EAC states yet to meet benchmarks for single currency

Kenya: Business executives, economists and technocrats are right to welcome the drive towards a single currency across the five East African countries with muted optimism.

Although it can make the region a strong single market of 140 million people, its success will require greater political commitment than the five leaders and their predecessors have demonstrated so far.

Perhaps, it is in recognition of the difficult work ahead that the five regional presidents meeting at Munyonyo Resort in Kampala, Uganda, last Saturday set benchmarks that have to be met before the Monetary Union Protocol they signed could become operational.

Under Article 5 of the protocol, member states will first have to fully implement the Customs Union and the Common Market Protocol before they can join the Monetary Union. Implementation of the Common Market Protocol, which allows free movement of labour, goods and services, has proved especially contentious in Tanzania.

 In addition, the EAC states will have to harmonise and co-ordinate their fiscal, monetary and exchange policies, as well as phase out any outstanding central bank lending to their governments and public institutions.

In what could easily become a bridge too far in the absence of a strong unified political commitment, member states must also attain set macroeconomic criteria and maintain them for three consecutive years before embarking on the monetary union. This will entail capping inflation at 5 per cent; fiscal deficits, excluding grants, of no more than 6 per cent of GDP and a minimum tax to GDP ratio of 25 per cent.

Once the prerequisites have been met, the member states must also meet the macroeconomic convergence criteria. This entails maintaining a ceiling on headline inflation of eight per cent, a ceiling on fiscal deficits, including grants, of 3 per cent of GDP, a ceiling on gross public debt of 50 per cent of GDP on net present value terms; and maintaining a reserve cover of four-and-a- half months of imports. The protocol further provides that single currency can only be adopted by at least three countries.

It has not been lost on observers that it took the five member countries four years of intense haggling before agreeing on the final details of the protocol that was signed last week.  As expected, purists are already finding fault with the agreement.

One criticism is that the Monetary Protocol hews too closely to the European Union model that is being largely blamed for making the current Euro-crisis pitting the northern — led by Germany, France, Belgium, Holland — against the southern economies of Greece, Spain and Portugal.

But the biggest risk would be for the region to be seduced into getting into a single currency before achieving significant convergence in fiscal and monetary benchmarks. Without free movement of labour, for example, it would be difficult for traders to realise the expected benefits from a single currency regime.