade barriers, leading to a
EAC framework to promote economic
subsequent increase in economic growth and
integration and facilitate business activities.
employment within the region. This, in turn,
Trade and investment are essential factors in
contributes to the overall enhancement of the
promoting economic growth and
region's economic well-being.
development. Countries that trade a lot with
each other could gain from regional
Figure 11 displays the data of the openness
integration. Countries can benefit from
measures for the EAC and Somalia. In 2022,
comparative advantages and specialization
Somalia (a potential candidate to join EAC)
by engaging in regional trade and attracting
had the highest trade-to-GDP ratio,
foreign investment, leading to increased
accounting for 107.7% of its GDP, indicating a
productivity and prosperity. This study
growing reliance on trade. It was followed by
assesses the trade openness of EAC
Congo (DRC) 98.9% and Rwanda (60.4%). On
countries, exports and imports, and foreign
the other hand, Burundi had the lowest trade
direct investment.
intensity at 28.3% of its GDP, indicating that
the country is the least open economy. Over
the years (2015-2022), EAC countries
4.2 Degree of Openness experienced fluctuations in trade intensity.
To determine whether an area is ready for These variations reflect changes in the
monetary unification, McKinnon (1963) countries' economic structures, policies, and
suggests looking at the openness of its external trade dynamics. Comparing the
economy, as measured by the ratio of exports trade performance among EAC member
and imports to GDP. An open economy that countries, Kenya, Tanzania, and Uganda
gives up its sovereign monetary and exhibited a relatively low degree of openness,
exchange rate policies, especially with its ranging from 30.7% to 34.4% for Kenya,
major trading partners, "would be 'losing' an 28.0% to 35.4% in Tanzania, and 31.2% to
adjustment instrument that has never 41.7% for Uganda.
existed" (Schelkle, 2001, p. 12). The degree of
openness is typically based on the ratio of the Figure 11: Trade Openness (% of GDP)
aggregate value of total trade (including
exports and imports) of member nations to
the sum of their gross domestic product.

Source: World Development Indicator, 2023

National Economic Council | 31 nec.gov.so

 Trade and Investment
4.3 Foreign Direct Investment (FDI) in the region
The present study examines the levels of
intra-movement of foreign direct investment
(FDI) within the East African Community. If
the inflow of FDI into the region needs to be
increased, it would be necessary for member
nations of the East African Community (EAC)
to implement country-specific policy
measures to address the asymmetric shocks.
This suggests that establishing economic
unification within the region needs to be more
attainable. To attain the desired target, it
would be necessary for the East African
Community (EAC) countries to enhance the
mobility of production factors within the
region.
Figure 12: Foreign Direct Investment (Millions of dollars)
Source: UNCTAD, FDI/MNE database (https://unctad.org/fdistatistics)
National Economic Council | 32
Figure 12 shows the FDI inflows in millions of
dollars. In the last ten years, FDI inflows in the
East Africa Community and Somalia (a
potential candidate to join EAC) reached the
highest historical value of 7 billion in 2013.
After that year, foreign investment flows fell,
and the most recent figure stood at 6.4 billion
in 2022. Although the investment of the
different countries is heterogeneous, all the
countries except DRC saw relatively stable
increases in FDI inflows compared to 2021. In
2022, the three countries that saw the most
significant investment increase were South
Sudan (80%), Kenya (64%), and Uganda
(39%). DRC, Uganda, and Tanzania had the
highest FDI inflows relative to the other EAC
members, while Burundi, South Sudan, and
Rwanda had the least FDI inflows.
nec.gov.so
 Trade and Investment
4.4 Analysis of Exports & Imports (EAC Countries)
According to the Optimum Currency Area
(OCA) theory, countries with intense trade
linkages among themselves could benefit
from introducing a common currency. Figure
13 shows the total import data for the EAC
countries for the last four years (2019-2022).
In 2022, the total import value was 53,749.84
million US dollars. The data shows that EAC's
total import values have increased over the
years, indicating a growing regional economy.
Kenya had the highest total imports in all four
years, reaching 21.1 billion USD in 2022.
Figure 13: Total Imports (Million USD)
Source: eac.opendataforafrica.org & IMF DOTS for Somalia
National Economic Council | 33
Tanzania had the second-highest total
imports worldwide, with 15.7 billion USD in
2022, followed by Uganda, with 9.7 billion
USD in the same year. These data suggest
that EAC countries heavily rely on imports,
with Kenya and Tanzania being the largest
importers. The top imports of Kenya are
refined petroleum, palm oil, packaged
medicaments, cars, and hot-rolled iron,
imported mainly from China, India, United
Arab Emirates, Saudi Arabia, and Malaysia.
The top imports of Tanzania are refined
petroleum, palm oil, p;ackaged Medicaments,
and Coated Flat-Rolled Iron, imported mainly
from China, India, the United Arab Emirates,
Saudi Arabia, and South Africa. South Sudan
and Burundi had the lowest import values
compared to the EAC members.
nec.gov.so
 Trade and Investment
Figure 14: Total Imports (Million USD)
Source: eac.opendataforafrica.org & IMF DOTS for Somalia
Figure 14 shows the total export data for the
EAC countries for the last four years
(2019-2022). In 2022, the total export value
was 25,004.33 million US dollars. The total
exports of all EAC countries increased from
18.7 billion USD in 2019 to 25.0 billion USD in
2022. Kenya had the highest total exports in
all four years, reaching 7.4 billion USD in
2022. The top exports of Kenya are Tea, Cut
Flowers, Coffee, Refined Petroleum, and
Titanium Ore, mainly exported to Uganda, the
Netherlands, the United States, Pakistan, and
the United Kingdom.
National Economic Council | 34
Tanzania had the second-highest total
exports, with 6.8 billion USD in 2022,
followed by Uganda, with 3.6 billion USD. The
top exports of Tanzania are Gold, Raw Copper,
Dried Legumes, Rice, and Refined Copper,
mainly exported to India, the United Arab
Emirates (UAE), South Africa, Switzerland,
and Kenya. Somalia (potential candidates to
join EAC) and Burundi had the lowest export
value compared to the EAC members. The top
exports of Burundi are Gold, Coffee, Tea,
Niobium, Tantalum, Vanadium, Zirconium
Ore, and Beer, mainly exported to DRC,
Germany, Pakistan, and Belgium.
nec.gov.so
 Trade and Investment

