by Japheth Katto Chief Executive Officer Capital Markets Authority, Uganda

1. REGIONAL INTEGRATION OF THE CAPITAL MARKETS AND REGULATION OF CROSS BORDER INVESTMENTS-East Africa’s ExperiencePresented at the Regional Workshop on Non-Bank Financial Institutions in AfricaMauritius 9 – 11 November 2003 by Japheth Katto Chief Executive Officer Capital Markets Authority, Uganda

2. Presentation Outline • Introduction • Benefits of integration • History of cooperation • The East African currency board • The (first) East African Community • The collapse of the EAC • Revival of the East African Community • EAC convergence criteria • Progressive performance • The journey towards capital markets integration • EASRA’s and CMDC’s mandates • Snapshot of the regional market • Progress on market integration • Other regional initiatives BVRM, CISNA, ASEA • Challenges and stumbling blocks • Conclusion • References

3. Introduction “There is a strong view among various observers and stakeholders that effort should be made to promote an integrated regional capital market given that, on an individual country basis, the investor base is too narrow and small to support the emergence of a truly dynamic capital market in any of the three countries. ..……. even a regional capital market will continue to be small in the short to medium term and would benefit from linkages with other markets in Africa and beyond that are experiencing rapid growth. There is, on the other hand, an opposing view that favours the development of free standing national capital markets. Proponents of this view argue that disparities in the levels of development of the capital markets in the three countries and differences in their regulatory framework render the pursuit of market integration meaningless and unattainable. ” Mr. Godfrey Tumusiime, Director General, East African Development Bank 7th November 2003

4. Introduction Benefits of integration • Economies of scale (larger and deeper market, cheaper to serve, more liquid, higher absorption capacity) • Economies of scope (savings from shared costs of central services (e.g. CDS) • Faster growth (cross border activity) • Shorter learning curve (shared experience) • Regionally & globally competitive as block

5. Introduction History of cooperationin East Africa • 1917 Customs Union between Kenya and Uganda, Tanganyika joins later in 1922 • 1919 East African Currency Board • 1948 High Commission • 1961 Common Services Organisation • 1961 Tanzania independence • 1962 Uganda Independence • 1963 Kenya Independence • 1967 EAC Treaty Signed • 1971 Idi Amin coup in Uganda

6. Introduction History of cooperationin East Africa cont’d.. • 1977 EAC Collapses • 1986 NRM Government in Uganda • 1993 Permanent Tripartite Commission for East Africa Cooperation • 1999 Revived EAC Treaty is signed • 2000 Entry into force of the Treaty • 2002 NARC Government in Kenya • 2004 January, EAC Customs Union protocol to be signed

7. The East African Currency Board • Established in 1919 and started issuing legal tender of Kenya, Tanganyika and Uganda in 1920 • Par value of £1=Shs 20 EA • Ultimate aim was to anticipate and to pave the way for the creation an East African Central Bank • June 1965 – Ministers of Finance announce in their budget speeches that separate currencies and national central banks would be created in 1966.

8. The East African Currency Board cont’d…… • Tanzania was of the view that an EA central bank could only work effectively under a political federation • Uganda preferred semi-autonomous national banks linked to a central reserve bank directing certain functions • Kenya preferred one central bank responsible for the common currency • The limitations imposed on national economic policies and ambitions soon after independence • No previous experience of one central bank serving two or more independent states

9. The East African Community 1967-1977 • Signed in Kampala in June 1967 • Focus was mainly on commercial exchanges, open inter-territorial trade, balanced industrial development and taxation policy in a common market system • First provision was for the free exchange of the national currencies and these actually traded at par for a couple of years • Partner States were required to “harmonise their monetary policies to the extent required for the proper functioning of the common market.” • EAC collapsed in 1977, when the Finance Council failed to approve the 1977/78 EAC budget

