What Does Monetary Union Mean For East Africa And Why Should The Community Be Cautious!

Posted on December 11, 2013 in GlobeScope

By Ssekandi Ronald Ssegujja:

East African heads of state have recently signed the Protocol for the establishment of a Monetary Union within the next 10 years. The East African Monetary Union is the integration stage that precedes the ultimate phase—the EAC Political Federation—with the earlier stages being the Customs Union and Common Market.


This is by far great news for the region considering the prospects that this fifth stage of integration presents. The ultimate goal is that the countries in East Africa will harmonize monetary and fiscal policies so as to establish a common central bank. Already, all the EAC countries apart from Burundi present their budgets in June. As the incoming EAC Chair, President Uhuru Kenyatta said, “The promise of economic development and prosperity hinges on our integration,” EAC will be looking at the prospects in gas and oil exploration to fuel the economic muscle in the region. He further predicts that businesses will find more freedom to trade and invest more widely, and foreign investors will find additional, irresistible reasons to pitch tent in our region. Kenya has launched a $13.8 billion Chinese-built railway that aims to cut transport costs, part of regional plans that also include building new ports and railways. Various institutions will also be put in place to see to the success of this plan and these include; the East African Monetary Institute; the East African Statistics Bureau; the East African Surveillance, Compliance and Enforcement Commission (to be responsible for surveillance, compliance and enforcement); and the East African Financial Services Commission.

However, I believe that the region needs to proceed with caution considering the fact that we are headed for a complex economic and political dispensation which luckily has been tested elsewhere. The biggest testimony to regional integration is European Union which is going through the famous Eurozone crisis. The structure of the Eurozone as a currency union (i.e. one currency) without fiscal union (e.g., different tax and public pension rules) contributed to the crisis.

A currency union (also known as monetary union) is where two or more states share the same currency, though without necessarily having any further integration such as an Economic and Monetary union, which has, in addition, a Customs Union and a Single market. They come in three types; Informal — unilateral adoption of foreign currency , Formal — adoption of foreign currency by virtue of bilateral or multilateral agreement with the issuing authority, sometimes supplemented by issue of local currency in currency peg regime and Formal with common policy — establishment by multiple countries of common monetary policy and issuing authority for their common currency.

Fiscal union on the other hand is the integration of the fiscal policy of nations or states. Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. Under fiscal union decisions about the collection and expenditure of taxes are taken by common institutions, shared by the participating governments. It is often proposed that the European Union adopt a form of fiscal union. Most member states of the EU participate in economic and monetary union (EMU), based on the euro currency, but most decisions about taxes and spending remain at the national level. Therefore, although the European Union has a monetary union, it does not have a fiscal union.

Now, East African Community is headed for an economic and monetary union that is a type of trade bloc which is composed of an economic union (common market and customs union) with a monetary union. It is to be distinguished from a mere monetary union, which does not involve a common market. This is the fifth stage of economic integration. EMU is established through a currency-related trade pact t. An intermediate step between pure EMU and a complete economic integration is the fiscal union.

Finally, this should be able to lead us to a complete economic integration which is the final stage of economic integration. After complete economic integration, the integrated units have no or negligible control of economic policy, including full monetary union and complete or near-complete fiscal policy harmonisation.

Complete economic integration is most common within countries, rather than within supranational institutions. An example of this is the original thirteen colonies of the USA, which can be viewed as a series of highly integrated quasi-autonomous nation states. In this example it is true that complete economic integration results in a federal system of governance as it requires political union to function as, in effect, a single economy.

As earlier stated, there is need for us as a region to proceed with caution. For example, there are multiple fiscal issues to keep an eye on, especially inflation and how best it will be contained in an integrated fiscal regime. Gladly, the EAC is considering all these. For a country to join the single currency area, it will have to adhere to a number of benchmarks. These include attaining an inflation rate of less than eight per cent, a fiscal deficit of less than three per cent of the country’s GDP, a public debt of less than 50 per cent of its GDP and less than 4.5 per cent reserve cover of its imports.

Quoted by the New Times Rwanda, Prof. Musahara said “The Eurozone landed into trouble mainly because their currency was common but policies differed from one country to another.”

“The devil will be in the detail… in the economic, monetary and political governance. Lucky enough, however, the EAC has experience, and the EU is there to provide more lessons. There are more experts in these issues in the region than they were more than 40 years ago.”

They further predict that the signing of the protocol paves way for a long, but carefully planned process that will bring about a single currency, an EAC central bank, and common macro-economic guidelines for the bloc. EAC states are expected to have concluded the ratification process of the protocol by next July. The single currency is expected to enhance intra—EAC trade by eliminating exchange rate volatility, reducing transaction costs and facilitating capital flows within the region, among other economic benefits.

The single currency will start once at least three economies have integrated. The ultimate objective is to phase out national currencies. The planned regional central bank will be set up once the partner states are ready to use the single currency. The name of the single currency and other pertinent specifics will be decided later after national consultations. According to a roadmap, institutions necessary for the implementation of the Monetary Union will gradually be put in place over the next decade.

Authorities say EAC economists worked on the Monetary Union Protocol with caution given the lessons of sovereign debt crisis in Europe. The European Union model is characterised by a central bank which formulates monetary policy that is implemented by the national banks; a floating currency exchange system; and a set of indicators for macro-economic convergence as precondition for entry into a single currency.

EAC experts agree that considerable fiscal and monetary convergence across the five member countries is required before getting into a single currency. They agree that the five economies will need to first phase out any outstanding central bank lending to their respective governments and public institutions. Every country is supposed to fulfil and monitor set conditions for three consecutive years before joining the single currency area. The bloc currently boasts a GDP (at market price) of about US$84.7 billion. It is expected that by 2023, when the envisioned EAMU has been achieved, intra-EAC trade will rise significantly.

As I pen off, I ask my friend Jordan from the United States of America what he thinks the EAC should do not to end up like the Eurozone, he jokes “Don’t let Greece in, no matter how many times they ask!!”