In 2022, Somalia’s estimated import basket
had a total value of nearly US$6.4 billion
while the country only managed to export a
total of around US$697 million. This shows
that the country’s economy has an enormous
mismatch between the export and import
values and, over the years, experienced a
widening gap in the trade balance. The top
exports of Somalia are Sheep and Goats,
Gold, Bovine, Other Oily Seeds, and Insect
Resins, mainly exported to Oman, UAE, Saudi
Arabia, India, and Bulgaria. Like the rest of
Sub-Saharan Africa, member countries’
exports are concentrated on a few primary
commodities, mainly food items, ores, metals,
precious stones, and agricultural raw
materials. Agricultural products are mostly oil
seeds. While raw hides and skins are
important exports for Somalia, live animals
alone constituted nearly 60 percent of
Somalia’s exports.
The inter-trade between the seven EAC
Partner States grew from 13% in 2019 at $7.1
billion to 15% in 2021 at $9.5 billion.
Total Intra-EAC trade grew by 11.2%, from
$9.8 billion in 2021 to $10.9 billion in 2022.
The primary traded goods include cereals
(maize, rice, wheat, beans, soya beans, and
sorghum), dairy products, cassava flour,
maize flour, groundnuts, tomatoes, carrots,
onions, and other vegetables and fruits, as
well as live animals.
Kenya had the highest total exports among
EAC countries in all three years, peaking at 2.1
billion USD in 2022. Intra-trade among EAC
countries has also grown in recent years; the
average volume is one-quarter of the overall
export activity, while Kenya is the largest
intra-trade exporter among EAC countries.
Intra-EAC trade varies significantly among its
members. Kenya, Uganda, and Tanzania, the
three founding members of the EAC, had the
highest total exports of goods within the EAC
in 2022, while South Sudan and Burundi had
the lowest export share of goods to the EAC.
Rwanda and Uganda are leading the highest
imports from the EAC region. In 2022,
Somalia imported $135 thousand from the
EAC region.

Table 4: Intra EAC trade (imports and exports, in USD million)

Total Import Total Export

Countreis
2020 2021 2022 2020 2021 2022

Burundi 180.30 233.46 273.36 48.22 57.30 55.36

Kenya 543.96 865.92 846.88 1613.22 1974.60 2058.44

Rwanda 856.48 796.04 1168.13 437.94 628.52 840.75

South Sudan 7.90 170.61 439.68 3.69 32.78 3.80

Tanzania 335.28 528.03 577.99 952.02 1368.48 1414.87

Uganda 1651.42 1609.56 1070.23 1246.04 1531.81 1944.34

EAC 3575.33 4203.63 4376.28 4301.14 5593.49 6317.56

Source: eac.opendataforafrica.org

National Economic Council | 35 nec.gov.so

 Trade and Investment
4.5 Conclusion
In summary, the East African Community's
(EAC) international trade and foreign direct
investment (FDI) indicated that member
states of the EAC have been consistently
experiencing a trade deficit over a prolonged
period. In trade openness data, Somalia, a
promising potential candidate to join EAC, has
shown a relatively high degree of trade
openness. Except for DRC, all other EAC
member states display a relatively low
openness. DRC and Uganda are the leading
countries in EAC for FDI attraction, while the
FDI for Tanzania and Kenya declined for the
last ten years. Somalia, a country coming out
of civil unrest, has shown an increasing trend
in FDI attraction.
National Economic Council | 36
South Sudan and Burundi have the slightest
FDI attraction, and the data trend showed no
improvement. For the intra-regional trade
data, all EAC countries have shown an
increasing trend in intra-regional trade, but it
remains low. Kenya, Uganda, and Tanzania,
the three countries that started the EAC, have
recorded the highest total exports and
imports of goods within the EAC, while South
Sudan and Burundi have the lowest export
share of goods to the EAC. Somalia's trade
performance and FDI attraction are
comparable to most EAC members.
nec.gov.so
Recommendations

