The Citizen (Dar es Salaam)

8 November 2011

East Africa: EA Single Currency Deadline in a Limbo

Dar es Salaam — The deadline for the East Africa countries to adopt monetary union, set for 2012, might be extended, if conditions for establishment of single currency in the region are not met.

The permanent secretary in the ministry of East Africa Cooperation, Dr Stergomena Tax Bamwenda, said the criteria such as budget thesis, inflation rate, foreign exchange reserve, government debts and exchange rates among the EAC member countries must be observed before they commit themselves to single current arrangement.

She was responding to queries by some economists in Dar es Salaam yesterday that the region shelves the monetary union process, pending solution to a number of economic problems in the region.

Dr Bamwenda noted that the ongoing negotiations on the monetary union consider all factors, and if not met, the countries will not enter the monetary union in 2012 as agreed earlier.

"We are still in the process. We can't rush to introduce monetary union until those criteria met, even as the deadline approaches, we will not rush, " the PS insisted.

She said that EAC was also learning from other parts of the world, notably in Euro Zone, on intricacies of monetary union, before penning the agreement.

Her comments come at a time when economists in the country have expressed their concerns that the underlining weak currencies and skyrocketing inflations in all five EAC countries, among others, were recipe for doomed monetary union, if the region rush to sign it before solving the problems.

Speaking to The Citizen yesterday, the experts raised an alarm over collapse of East African monetary union if the member states rush to introduce it to meet the deadline before settling problems facing their economies.

Among thorny issues, they pointed out, include economic disparities, increasing inflation rate as well as weakening value of the local currencies against the dollar.

The experts' alert comes at the time when the member countries were continuing with series of negotiations on monetary union, with the fifth round of talks towards the regional single currency held recently in Entebbe, Uganda. The talks target to meet the 2012 deadline for the establishment of the single currency.

In separate interviews with The Citizen yesterday, the analysts said the EAC countries should first harmonise their economies for stronger monetary union.

Confederation of Tanzania Industries (CTI) director of Policy and Research, Mr Hussein Kamote, said many economic challenges should be looked at, particularly on harmonising economies of the five EAC member states.

"There is a danger of single currency to collapse if it would be introduced without key economic indicators of these countries being brought to parity," he said.

He said the ratio of nations' debts against the GDP (Gross Domestic Product), inflation rate as well as growth rate must correlate with each other among the partner states, before they commit themselves to the single currency.

He warned that if monetary union is introduced under the prevailing conditions, the stronger economies in the region might suffer as they would be forced to bail out the weaker ones.

Prof Humphrey Moshi from the University of Dar es Salaam's Economic Department, said all EAC countries were required to trim down the inflation rate to single digit before thinking of a monetary union.

"The inflation has significantly shot up; we hoped it could be in single digit. But with this situation, something should be done for the sake of monetary union," he said.

However, Prof Moshi said the serious problem was not about the declining value of the local currencies against the dollar, but member countries were not well prepared to enter the monetary union.

He underscored the importance of studying the problems facing the Euro zone in order to learn for a successful EAC monetary union.

Prof Delphin Rwegasira, also from the University of Dar es Salaam, had the same views, saying it was crucial for the five countries to ensure economic convergence.

It was important also for member countries to stabilise their local currencies by reducing inflation rates, and balance of payment among them should be nearly equal, said Mr Rwegasira.

"They should ensure that key microeconomic fundamentals are not far apart like in the current situation. They must be closer," he noted.

He warned that the fast-tracking of the monetary union without proper arrangement could result into financial challenges to the currency.

For instance, he said, the monetary union of Greek and Portugal face troubles because the countries entered early to the system.

To enrich the negotiations, the EAC has commissioned various studies, which include, among others, a study on the review of the EAC macroeconomic convergence criteria as well as on a harmonised monetary policy framework for the region, both of which are being done jointly by the regional body and the International Monetary Fund (IMF).

After the Customs Union and the Common Market, the Monetary Union is the third stage in the integration process of the EAC bloc, which ultimately aspires to establish a Political Federation.

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