OPINION : Monetary Union is a gold mine for the EAC

Over the recent few weeks, the East African Community (EAC) states have been deliberating on how ways of formulating a single regional currency by 2012. According to the preamble, the monetary unification involves the adoption of a common currency, coordinated exchange rate policies, and harmonisation of fiscal and monetary policies. The phenomenon is usually characterised by a common currency, common monetary and fiscal policies, a common pool of foreign exchange reserves, a harmonised credit policy and a common monetary authority or central bank. Since a monetary union means giving up your national currency and adopting a new currency, it sounds a provocative notion equated to treason to some people. Why, then, should a country want to enter into a monetary union? Based on preamble explanations, it sounds justifiable that the move aims to yield more gains than pain. Firstly, it will promote the integration efforts of all EAC partner states. Just like President Kagame has always emphasised, regional integration is the only way for economic development. The president’s desire for Rwanda to join the regional bloc can therefore not be doubted. It is for the good and benefit of every Rwandan and the country as a whole. All the other initiatives such as customs unions and common markets are clearly designed as strategies of promoting a region within the global economy. The globalisation process in terms of integrated markets is seen as a mechanism to enhance and promote the region’s competitiveness vis-à-vis other trading blocks and enlarged internal markets. Economists argue that if members’ economies experience large idiosyncratic shocks, the union’s monetary policy will not always be optimal for each member. It follows that the benefits of monetary union are more likely to outweigh the potential costs, the greater is the degree of real economic integration among its members. Yet the adoption of a single currency is apt to foster further integration, including the integration of the financial sector, as is now occurring in Europe. It can also be argued that a monetary union improves macroeconomic stability by ensuring fiscal and monetary policy credibility. This is necessary for attraction of investments, which eventually translates into economic growth as potential investors would only invest if they have full confidence that they would get sufficient returns on their investments. The increased interest in monetary integration is closely linked to the process of globalisation. In today’s globalised financial markets, capital has become too mobile and cross-border investment too vast. Today world financial markets are too large, economies are closely integrated and financial technology too innovative. The unification of the national capital markets of the integrating countries would promote market deepening, greater competition and more investment opportunities for institutional and individual investors. Private firms and public entities issuing debt instruments would have a larger pool to tap into. For instance, nationals of the region could freely trade on the Kenya Stock Exchange without exchange rate or currency risks. Further more, monetary union implies saving on foreign exchange reserves by union members. Union members experiencing temporary balance of payments problems could seek accommodation in a special fund rather than resort to the costly international financial markets. Ultimately, the members would be completely liberated from having external reserves for transactions internal to the union, just like states within a country. Long-term interest rates would decline and be less volatile. This was the experience of Europe where interest rates declined in a number of countries – notably, Ireland, Italy, Portugal and Spain. This development made it easier to reduce fiscal deficits and promote growth. Though a country which participates in a monetary union renounces a very important instrument of economic policy, it should not be ignored that there are pains involved. A country would lose national sovereignty stemming from the relinquishing of independent control over domestic monetary, fiscal and exchange rate policy. The system would likely impose strict budgetary rules and constraints because an excessive fiscal deficit in one individual member country could undermine exchange rate stability throughout the whole currency area. Rwanda, for instance, might find that it could not expand expenditures during a recession to the extent it might prefer, because of the adverse effect it might have on other EAC member states. But better still, national autonomy over monetary policy gives a country the maximum freedom and flexibility to steer the economy in a particular direction. The writer works with the Ministry of Finance and Economic Planning alex.twahirwa@minecofin.gov.rw

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OPINION : Monetary Union is a gold mine for the EAC