Two senior IMF officials, writing in their personal capacities, recently offered some insight into what the East African Community (EAC) will be up against in the run-up to having a Monetary Union.

It will not be easy.

The Union is scheduled to come into effect in 2024 when, hopefully, EAC member states will be using a common currency.

However one basic point that Paulo Drummond and Oral Williams made very clear, is the need to have the building blocks firmly in place. In this way, the sequencing of reforms, all tied to achieving economic convergence, will be much easier.

Not surprisingly, due to the relative success of the European Union euro single currency, the EAC is also following the same path. Although not all the EU members are part of the euro pact, it is fortunate for the EAC to have a living example of what to expect.

From the time a decision was made to have a single currency to minting the first coin, took the Europeans 18 years. The EAC wants to do it in less time, specifically over 10 years.

Events in Burundi have put a damper on things. Regional stability is essential for any chance of a successful transition period. Consequently, this crisis has to be resolved as quickly as possible.

According to Drummond and Williams, as cross-border activities increase, national central banks will need to adopt a consolidated approach to banking supervision in order to avoid difficulties in a bank’s operations in one country spilling over to other countries in the region.

Looking ahead, the unfinished agenda includes the establishment of institutions to guide the convergence process ahead of the monetary union. In particular, the East African Monetary Institute will be set up as a precursor to the eventual establishment of an East African Central Bank.

Others institutions such as the East African Compliance and Enforcement Commission that will guide the convergence process during the transition period; the East African Statistics Bureau that will harmonize statistics, and the East African Financial Services Commission that will supervise financial services are expected to be established. As financial integration strengthens, a single supervisory authority with clear roles, adequate resources, and powers is critical in addressing risks that could arise. This authority should be empowered to intervene, resolve, or restructure weak banks and to avert systemic risks to the union.

The two most important institutions in the proposed Union are the East African Central Bank to be and the relevant National Central Banks. However the next most crucial factor is the deciding on the criteria. Usually this will involve price stability and a good track record of well managed public finances. That means issues of corruption will have to be handled even more seriously than ever before.

For the Europeans, they developed a Stability Pact, which mainly involved members agreeing to keep their economies stable, and keeping their budget deficits under control. The agreed limit for a deficit was that it must be no more than 3% of GDP. Obviously none of the EAC Partner States are anywhere near that and so we will have to come up with our own formula in the near future. But all this will remain largely conjection if the situation in Burundi is not contained.

Source: East African Business Week

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