The signing, last Saturday, of the protocol establishing the long-envisaged East African Monetary Union by the East African Community Heads of State has aroused mixed feelings from the public.

The protocol is expected to pave way for a single currency within the five-nation Community in 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, whose full benefits are arguably yet to trickle down to the masses.

Herman Musahara, an associate professor at the University of Rwanda’s College of Arts and Humanities, said a monetary union is an important step but there are multiple fiscal issues to keep an eye on, especially inflation and how best it will be contained in an integrated fiscal regime.

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.

He said while there are lessons to be leant from such places as Europe Union, EAC should not be discouraged by the challenges others have faced.

"The Eurozone landed into trouble mainly because their currency was common but policies differed from one country to another,” Prof. Musahara said.

"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.”

Careful process

Dr Thomas Kigabo, who was Rwanda’s lead negotiator during the Monetary Union negotiations, said 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,” Dr Kigabo said.

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.  

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.

Kigabo said these institutions will handle the envisaged single currency challenges, including "ensuring that economies converge, the need to ensure that intra-regional trade increases significantly, and ensuring that the fiscal policies in the five countries are coordinated and disciplined.”

The EAC Heads of State Summit in Kampala also directed that the Council of Ministers develops bills establishing the institutions provided for in the Protocol for consideration by the East African Legislative Assembly (EALA).

The regional bank’s location will be determined after the legal framework is concluded.

Lessons from the EU

Prof. Manasseh Nshuti, an economist and financial expert, said there are similarities between the EAC and EU models with regard to shared goals – larger markets for goods and services and extension growth.

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.

Richard Othieno, the head of EAC corporate communications and public affairs, said partner states will adopt a similar model with modifications.

The EAC will put in place a mechanism for monitoring compliance to the harmonised statistical frameworks, he said.

A mechanism for resilience and managing economic shocks from "exogenous factors,” including an EAC financial stabilisation facility, is also on the cards. Most of these instruments are planned to be established by 2018. The EAC financial stabilisation facility is expected by 2022.

"The legal framework should be complete by 2016 because matters of legislation take time,” Othieno said.

EAC economists 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 fulfill 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.