10. Why did the first EAC collapse • Intra-community political differences • Differences in the sharing of benefits from the jointly owned common services and lack of policy for redress • The then East-West divide • Low private sector and civil society input in the community • Lack of a shared vision • NO POLITICAL WILL

11. Revival of the East African Community • 30.11.93 Permanent Trip’tite Commission for EA Cooperation established • 14.03.96 Cooperation Secretariat established - the executive arm • 30.11.99 EAC Treaty signed in Arusha • 07.07.00 Entry into force of EAC Treaty • 30.11.01 Inauguration of the EALA and EA Court of Justice • Jan 2004 Signing of the EAC Customs Union Protocol NEW EAC PEOPLE CENTRTED, PRIVATE SECTOR DRIVEN

12. EAC Convergence Criteria • Maintenance of low underlying annual inflation of less than 5 percent. • High and sustainable annual rate of growth of real GDP of at least 7 percent per annum. • Sustainable current account deficit to GDP ratio. • Budget deficit to GDP ratio (excluding grants) of less than 5%. • National savings to GDP ratio of at least 20 percent in the medium term. • Gross foreign exchange reserves equivalent to at least 6 months of imports in the medium term.

13. EAC Convergence Criteria cont’d…. • Maintenance of low market determined interest rates. • Maintenance of stable market determined exchange rates. • Pursuit of debt reduction initiatives to reduce both domestic and foreign debt to sustainable levels. • Maintenance of prudential norms of banking regulation, strict supervision, improved corporate governance and transparency of all financial transactions.

14. Progressive Performance Average GDP growth rates in Uganda and Tanzania at 5.0 percent but declining growth in Kenya. Kenya trend has reversed with NARC Government Source: MD Sajjabi Presentation AACB Kla

15. Progressive Performance cont’d…. Inflation has been contained within single digit levels in the three countries Source: MD Sajjabi Presentation AACB Kla

16. Progressive Performance cont’d…. Current account to GDP (exc. grants) has declined to less than 5.0 percent in Kenya and Tanzania but Uganda’s deficit remains high at more that 13.0 percent. - Trend of Budget deficit is similar. Source: MD Sajjabi Presentation AACB Kla

17. Capital markets integration journey • Nairobi Stock Exchange was the bourse for all East African Companies from 1954 • 1977 Collapse of EAC • Non- Kenyan companies de- listed • Capital Markets Authority (K) born 1990 • Capital Markets and Securities Authority born 1994 • Dar es Salaam Stock Exchange born 1996 • Capital Markets Authority (U) born in 1996 • Uganda Securities Exchange born in 1997 • MOU establishing EASRA in 1997 (East African Member States Securities Regulatory Authorities) • Full stock exchange membership 1999 • CMDC established April 2001 (Capital Markets Development Committee)

18. Capital Markets highlights of the EAC Treaty • Article 85 Implementation of capital market development program and creation of conducive environment for the movement of capital within the Community • Article 86 Develop, harmonize and integrate financial systems

19. EASRA’s Mandate • Develop common capital market strategies • Harmonize laws and structures • Foster regional stock exchange (with a trading floor in each capital) • Facilitate cross-border trade & issues • Facilitate national status for East Africans • Development of market infrastructure • Development of policy proposals for capital markets incentives • Development of proposals for the alleviation of impediments • Development of a common trading system

20. CMDC’s Mandate • Sectoral Committee of the EAC • Makes policy proposals to the three member states through the EAC secretariat • Makes joint proposals with the fiscal and monetary affairs committee to EAC Finance Ministers at annual pre-budget meeting

21. Snapshot of the regional market

22. Snapshot of the regional market cont’d…..

23. Snapshot of regional market cont’d…..

24. Progress on Market Integration • Legal and Regulatory • Common English Law system • Harmonization of legal framework (on-going) • Harmonization of disclosure requirements (on-going) • Harmonized trading rules and procedures • Corporate governance guidelines • Framework for dispute resolutions • Framework for Collective Investment Schemes • Guidelines on the issue of corporate debt • Cross border listing requirements regulations • CDS Legislation (on-going)

