The country’s capital account regime prohibits flow of foreign investments into the country.
It is these regulations that have landed the country’s financial sector with the unenviable tag of the most rigid in the region, in a new study by International Monetary Fund that also delivers a harsh indictment of its stultifying effect on the region’s efforts towards monetary integration.
The new report, contained in the IMF working paper on ‘Measuring financial barriers among the three EAC founder member states’ — a copy of which has been seen by The EastAfrican — ranks Kenya’s financial sector as the most flexible and open in the region, followed by Uganda, and finally Tanzania.
With the coming into force of the Common Market protocol, the EAC now has its sights trained on the Monetary Union expected to come into force in 2012, which requires openness in the partner states’ financial systems.
The other EAC partner states of Rwanda and Burundi were not covered in the IMF paper, prepared by Yi David Wang, which was published early last week.
Mr Wang used the “covered interest rate parity” (CIP) and “forward foreign exchange” (FFE) systems to measure the region’s financial openness.
CIP refers to a principle stating that yields from two equivalent investments in the domestic market and the foreign market, respectively, are equal after accounting for fluctuations in the exchange rate.
On the other hand, FFE is an agreement that obligates an investor to deliver a specified quantity of one currency in return for a specified amount of another currency.
According to the paper, Tanzania contains a number of explicit capital movement restrictions that may impede CIP’s functioning.
For example, Tanzania restricts non-residents from borrowing abroad and restricts the participation of non-residents in the domestic money market.
Available data indicate that Tanzania is the only country in EAC that restricts outward direct investment.
The same applies to the aspect of purchase of foreign securities by residents, whereby Tanzania only allows purchasing of foreign securities using externally generated funds.