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Why proposed single currency for East Africa could be doomed

Wednesday March 18 2020
SANPIC

Rwandan President Paul Kagame (left) takes over East African Community chairmanship from Uganda's Yoweri Museveni during the 20th Heads of State Summit in Arusha on February 1, 2019. Previously, the EAC had a “monetary union” with the shilling as its currency. PHOTO | COURTESY

By DONNET SANDE

It is der rigueur in the field of regional integration that a functioning common market is necessary before a monetary union.

This is echoed in Article 5(1)(a) of the protocol establishing the East African Community Monetary Union (Eamu), which dictates that there must be seamless movement of people, goods and services within the East African Community partner states.

This assumption feeds on the fact that it is more pragmatic to realise the benefits of a monetary union where there is free movement of goods, labour and capital.

Simply put, money moves where goods, services and people can also move.

But with a lukewarm common market, the EAC is creating a monetary union that will, among other things, have a single currency for Kenya, Uganda, Tanzania, Rwanda, Burundi and South Sudan.

A monetary union, strictly defined, means the use of a common currency by a group of countries. It entails the abandonment of national currencies and fiscal policies for a supranational shared currency.

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BOOSTING ECONOMY

Previously, the EAC had a “monetary union” with the shilling as its currency. This ceased with the end of colonial rule.

But in 2013, the revamped EAC signed the Protocol for the Establishment of the East African Community Monetary Union in line with the treaty.

The Heads of State soon ordered the acceleration of a single currency. Stakeholder forums and comprehensive studies were held and a high-level task force formed to assess preparedness for such a union.

A monetary union, it is hoped, will lead to reduction in transactional costs, consolidation of the single market, price convergence and stability.

With increased specialisation and economies of scale it should increase efficiency in production, increasing the EAC’s total GDP.

A single currency is expected to bring about economic emancipation and the monetary union to lead to a stable EAC currency that will boost certainty to business and trade as well as enhance the EAC’s bargaining power in trade negotiations, attracting multinational investors.

ACTS OF DISHARMONY

This is all the people-centred community has told its citizenry. Even on its website, little has be divulged on the status of the monetary union.

What is apparent is that the common market is under siege and the conditions for its full realisation are far from satisfactory.

The textbook example of the suffocating common market lies in the lack of convergence of macroeconomic policies of partner states.

For example, the tax regimes are not unified, there is no price control on similar goods and no common standardisation measures and quality controls.

Lack of harmonisation of standards, for example, led to Rwanda rejecting a consignment of Kenyan manufactured products last year on account of not meeting their standards.

The past half-decade has seen the use of non-tariff barriers (NTFs) flourish. Tanzanian authorities burnt 2,000 chicks from Kenya and auctioned 1,000 heads of cattle belonging to Kenyan traders.

Last year saw several instances where points of entry were closed — like in the case of Uganda and Rwanda.

END CONFLICT

The cherry on the cake is on the political instability that bedevils members like South Sudan and Burundi, who are yet to embrace the common market.

Further, unresolved tension between Heads of States that led to cancellation of summits undermines the political will to propel decision-making.

The threat posed by the underperforming common market to the monetary union cannot be ignored and must first be addressed.

While the customs union and the common market call for elimination of tariffs, NTFs continue to hamper the free flow of factors of production.

It is unrealistic for the EAC to chase a monetary union with an underdeveloped common market. Creating the monetary union first is to put a Band Aid on a leaking gunshot wound.

Ms Odhiambo-Sande is a lawyer specialising in regional integration. [email protected] @donnetrose

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