12 July 2012

East Africa: EAC Monetary Union - Will It Work?

Photo: Monicah Mwangi/The Star
Kenyan shilling: A single currency would remove the costs of having to transact in different currencies and the risk of adverse exchange rate movements for traders and travellers alike within the region.


In this third part of our series on the East African integration, Moses Mugalu asks whether the monetary union will work.

Moses Lubega, a dealer in clothing and shoes along Luwum street, hardly paid any attention to negotiations over the integration of East Africa until debate over having one currency for the region turned intense. Lubega detests the hassle of changing money at border posts.

"These exchange rate things are designed to make us lose money. Why should I change to Rwanda Francs simply because I'm going to do a deal in Kigali?" he asks.

For Lubega, the EAC would have more meaning if it met the basic need of the trader - a single currency.

"Our parents tell us that in the 1960s you could go to Tanzania or Kenya and not change money. Why can't we do it now?"

A High Level Task Force (HLTF) composed of ministry of Finance and Central Bank officials from around the region has been in place since January 2011, figuring out how to form a single currency. But traders like Lubega can't understand why it is taking too long. "Why can't they simply declare that all other currencies are abolished and we exchange our notes for a new currency that will work across the region?"

However, Europe's financial troubles have complicated matters, especially when it comes to regional currency. In order to attain the EA Monetary Union, the 20th Council of Finance Ministers, meeting in Arusha in August 2010, sanctioned a study that was undertaken by the European Central Bank (ECB) and the EAC, from which a draft monetary union protocol was prepared.

The study involved consultations with stakeholders in the five partner states and laying out a plan on how the key regional bodies - the East African Monetary Institute (EAMI) and new monetary authority (the East African Central Bank (EACB) - would run. There have been suggestions for a central body based in Arusha that controls five branches in each of the partner states, or for five semi-independent bodies that share control across the region but meet regularly for collective decisions.

This year, there have been three East African delegations to Brussels to study how the Eurozone crisis is being handled and how to avoid it. Edith Mwanje, Uganda's Permanent Secretary to the ministry of East African Commumity Affairs, elaborated at the last meeting in March in Nairobi that the centre needs more power.

"Given the experience of the Euro zone, you will realise the need for integration of partner states' fiscal policies to support the monetary policy, which will require partner states relinquishing their sovereignty."

The EAC Summit of Heads of State has extended its March 2012 deadline for the conclusion of the Monetary Union protocol to November. After the Customs Union and the Common Market, the Monetary Union is the third stage in the integration process of the EAC bloc, which will ultimately evolve into a political federation.

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