The implementation of a fully fledged Customs Union and the recent commencement of the Common Market among the East African Community (EAC) Partner States will lay the background for a Common Currency, experts have said.
Recently, EAC launched a Common Market that will allow free movement of goods, people and services.
This follows implementation of a Customs Union that allows goods originating from one partner state to another will circulate freely without incurring any duties.
According to a working paper released this month dubbed “Should African Monetary Unions Be Expanded? An Empirical Investigation of the Scope for Monetary Integration in Sub-Saharan Africa,” by experts at the International Monetary Fund (IMF), the region has made headway in preparing for the monetary union.
Commissioned by the EAC Secretariat, the European Central Bank, working with the EAC central banks early this year completed a study on preparedness for a monetary union.
“Proposals relating to the road map to the establishment of the monetary union are being considered by the relevant EAC organs. It should be noted that the currencies are convertible, and some progress has been made in harmonizing banking regulations, as well as institutional steps to support a more integrated capital market,” the Working Paper reads in part.
The study gives an overview of the legal, institutional framework and the monetary union’s structure, including for the East African Monetary Institute which will precede creation of an East African Central Bank.
It also provides for a mechanism for monitoring and enforcement of the macroeconomic convergence criteria and a protocol for negotiations.
The Paper also underscores the fact that finance ministers conduct pre and post-budget consultations; there is regular sharing of budget information, and the budget statements are read on the same day.
“While none of the countries consistently met all the criteria, macroeconomic performance has been relatively strong in the region.”
In addition to progress toward macroeconomic convergence, the Paper underscores the extent to which monetary and exchange rate policies operate similarly as an important practical factor affecting the compatibility of future members of a monetary union.
“The EAC central banks all operate de jure flexible exchange rate regimes, target reserve money, and use similar domestic money market instruments for liquidity management,”
Experts also observe that monetary policy operation has faced common issues in recent years including dealing with a sharp increase in portfolio inflows in 2007, and controlling inflation in light of the spike in global food and fuel prices in 2007–08.
Despite the presence of strong political will for further regional integration by establishing a Common Currency in the region, experts underscore that challenges remain for effective implementation.
“Translating this into the political will to work toward macroeconomic convergence, harmonized policy frameworks, and the complex institutional process of adopting a common currency will be the next challenge,”
Currently the different Partner States of the EAC are in the process of formulating a task force that will negotiate the Common Currency protocol.
At their Summit in 2007, the Heads of State of the EAC Partner States decided to fast track the achievement of Monetary Union by 2012.