Don’t bet on a mone­tary union by 2024

The East African - - OPINION -

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.

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