On November 30, 2013, the heads of the East African Community (EAC) member states signed the Monetary Union (EAMU) Protocol in Kampala. This is the third pillar of the EAC integration.

According to Article 5 of the Treaty establishing the EAC, the integration is anchored on four major pillars: customs union, common market, monetary union, and political federation.

The Customs Union Protocol was signed in 2004, and came into effect on July 1, 2005. The Common Market Protocol came into effect on July 1, 2010 having been signed on November 30, 2009.

Following the signing of the EAMU protocol, we have been inundated with questions from stakeholders about its implications and when the EAC shall fully realize its provisions.

To begin with, a monetary union is a group of two or more states sharing a common currency and with common fiscal and monetary policies. An example of a monetary union is the European Union where several countries use the Euro and monetary policies are conducted by the European Central Bank.

A monetary union can have different currencies, but with a fixed mutual exchange rate monitored and controlled by one central bank (or several central banks with closely coordinated monetary policies).

In the African context, we have examples of other regional economic communities in advanced stages of implementing monetary unions as part of their broader integration agenda. One example is the West African Economic and Monetary Union (UEMOA) – comprising Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo – using the CFA franc.

There is also the Central African Economic and Monetary Community (CEMAC) made up of six states: Gabon, Cameroon, the Central African Republic, Chad, the Republic of the Congo and Equatorial Guinea. Lesotho, Namibia and Swaziland are pegged to the South African rand, which means they share the same monetary policy.

The greatest benefit of a monetary union is reducing transaction costs as there is no need to incur the expense of currency conversion or hedging against exchange rate risk in transacting.

The framers of the protocol establishing the EAMU deliberately provided for rigorous and meticulous processes before finally launching a single currency. It involves establishing the following institutions: the East African Monetary Institute, the East African Surveillance, Compliance and Enforcement Commission, the East African Statistics Bureau, and the East African Financial Services Commission.

All this is because when there are wide differences in the degree of fiscal discipline across the partner states, that reality can create challenges for the survival and stability of any union.

The Eurozone experience also underscores the need for countries that are about to participate in a monetary union to have a credible and feasible mechanism for fiscal transfers to enable them respond and adjust to asymmetric shocks.

In the absence of such a mechanism, any monetary union would be susceptible to enormous pressure when its members are hit by such lopsided tremors.

As part of the process to prepare for a monetary union and ultimately a single currency, the EAMU protocol specifies institutions to support this process. They include the East African Central Bank, East African Statistics Bureau, East African Surveillance, Compliance and Enforcement Commission, and East African Financial Services Commission.

But what will be the role of these establishments vis-a-vis the existing institutions? They will work closely in execution of their mandates. For instance, the East African Central Bank will formulate a monetary and exchange rate policy as the Bank of Uganda and other partner states’ central banks implement those policies.

The process also provides for a matrix of macroeconomic convergence criteria, which include maintenance of low and stable inflation at below five per cent, maintenance of a high and sustainable growth rate of GDP greater than or equal to seven per cent, reduction of current account/GDP ratio to a sustainable level and reduction of budget deficit excluding grants/GDP ratio to less than five per cent, among other provisions.

The macroeconomic convergence matrix is aimed at ensuring price stability within the EAC sub-region, strengthening the financial sector, encouraging cross border activities and providing liberal policy conducive to trade, investment, savings, growth and development.

The EAC is also working towards full implementation of the Customs Union and Common Market protocols if the Monetary Union is to take off. This will include trade integration and openness, labour mobility, capital mobility and exchange rate flexibility.

So, when is the EAC Monetary Union expected to commence? The EAMU protocol lays groundwork for a monetary union within 10 years, and allows partner states to progressively converge their currencies into a single currency.

The transitional arrangements for entry into force will commence as per implementation schedule spelt out in the protocol.

Source: All Africa

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of TradeMark Africa.