25. Progress on Market Integration cont’d…. • Structural/Institutional • Common market structure (3-tier) • Establishment of a regional CDS (on-going) • Development of websites • Training and study tours • Regional certification program (on-going) • Regional studies • Cross border listings

26. Progress on Market Integration cont’d…. • Policy • According all East Africans domestic investor status (ongoing) • Regulatory consolidation (discussions) • Harmonization of tax rates and tax incidences • Provision of tax incentives • Pension sector reform

27. Other regional integration initiatives in Africa • The West African Stock Exchange (BVRM)

28. BVRM -Created; 18th December 1996 • Activities started; 16th September 1998 • Member countries; Niger, Mali, Burkina Faso, Benin, Togo, Cote D’Ivoire, Senegal, Guinea Bissau • Population:74.30 million • GDP; US$ 26.17 billion(40% for Cote D’Ivoire) • Growth Rate: 2.6% (2002) • Inflation Rate; 3.1% (2002)

29. BVRM Cont’d…. • Burkina Faso – 1 • Benin - 2 • Cote D’Ivioire - 38 • Guinea Bissau - 0 • Mali - 0 • Niger – 0 • Senegal – 2 • Togo - 2

30. BVRM Impacts • Increase in savings rate - 1996 = 12.90% - 2000 = 16.05% • Mobilization of long term capital -Treasury bonds of Cote D’Ivoire <-> US$98.46million - Bonds of Chemical industry of Senegal <-> (=US$ 23.08 million - Bonds of Telecommunication Company of Senegal <-> US$ 18.46 Million - Bonds of Bank of Africa of Benin <-> US$7.69 Million

31. Other regional integration initiatives in Africa • Southern African Development Cooperation’s (SADC) – Committee for Insurance Securities and Non bank financial Authorities (CISNA) • African Stock Exchanges Association (ASEA)

32. Challenges and stumbling blocks • Macro economic stability • Policies not fully harmonized (e.g. foreign investment restrictions) • No free movement of people, capital and investments • No single currency • Low level of awareness • High poverty levels • Poor savings culture • Different paces towards liberalization • Tax policies not fully harmonised • Not single investment area

33. Challenges and stumbling blocks cont’d… • Lack of depth and liquidity • Information asymmetry • Regulation arbitrage • Underdeveloped and unliberalised pension sector • Development of long term insurance sector • Raising more savings to finance investments • Multiplicity of regional blocks (map illustrates)

35. Conclusion • No integration will succeed without political will • Regional integration is a way forward if Africa’s capital markets are to compete in the global market • Explore regional stock exchanges. BVRM good example. Alliances can be a good first step • African Union and NEPAD should provide backbone • EAC made significant progress towards integration/single market

36. Quote… “ ‘Emerging Markets’ may be a euphemism but it is also a declaration of hope and faith. Although some of the stock markets of developing nations may sometime seem ‘submerged’, they are generally emerging into bigger and better things” Mark Mobius, Investment Manager, Templeton Emerging Markets Group

37. References • Capital Market Integration in the East African Community, the World Bank, December 2002 • East African Community Treaty • Achieving market integration; Scott McCleskey 2003 (Elsevier Butterworth Heinaman) • Sub-regional monetary integration: challenges and prospects. The case of the East African Community (EAC). Presented at the 27th annual assembly of the Association of African Central Banks (AACB) by M.D Sajjabi , Economist (fiscal and monetary) East African Community secretariat; 18th August 2003, Kampala, Uganda

38. For more information contact Capital Markets Authority 76/78 William Street Bank of Uganda Building P. O. Box 24565 Kampala Tel: + 256 041 342788 Fax: +256 041 342803 Email: cma@starcom.co.ug Website: www.cmauganda.co.ug

39. THANK YOU