13 November 2011

East Africa: Experts Caution EAC States Over Monetary Union

Photo: Nation
The single currency will enhance trade within the region.

An Oxford University scholar has cautioned the East African Community member countries against rushing into the proposed Monetary Union, citing the likelihood of oil-induced volatility in Uganda that could have a contagious effect on the regional currency.

"Commodity prices will frequently shoot up in tandem with the high oil prices, making it difficult and uncomfortable for other partner states to share the same currency with Uganda, whose inflation will then be riding on a high tide occasioned by high and fluctuating oil prices," said Paul Collier, a professor of economics and author of the book The Bottom Billion.

Under the assumption that the EAC member states are already aware of the implications, he said the Monetary Union was likely to impact negatively on the regional economies.

"EAC member countries are better off without a monetary union and it is for this reason that they will not join one; because they will not want to be caught up in the trap of a volatile Ugandan currency," he said.

Prof Collier's warning comes when efforts to deliver a single currency within the five EAC member countries by the end of next year are in high gear.

In Entebbe last week, regional economists called on partner states to cede some sovereignty to pave the way for the introduction of a single currency in the five nation bloc.

However, Prof Sam Tulyanamuhika, who doubles as the president of the EAC and a member of the committee of experts in charge of fast-tracking the EAC Federation, agreed with Prof Collier's argument, saying countries with low inflation rates such as Burundi and Rwanda are likely to raise inflationary concerns in relation to Uganda's oil discovery and subsequent transactions.

"It is understandable that some member countries, especially those with low inflation rates, could fear volatility in Uganda," he said.

Henry Makmot, another member of the committee of EAC experts, said a monetary union was simply not feasible under the current EAC Treaty as found by a study carried out by their committee.

"After a careful examination of the current EAC Treaty, we discovered that the Monetary Union is not feasible because it does not address key issues that are core to the operation of the union," Makmot said.


He revealed that the experts had written a proposal to be tabled at the summit of EAC presidents slated for the end of this month in Bujumbura, calling for another treaty.

"We have advised the presidents to allow for new arrangements to have the EAC member states sign another treaty similar to the Maaschtrit Treaty, which allowed the European Community [now the EU] countries to establish a monetary union."

The EAC experts argue that the current EAC treaty is silent on what they call salient issues, including matters of fiscal convergence, which are necessary for the dream of a monetary union to be achieved.

Citing the ongoing economic hardships in the Eurozone, and in particular Greece, the experts said key bench marks such as common interest rates, debt ceilings, inflation and taxation rates must be enshrined within the new treaty to guide the pursuit and operationalisation of a monetary union.

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