EAC Monetary Union protocol: Journey towards single currency

Cris Magoba

What you need to know:

  • Advantage. The greatest benefit of a monetary union is to reduce transaction costs as there is no need to incur the expense of currency conversion or hedging against exchange rate risk in transacting.

On November 30, 2013, the Heads of State of the East African Community signed the Monetary Union Protocol in Kampala. The Monetary Union (EAMU) Protocol is the third pillar of EAC integration.

According to Article 5 of the Treaty establishing the EAC, the integration is anchored on four major pillars, to wit; Customs Union, Common Market, Monetary Union, and ultimately Political Federation. The Community signed the Customs Union Protocol in 2004 and it came into effect on 1st July 2005. The Common Market Protocol came into effect on July 1, 2010 having been signed on November 30, 2009.

Following the signing of the EAMU protocol, we have been inundated with questions from stakeholders about its implications and when the EAC shall fully realise its provisions. To begin with, a monetary union is a group of two or more states sharing a common currency and with common fiscal and monetary policies.

An example of a monetary union is the European Union where several countries use the Euro and monetary policies are conducted by the European Central Bank.

A monetary union can also be with different currencies, but having a fixed mutual exchange rate monitored and controlled by one central bank (or several central banks with closely coordinated monetary policies). In the African context, we have examples of other Regional Economic Communities (RECs) in advanced stages of implementing monetary unions as part of their broader integration agenda.

These include the West African Economic and Monetary Union (also known by the French acronym, UEMOA) Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo using the CFA franc. There is also the Central African Economic and Monetary Community (CEMAC) made up of six states of Gabon, Cameroon, the Central African Republic, Chad, the Republic of the Congo and Equatorial Guinea. Lesotho, Namibia and Swaziland are pegged at par to the South African Rand, which effectively means that they share the same monetary policy.

The greatest benefit of a monetary union is to reduce transaction costs as there is no need to incur the expense of currency conversion or hedging against exchange rate risk in transacting. The framers of the protocol establishing the EAMU deliberately provided for rigorous and meticulous processes before finally launching a single currency. It involves the establishing of the following institutions:

The East African Monetary Institute (EAMI); the East African Surveillance, Compliance and Enforcement Commission; the East African Statistics Bureau; and the East African Financial Services Commission. All this is because when there are wide differences in the degree of fiscal discipline across the partner states, that reality can create challenges for the survival and stability of any union.

The Eurozone experience also underscores the need for countries that are about to participate in a monetary union to have a credible and feasible mechanism for fiscal transfers in order to enable them to respond and adjust to asymmetric shocks. In the absence of such a mechanism, any monetary union will be susceptible to enormous pressure when its members are hit by such asymmetric shocks.

As part of the process to prepare for a monetary union and ultimately a single currency, the EAMU protocol provides for institutions to support this process. They include East African Central Bank; East African Statistics Bureau; East African Surveillance, compliance and Enforcement Commission; and East African Financial Services Commission.

What will be the role of these institutions vis-a-vis the existing ones? The regional institutions will work closely with the existing national institutions in execution of their mandates. For instance, the East African Central Bank will formulate Monetary and Exchange rate policy while the Bank of Uganda and other partner states’ central banks implement those policies.

The process also provides for a matrix of macroeconomic convergence criteria which include maintenance of low and stable inflation at below 5 per cent; maintenance of a high and sustainable growth rate of GDP greater than or equal to 7 per cent; and reduction of current account/GDP ratio to a sustainable level, among others.
So when is the EAC Monetary Union expected to commence? The EAMU Protocol lays groundwork for a monetary union within 10 years.

Mr Magoba is the principal public relations officer, ministry of EAC Affairs.