Don’t bet on a monetary union by 2024
On November 30, 2013, the East African heads of state met in Kampala Uganda and approved the protocol for the creation of a common currency regime.
The Monetary Union Protocol is the third pillar of the EAC regional integration aganda after the Customs Union and the Common Market Protocols, with political federation being the final pillar.
While endorsing the agreement for the establishment of a monetary union, the leaders also agreed on a road map of 10 years within which to put in place the necessary structures, enabling legislation and institutions to operationalise the single currency regime by the year 2024.
The EAC countries are now are in the implementation stage of the protocol, whose key benefits include removal of transaction costs of exchanging currencies, and reduction of exchange rate volatility which will in turn translate to increased intra-regional trade that has been on the decline.
However with only six years to the due date, the readiness of the EAC countries to embrace this key milestone has come into sharp focus.
While the passage of key legislations to operationalise key institutions for the single currency regime has lagged behind schedule, the countries are also struggling to meet critical macroeconomic convergence targets on inflation, public debt, fiscal deficits and adequate foreign currency reserves.
A scorecard on these targets by the member countries for the past eight years shows that none of the EAC countries qualifies to join a monetary union.
These macroeconomic convergence criteria include headline inflation ceiling of 8 per cent, a fiscal deficit (including grants) of not more than 3 per cent of GDP, public debt-to-gdp ratio of 50 per cent and forex reserves of at least 4.5 months of import cover.
EAC countries are required to fulfil these conditions and comply with them for at least three years before the Monetary Union is launched, implying that they only have three years remaining to meet these condition.
By 2021, all EAC counties should be talking the same language as far as foreign currency reserves, inflation, public debt, and fiscal deficit are concerned.
However, complying with these conditions has become a challenge for these countries considering their varying macroeconomic environments and the growing demand for infrastructure spending, which has resulted in increased borrowing.
It is also argued that the establishment of institutions to support the implementation of the EAMU Protocol has been delayed by the lack of clear commitment on the part of member states.
For instance, the East African Monetary Institute was supposed to be up and running in 2015 but the Bill for its creation was only passed by the East African Legislative Assembly in April this year while other Bills for the creation of the East African Statistical Bureau, East African Financial Services and the East African Surveillance, Compliance and Enforcement commission are still pending.
Some analyts say adopting a single currency before reaching the proper level of convergence will be dangerous to for EAC countries, and that they should achieve full implementation of the Customs Union and Common Market before adopting a common currency.