The East African Legislative Assembly has tasked the East African Community Council of Ministers, the governing organ of the EAC, to shed light on steps taken by the bloc on the implementation of a common currency.
The question was put to Dr Ali KirundaKivejinja, Uganda’s Minister for EAC Affairs who is Chairperson of the Council of Ministers, by Rwandan representative to EALA, Dr Pierre Celestin Rwigema as the Assembly wrapped up a sitting in Arusha, Tanzania, and sought clarity on what is being done to implement the third pillar of integration, the Monetary Union.
The EAC Treaty provides for four pillars of integration: the Customs Union, Common Market, Monetary Union and Political Federation.
Dr Rwigema said: “As of now, the first two pillars are being executed but we are aware that East Africans are desirous to use one common currency, and to integrate politically.”
“Can the Chairperson of the Council of Ministers inform this August House the status of implementation of the third and fourth pillars of the integration?”
Partner States negotiated a Protocol for establishment of the East African Monetary Union (EAMU) which was signed by regional leaders in November 2013.
It sets out the process and prerequisites for attaining a monetary union in the region over a period of 10 years. The Monetary Union is expected to be in place in 2024 with introduction of a common currency to replace national currencies and establishment of a regional central bank – the East African Central Bank (EACB) – which can be hosted by any Partner State.
Transition to the EAMU is conceptualized in two phases. In the initial convergence phase, Partner States are to work towards achieving preconditions designed to limit the union’s exposure to internal economic strains.
Preconditions include macroeconomic convergence criteria, full implementation of the Customs Union and Common Market protocols, establishment of institutions to support the Monetary Union and harmonisation of policies and practices.
Once these preconditions are satisfied, countries will enter the final, conversion phase, marked by announcement of a predetermined date for formation of the union.
Establishing a stable monetary union, officials say, will require a strong institutional framework to monitor and enforce convergence. The EAMU protocol therefore provides for the establishment of four support institutions: the East African Monetary Institute – a precursor to the East African Central Bank – which was supposed to be set up by December 2015 but never happened, East African Statistics Bureau (2018), East African Surveillance, Compliance and Enforcement Commission (2018) and the East African Financial Services Commission (2018).
The East African Monetary Institute will be established first as a transitory institution to do all preparatory work for the establishment of the Monetary Union.
None of these institutions is in place. But Dr Kivejinja told MPs that the EAC Secretariat – the executive organ of the Community – is working with Partner States to develop legal instruments for establishment of the institutions.
Bills for establishing the EAC Monetary Institute and EAC Bureau of Statistics were developed, cleared by the Council and forwarded to the Assembly.
Another Bill for establishing the EAC Surveillance, Compliance and Enforcement Commission has been negotiated by the EAMU task force and cleared by regional ministers of finance and economic affairs and forwarded to the ministers of justice for legal input.
A study on “Financial Sector Regulatory and Supervisory Architecture” was undertaken to inform drafting of the Bill for establishing an EAC Financial Services Commission and, a related report is being reviewed by Partner States.
Dr Kivejinja said: “Transition to a monetary union requires a substantial degree of coordination and harmonisation of policies, laws and practices in the run-up to a single currency. In essence, this implies that, over time, Partner States will need to reform and integrate various policies and laws in order to allow smooth implementation of the EAMU protocol.
Partner States, he said, are working towards harmonisation of their policies, laws and practices.
“EAC central banks have agreed to converge in terms of monetary policy regimes and exchange rate policies by moving from reserve money based framework to a forward-looking price based monetary policy framework by December 2018,” Dr Kivejinja explained.
High degree of economic convergence, he said, is important for individual countries planning to form a monetary union, and this aspect is also important for the stability of the monetary union once formed.
Making steady progress
The EAMU protocol provides for a set of four primary convergence criteria – a ceiling on headline inflation of eight percent; reserve cover of 4.5 months of import; a ceiling on the overall deficit of three percent of GDP, including grants; and a ceiling on gross public debt of 50 percent of GDP in net present value terms – which must be attained and maintained by each Partner State, for at least three years, before joining the Monetary Union.
“Assessment of progress towards achieving the primary convergence criteria shows that most Partner States have achieved some of the convergence targets ahead of the year 2021, and are making steady progress in achieving remaining convergence targets,” Dr Kivejinja said.
Dr KessyPantaleo, a principal economist (fiscal and monetary affairs) at the Arusha-based EAC Secretariat told Sunday Times that assessment of progress towards achieving the primary convergence criteria shows that in 2016, “the most recent year for which data is available,” annual headline inflation in all countries – except South Sudan – was below the eight percent criterion.
During the same year, he said, all these countries had debt to GDP ratios below 50% of GDP (except Kenya whose debt to GDP ratio was above the ceiling of 50% of GDP). However, regarding the reserve cover, except for Uganda and Kenya, other countries have not been able to achieve the 4.5 months of import cover criterion since 2014.
Dr Pantaleo said: “In addition, compliance with the fiscal deficit criterion including grants has, on average, been very challenging for most countries, particularly South Sudan, Kenya, and Burundi. However, these targets are to be achieved by the year 2021.”
“There is no reason at the moment to doubt that any of the EAC Partner States will fail to attain the convergence targets in 2021.”
Harmonisation of fiscal policies
Regarding the harmonisation of fiscal policies, Dr Pantaleo said, some marked achievements have been made.
So far, he said, two policy documents – the EAC Tax Treaty Policy, developed to provide a policy framework for guiding future treaty negotiations by Partner States, and the EAC Model Tax Treaty, which is expected to further develop Partner States’ economic relationship and to enhance cooperation in tax matters in order to eliminate double taxation without creating opportunities for tax evasion or avoidance – were developed to guide the process of tax harmonisation.
“In addition, Partner States developed a draft Policy Framework for Domestic Tax Harmonisation, which identifies possible areas for harmonisation, coordination and the approach for coordination. And Partner States recently established a regional technical working group (RTWG) on harmonisation of national laws,” he said.
The RTWG, he said, is expected to review and recommend necessary reforms on national laws to allow smooth implementation of the EAMU protocol.