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Speaking at GTR’s East Africa Trade & Commodity Finance Conference, Ecobank’s head of group research, Edward George, surmised that informal trade represents 30 to 40% of the EAC’s trade flows, affecting the competitiveness of the region’s formal traders. In this excerpt from his presentation, he questions who and what is driving this illicit activity and what hopes East Africa has for the future of trade.

The East African Community’s (EAC’s) informal flows could be as large as formal flows – but they occur under the radar, free from the control of governments or regulators. This trade extends from the sale and bartering of large volumes of agricultural goods – sorghum, cassava, maize and pulses, none of which appear in official data – to the trading of millions of tonnes of rice, crude oil, petroleum products, cash crops and consumer goods through extensive informal networks.
Vast communities of traders handle informal flows across East Africa: from the thousands of Chinese traders who set up shop in the heart of East African slums, undercutting their African competitors with Chinese manufactures sourced in Guandong; to the networks of women traders along the border between the DRC and the EAC, who handle as much as 70% of all informal flows.
But of all the trade communities operating in East Africa, perhaps the most intriguing – for its sheer size and complexity – is that run by the Somalis.
Officially, trade flows from Mumbai, Karachi and Dubai towards East Africa’s leading ports of Mombasa and Dar es Salaam. In reality, huge volumes of goods are landed on the Somali coast, at Bosaso, Kismayu, and Mogadishu, where they enter Somali trade networks. These flows are the hidden underbelly of East African trade.
There are no reliable estimates of the size of these flows, but anyone trading goods in East Africa will tell you that the Somalis control the lion’s share of rice, palm oil, sugar, khat and many electronic goods.
These goods are spirited over the border into Kenya, across the north of the country and into Uganda and South Sudan, and from there into the heart of East and Central Africa.
This is hurting formal traders who are struggling to compete against non-taxed, non-regulated goods.

How it happens

The sophistication of the Somali informal network is remarkable. Recent research by the Kenyan journalist Adow Jubat has uncovered just how it works: goods enter Somali ports and make their way to one of several refugee camps in Dadaab district, close to the Kenyan border. From there, Somali traders – some of whom have reportedly become millionaires – smuggle 15,000 bags of sugar per day across the border, worth around US$800,000. This is Brazilian sugar, repackaged in Dubai, sold in Kenya. They also export Pakistani rice, some of it food aid re-exported from Dubai, but again sold in Kenya.
In order to get these goods over the border, a new kind of service provider has emerged: the broker. The Somali broker is basically a fixer: someone who can arrange – for a fee of around US$1,000 – the trouble-free passage of goods over the border, without any hindrance from police, border or tax authorities. Each week these brokers arrange for around 60 trucks, carrying 1,500 MT of sugar, to cross the border. 17 of these brokers operate along the Kenyan-Somali border. They use at least 40 different routes, although there are five corridors that are favoured.
All of these flows are tied to, and often converge on, a small area in Nairobi: Eastleigh. Known as ‘Little Mogadishu’, Eastleigh has become the heart of the Somali trading community. Everything and anything is traded in Eastleigh, and the sums of cash are astounding. I’m told that Kenyan banks with local branches in Eastleigh handle over
US$50mn per day, in cash.
Eastleigh’s tentacles stretch all the way across the Indian Ocean to Dubai, and beyond to India and Pakistan, even to Guandong. The problem is that these Somali-led trade flows aren’t solely made up of food and consumer goods. Some Somalis also trade guns, drugs and explosives. And given the illegal nature of this trade, some Somali traders are inevitably linked to international criminal networks, even to Islamist extremists. This makes these trade flows a security, as well as a tax, issue.
Governments have been trying to clamp down on informal flows for years – with little success. But in my view, this is the wrong approach. We should not be seeking to stamp out these trade flows – they provide a livelihood for millions of Africans, and are remarkably innovative and resilient in getting goods to where they are needed.
But for many of the Somalis the volume of goods – and cash – is too big to handle informally, and they need to formalise at least some of their flows. What is required are genuine incentives for these traders to formalise their trade, so that it can be regulated, quality-controlled and taxed. Only then can its more pernicious qualities be curbed.
But why is it that informal flows are so vast across East Africa? In my opinion, this reflects the huge obstacles facing traders in the region. These include numerous and conflicting tariff regimes, high trading costs and poor logistics. All of these deter formal flows and encourage informal ones.

Trade corridors will drive growth

In order to address this problem, numerous projects to develop East African trade corridors are on the drawing board, some speculative, others pure blue-sky thinking.
The most ambitious is the Lamu Port-South Sudan-Ethiopia Transport Corridor, known as the LAPSSET project. This will build a multi-sectoral trade network linking Kenya with Ethiopia and South Sudan, with the potential to expand into Uganda and the DRC. The focus of the project is Lamu in Kenya’s Manda Bay, where a port with 6km of berthing docks is being constructed. From Lamu there will run a 1,720 km railway line, a 1,300 km oil pipeline, an 800 km oil product pipeline, alongside new highways and airports, and an oil refinery at Lamu with a capacity of 120,000 barrels per day.
If fully realised, this project could create a trade corridor in northern East Africa to rival the historical corridor from Mombasa via Nairobi into Central Africa.
But this is a long-term project, with numerous geographical, political and financial obstacles to overcome, and it will need to advance in phases over a number of years.

Where next for the EAC?

The EAC has a long and complex history involving customs unions between different East African colonies, but the trade block reached its present configuration in 2009 when Rwanda and Burundi joined.
Given the community’s explicit focus on East Africa, it is natural that it should expand northwards to take in the rest of the area known geographically as ‘East Africa’.
South Sudan has already applied for membership, and is likely to get it, although progress has been delayed by the country’s civil conflict. Ethiopia is officially not interested in joining – relying on its membership of Comesa to meet its regional trade ambitions – but it could change its mind, as it has done about foreign investment over the past five years. Should Ethiopia join, Djibouti would be a natural addition, as it is the main transit point for goods into and out of Ethiopia.
The other periphery countries are more problematic, however. Sudan has expressed interest in joining, but is likely to be blocked by long-term rival South Sudan, just as Ethiopia is unlikely to welcome Eritrean membership. And Somalia is a natural addition in the future, but probably the distant future. What is needed first is a political settlement, probably involving a loose federation of Somali states, before Somalia can join the EAC. But given the country’s integral role in regional trade flows, it is inconceivable that it should be excluded from an expanded EAC.
There is also the possibility of the EAC looking westwards. Tanzania has proposed inviting Malawi, the DRC and Zambia to join the EAC. Looking at a map, this is logical as it would link up trade through the East African corridor and help facilitate trade over tricky borders between East and Central Africa.
But, in my opinion, this is a step too far. Regional trade blocks work best when they have a limited number of countries and a clearly defined geographical remit. Compare how the European Common Market worked when it was made up of a dozen countries, with its successor, the EU, which is made up of 28, and the dangers of over-reach are painfully apparent.
So an extension to include South Sudan and, eventually, Ethiopia, is desirable. And perhaps a bilateral agreement with the SADC countries that border the EAC could facilitate trade flows between the two communities.
However, any further attempt at expansion or integration will ultimately conflict with the overriding objective of Africa’s three most developed trade blocks – SADC, Comesa and the EAC – to join together to form an Africa Free Trade Area (AFTA).
This is truly a long-term goal, but provided a structure can be found that fits African realities but encourages intra-regional trade, there is no reason it could not become a reality. And the EAC will sit in the centre of this free trade area as the hub between its two powerful neighbours.