02
National Economic Council | 01
nec.gov.so
 5 Recommendations

This section presents the policy

recommendations drawn from the analysis
Somalia is required to integrate
conducted and the gaps identified in this
financial systems and adopt common
paper. The following key policies are
principles and rules for regulating
recommended for the Federal Republic of
and supervising the financial system.
Somalia:
Somalia must also establish a capital
market authority to strengthen
financial integration.
To implement the EAC Customs Union
and Common Market Protocol, FRS
needs to establish the following key Somalia needs to harmonize relevant
institutions and agencies to national Laws and frameworks to
coordinate with the Organs and facilitate the establishment of the
Institutions of EAC and similar Monetary Union. Somalia must also
national ones in the Partner States. establish a National Macroeconomic
These institutions are Convergence Committee that
i) the National Revenue Authority monitors compliance to
with a Directorate/ Department macroeconomic convergence
responsible for Customs criteria.
Administration;
ii) the National Implementation
Committee to facilitate and promote
FRS must diversify its revenue
the implementation of the EAC
sources and avoid heavy dependence
Common Market Protocol;
on customs duties. It needs to
iii) the National Committee on Trade
mobilize its revenue resources by
in Services that coordinates the free
applying different types of taxes such
movement of trade in services;
as income tax, value-added tax,
iv) and National Competition
corporate tax, property tax, etc.
Authority.

Somalia must also empower the

Harmonize policies, standards, and Somali Institute of Certified Public
laws relating to statistical information Accountants (SICPA) to provide
production, analysis, and technical support and expertise to
dissemination. Somalia is required to Micro, Small, and Medium Enterprises
develop a national statistical system (MSMEs) to formalize their financial
while observing the requirements of and accounting process.
the EAC statistical system and
internationally accepted best
practices.

National Economic Council | 38 nec.gov.so

References

Abdighani Hirad, (2023). Somalia’s Membership to the East African Community (EAC):
Gradual Approach Is Best After Institutional Reforms.
https://wardheernews.com/somalias-membership-to-the-east-african -community-
eac-gradual-approach-is-best-after-institutional-reforms/

African Development Bank (December 2012) Supporting Macroeconomic convergence in

Africa RECs, Jian Zhang. NEPAD, Regional Integration and Trade Department.

Anthony Kitimo, 2023. EAC ministers' talks for political confederation shift into high gear.
The East African. https://www.theeastafrican.co.ke/tea/news/east-africa/talks- for-
political-confederation-shift-into-high-gear-4233452

Dr. Lunogelo, B., & Mbilinyi, V. (November, 2009). Convergence of COMESA-SADC-EAC

regional frameworks, The Economic and Social Research Foundation (ESRF). Dar es
Salaam, Tanzania.

EAC, (2023). About EAC: EAC Partner States. https://www.eac.int/gender/60-about-

eac?layout=blog&start=15

EAC, (2023). Political Federation. https://www.eac.int/gender/14-integration-pillar

East African Community (November, 1999). Treaty establishing the East African
Community, Arusha, Tanzania.

East African Community (November, 2013). The Protocol on the Establishment of the East
African Community Monetary Union (EAMU).

East African Community. (2023). Summit adopts Verification Report of Somalia to join EAC.
https://www.eac.int/press-releases/2817-summit-adopts-verification-report-of-
somalia-to-join-eac
Federal Government of Somalia (August, 2020). Government Financial Statistics (GFS)
Analytical Report, 2013 – 2019. Ministry of Finance.

National Economic Council | 39 nec.gov.so

References

Federal Government of Somalia (March, 2023). End-Year Budget Fiscal Performance

Report for Fiscal Year 2022. Ministry of Finance.

Garowe Online (2023). Interview: Somalia will be the 8th Member of EAC by mid-2023.
https://www.garoweonline.com/en/interviews/interview-somalia-will-be-the-8th-
member -of-eac-by-mid-2023

International Monetary Fund (January, 2015). The Quest for Regional Integration in the East African
Community. IMF, https://doi.org/10.5089/9781484364413.071

Pan African Chamber of Commerce and Industry, (2023). Celebrating 20+ Years of
East African Community- EAC. https://www.pacci.org/east-african-community-
eac/#harmonisation-of-sectoral-policies

Professor V.N. Attri (2017). The Study on Bilateral and Regional Trade And Investment
Related Agreements and Dialogues Between Members States. Indian Ocean Rim
Association (IORA). University of Mauritius, Republic of Mauritius.

World Bank (2022). Collection of Policy Notes for the New Somali Government - Unlocking
Somalia’s Potential to Stabilize, Grow and Prosper.
https://documents.worldbank.org/pt/publication/documents- reports/documentdetail/
099500006282221939/p1775040e575fc036094170aca16ab 29e5f

National Economic Council | 40 nec.gov.so

 National Economic
Council of Somalia

Published in 2023
Design
Jtech | https://jtech.so