Hard part ahead of EAC protocol

By MARK KAPCHANGA

NAIROBI, KENYA: Trade within the East African Community (EAC) could rise significantly, if the envisioned dream of a monetary union is achieved.

Last weekend, Kenya, Uganda, Rwanda, Tanzania, Rwanda and Burundi finally signed monetary union, which could see the countries have a unified currency by 2023. But this will only happen if the necessary prerequisites for a single currency are met.

The partner states will now start working on the complicated project whose chances of failure,  according to critics, are very high if the preconditions for forming the East African Monetary Union (EAMU) are not attained.

The states must, among other things, ensure that economic, political and institutional requirements are met. According to the protocol that was signed last Saturday, EAC members will have to make consistent their inflation rates, fiscal deficits, debt to Gross Domestic Product (GDP) and tax to GDP ratio.

As of October this year, inflation in Kenya had hit 7.76 per cent, Uganda 8.1 per cent, Rwanda 4.2 per cent, Tanzania 6.3 per cent and Burundi 4.7 per cent. South Sudan had a 21.5 per cent reduction in the purchasing power per unit of money. If the monetary union were to be implemented today, Uganda and South Sudan would have to be left out as the inflation rate threshold is eight per cent.

The protocol says there must be at least three members for EAMU to be launched. However, member states at the periphery must be given time to put their houses in order, according to Cabinet Secretary for National Treasury Henry Rotich.

Mr Rotich says there are no worries about macro-economic convergence as the protocol will be rolled out over a 10-year period as partner states undertake the requisite reforms to support the process.

Economic Weakness

“We appreciate some members’ institutional and economic weaknesses. However, we have created surveillance bodies to corroborate the monetary union work,” he said.

Notably, the monetary union borrows heavily from the precarious European Union model, which merges economies of 17 Eurozone states and 11 non-euro states.

 “There are few monetary unions in the world. We had to learn from the best of them all. We have the advantage of drawing some critical lessons where the Eurozone went wrong,” he told The Standard.

Economists say the common monetary system will put the region in the global map as a business hub. It will also increase cross-border business between partner states as argued by Forbes Magazine business journalist, Luke Mulunda.

 “A joint shilling controlled by a common central bank will be a strong currency that will have stronger cushion against external shocks and fluctuations. It will also mean faster cross-border transactions and thus will stimulate commercial activities in the region,” said Mr Mulunda.

He added: “There’s a lot of time and money value lost in converting currency and traders from Tanzania and Uganda fear trading with Kenya, which has a stronger currency, for fear of losing value of their money in the conversions.”

28-member union

 However, the World Bank argues that despite the idea being well founded, it is not clear if the proposed currency would be well managed to stimulate trade. Its reasoning springs from the ongoing euro crisis.

To date, no permanent solution has been reached on how well to manage the 28-member union. Worse is the fact that Britain, one of the major contributors of the EU budget, is threatening to pull out of the union.

The region has already launched a standardised payment system, which replicates the European Union’s Single Euro Payments Area. This has seen all electronic payments within the bloc considered domestic.

For years, fragmented payment systems have been a major obstacle to financial integration at the regional and international levels.

The building of common infrastructures and payment systems is therefore seen as one of the conditions for efficient allocation of financial flows among East African countries.