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The East African : Jul 5th 2015
The EastAfrican MARKETS JULY 4-10,2015 RUN-UP TO MONETARY UNION East Africans could pay higher taxes as govts prepare for single currency Count≥ies a≥e to keep the g≥oss public debt ceiling at 50pc of GDP By CHRISTABEL LIGAMI Special Correspondent taxes for their citizens as they move towards a common currency. Rwanda, Burundi, Uganda, E Kenya and Tanzania have agreed to keep the gross public debt ceiling at 50 per cent of GDP in net present value terms as part of the EACs primary macroeconomic convergence criteria. Countries are expected to observe and maintain the criteria for three consecutive years in the run-up to the adoption of the monetary union and single currency in 2024. “This means that govern- ment spending will be controlled and countries will not be allowed to borrow beyond the set limit, forcing them to look for the other ways of generating revenue to fund their projects,” said Peter Njoroge, director of economics at Kenya’s Ministry of EAC Affairs, Commerce and Tourism. “The majority of countries look to raising taxes for their citizens to generate funds to run projects. They also include the other groups of citizens that were previously not in the tax bracket, such as non-governmental organisations, to generate revenue.” According to Mr Njoroge, the 50 per cent ceiling is likely to constrain EAC countries from undertaking huge infrastructure projects to avoid exceeding the debt ceiling. Alternatively, countries may be forced to phase the implementation of the huge projects in such a way that they do not break the debt ceiling thus projects take longer to implement. “In a way, it will instil fis- cal discipline among partner states,” he said. “But the agreed upon ceiling will start applying after 2021.” Currently, all the EAC part- ner states’ public debt ceiling of GDP is below 50 per cent. Kenya is at 46.5 per cent, Rwanda and Tanzania 42 per cent, Uganda 34.5 per cent and Burundi 32 per cent. “With a 50 per cent debt ceil- ing, the five partner states will have to ensure that they collectively remain debt-sustainable under the monetary union to avoid the adverse effects of ast African governments could be forced to raise 49 New ≥ule to let fi≥ms claw back bonuses By PETER EAVIS New York Times News Service SENIOR EXECUTIVES of US companies that publish faulty financial statements would have to give back some of their compensation as punishment for the accounting missteps under a rule proposed Wednesday by the Securities and Exchange Commission. The rule, required by the Dodd- Frank financial overhaul law, which Congress passed in 2010, is aimed at increasing corporate accountability. It focuses on executive bonuses, also known as “incentive-based compensation,” which have grown larger in recent years. Critics of this pay boom say that it creates incentives for executives to cash out quickly, regardless of whether their companies falter in the ensuing years. The size and payment of bonus- The Central Bank of Kenya. A 50 per cent ceiling of GDP on the public debt is part of the EAC primary macroeconomic convergence criteria for adopting the monetary union. Pic: File asymmetric shocks whose consequences will have broader ramifications for the whole region,” said Jared Osoro, director of research and policy at the Kenya Bankers Association, adding that the five countries can maintain their borrowing at different levels but below the 50 per cent ceiling. The EAC partners are ex- Government spending will be controlled and countries will not be allowed to borrow beyond the set limit.” Peter Njoroge, director of economics, Kenya’s Ministry of EAC Affairs pected to present a medium term convergence plan on how they will maintain and sustain this ceiling starting this financial year for two years on July 22, in Dar es Salaam. This will be approved by the EAC finance ministers. “Among the things the five countries will include in the plan is how they will generate funds at a set target of 25 per cent of their GDP to avoid borrowing,” said Mr Njoroge, adding that although this is not a mandatory obligation for the EAC partners, it is an indicative parameter for the partner states. He said that if any of the EAC partners goes beyond the 50 per cent limit, it will experience difficulties in servicing its debts, which could lead to a crisis similar to that Greece is experiencing, for defaulting to pay the principal amount and the interest. “One country may force in- flationary increases for the entire union to maintain national solvency or seek a bailout,” said Mr Njoroge. Henry Rotich, Kenya’s Treas- ury Cabinet Secretary, said that if the 50 per cent ceiling is maintained, the government will address debt sustainabili- CRITERIA FOR COMMON CURRENCY To qualify to be part of the monetary union, (expected to be introduced in 2024) countries are expected to meet the convergence criteria and comply with them for at least three years. The primary convergence criteria are ceilings on headline inflation (8 per cent), fiscal deficit including grants (3 per cent of GDP), gross public debt (50 per cent of GDP in net present value terms) and a floor ty issues by containing the overall fiscal deficit and putting emphasis on the efficiency and effectiveness of public spending, as well as improving revenue performance. “Specifically, the fiscal policy aims at a revenue effort of 21.8 per cent of GDP over the medium term and containing growth of total expenditure,” said Mr Rotich. The World Bank and Interna- tional Monetary Fund require that developing countries maintain their gross public debt ceiling below 50 per cent of the GDP in net. The European Union has a debt ceiling of 60 per cent while the Economic Community of West African States has a debt ceiling slightly above 50 per cent. Among the proposed debt in- struments the EAC p a r t n e r s are pected to consider to ex- on reserve coverage (4.5 months of imports). So far, partner states have formally agreed on the public debt ceiling of 50 per cent and the floor on reserve coverage of 4.5 months on imports. In addition, there are three indicative criteria ceilings on core inflation (5 per cent) and the fiscal deficit excluding grants (6 per cent of GDP) and a floor on the tax-to-GDP ratio (25 per cent). raise funds are the traditional instruments used by the partner states. These include debt securities, loans and special drawing rights. But the EAC countries will agree on which instruments they will stick to. The EAC single currency is ex- pected to be introduced by 2024 by member states that comply with the convergence criteria. Joint monetary policy will be governed by an independent EAC central bank with a system of national central banks as its operational arms. The central bank’s primary objective will be price stability; secondary objectives will be financial stability and economic growth and development. The single exchange rate will be free floating. es typically depend on whether a company meets or exceeds certain financial metrics, like stock price performance or earnings. As it stands, an executive may get to keep a bonus even if the company artificially inflated those metrics and then corrected the missteps by issuing new financial statements. The new rule would enable a company to “claw back” bonuses when the financial statements have been restated. The proposed rule would apply to companies listed on US stock exchanges. “These listing standards will require executive officers to return incentive-based compensation that was not earned,” Mary Jo White, the SEC chairwoman, said in a statement. Existing rules allow corpora- tions to claw back the pay of the chief executive or chief financial officer, but the new regulation includes not only other senior officers but also “any other person who performs policy-making functions for the company,” according to the SEC. The proposed rule would allow for clawbacks even if the financial restatement was not the result of misconduct, something that is required under the existing provisions. And the rule would apply to pay earned over three years, compared with a year under the current regulation. “This rule targets the lack of accountability and the inflated compensation that helped contribute to excessive risk-taking in the run-up to the financial crisis,” said Kara M. Stein, a Democratic commissioner at the SEC who has pressed the agency to take tougher stances on several issues.
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