Is a monetary union necessary for East Africa ?

What you need to know:

  • Given the recent history of the effects that a currency union has had on countries that needed currency flexibility such as Greece, it’s prudent to ask what insurance individual member states retain.
  • Considering the tendency for governments in this region to assert sovereignty in economic policy, the decision to surrender a degree of autonomy will have both economic and political consequences.
  • No East African Community (EAC) country is a clear leader, with a dominant economy to act as the buffer in the event of a financial crisis such as that faced by the EU recently.

It is credible to claim that among initiatives for economic integration in sub-Saharan Africa, the East African Community (EAC) is the finest example

Not only does it have the most developed institutions, but it may also be the most ambitious in terms of the degree of social and political integration envisaged by its founding treaty.

For countries at the development level of the EAC member states, it is expected that the negotiations required for completion of the Customs Union and the Common Market will be politically risky and prone to stalemates and reversals.

Indeed, this has been the experience of the EAC since 2005, when big decisions on the Customs Union were first made.

Presidents of the EAC member states at the end of November last year signed a protocol to establish monetary union. At the time, the major preoccupation was the degree to which Tanzania was committed to the EAC.

Much less attention was dedicated to asking about prudence and the pragmatic requirements for the establishment of a common central bank and a single currency. It is not self-evident that the process towards establishing monetary union comprised of common monetary policy, a single currency and one central bank is justifiable for individual members of the EAC at all.

LEARNING FROM GREECE

The first point of contention comes from the implementation status of the common market and the customs union. Any observer who is sufficiently separated from the exuberance would ask whether the sequence is correct. This is because the progress towards a monetary union and a single currency presumes a far higher degree of institutional development and integration than is the case in the EAC today.

Members of the EAC have been working at making the customs union a reality for nearly a decade, and are not yet there. In other words, they have lots of work to do in ensuring that the customs union and common market are real before going to the more complicated task of working out a single currency.

Second, the advisory documents that formed the basis for the design of EAC’s monetary union were based on the European Union (EU). Given the recent history of the effects that a currency union has had on countries that needed currency flexibility such as Greece, it’s prudent to ask what insurance individual member states retain.

Conversations at the national level should be informed by the reality that autonomy in exchange rates policy would not be available. Considering the tendency for governments in this region to assert sovereignty in economic policy, the decision to surrender a degree of autonomy will have both economic and political consequences.

For Kenya, this is a decision that ought not to conclude without broader discourse with informed public participation. To the extent that I can tell, this has not happened. Monetary union should not be concluded by stealth.

The stated objective of the protocol is “to maintain monetary and financial stability aimed at facilitating economic integration to attain sustainable growth and development.” While it is difficult to disagree with the long-winded objective, it does not follow that a monetary union is a superior policy choice for attaining stable and sustainable growth.

NO CLEAR LEADER

Important policy changes that could bring that stable and sustained growth include unilateral liberalization by Kenya. This would inspire the confidence of its partners that the logic of integration is not just to advance national interests or secure economic domination.

That does not require establishing complex institutions, and would do far more for growth and economic efficiency than a monetary union today. That this has not been done is clear evidence that the EAC spaceship is trying to move at warp speed when the ingredients are not in place.

An advantage of the region is that though its members may all be classified as poor countries, they are also diverse in terms of structure of the economy. Kenya may have a decent industrial base compared with its partners, but no partner in the EAC has a sufficiently diversified economy to act as the anchor economy.

No EAC country is a clear leader, with a dominant economy to act as the buffer in the event of a financial crisis such as that faced by the EU recently.

Further, in spite of the commitments to ensure a strict adherence to a target of inflation of eight per cent and a fiscal deficit of three per cent of Gross Domestic Product, no country is sufficiently dominant to enforce compliance with these ambitious targets.

While the advantages of the monetary union are overstated, its real risks are being downplayed.

Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame