While economics officials in the East African Community (EAC) have committed themselves to kick off the third integration, the Monetary Union, before the end of this year. Some experts, however, caution them not to rush.
John Rwangombwa, the former Finance Minister who was recently appointed the governor of the central bank, recently confirmed that most of the components of the roadmap have been agreed upon while the remaining ones must be finalized by November. "We committed ourselves to sign the monetary union protocol by November," he said, adding that by then all guidelines necessary to implement the protocol should be available.
The steps achieved so far include assessment of the feasibility to establish a regional central bank, functioning of a monitoring committee that will oversee whether the protocol will be implemented in the same way in all five partner states, and the deadline for signing the protocol, among others.
Rwangombwa noted the bloc still has to discuss the microeconomic convergence criteria that will allow countries participating in monetary union to reap the benefits without incurring undue costs. The framework will for example set a debt ceiling for each of the partner states so as to safeguard the financial stability.
The monetary union would include a common currency, monetary policy and implementation of existing protocols which call for free movement of people, goods and services across the borders within the bloc.
The transition phase from national currencies to a single one will be preceded by a "convertibility of currencies" phase which will consist of buying and selling goods across the community by using the existing national currencies. "A Rwandan will for instance be able to move to Kenya with Rwandan francs and buy or do banking services using our national currency," Rwangombwa explained.
The monetary union protocol was initially set to be signed by 2012, but the deadline was missed. If it gets implemented by the end of this year, it will be the third stage of EAC integration after that the customs union (January 1, 2005) and the common market (July 1, 2010) with free movement of goods, persons, labor, services, capital and the right of establishment of residence. The ultimate stage is the political federation.
Independent central banks
Though policy makers are optimistic that they will be well-prepared for the single currency, some experts are skeptical and advise the EAC to take its time to study all the details involved to avoid a potential future crisis. Paul Collier, professor of economics and director of the Center for the Study of African Economies at the University of Oxford, last week told The Rwanda Focus that the feasibility of the EAC monetary union is still "premature."
"First, have a decade of independent national central banks with the same mandates of moderating inflation," advised the economist who has been attending high profile regional conferences on the integration of the EAC financial sectors.
In addition, Collier observed that the EAC should "complete trade integration well before any further steps on Monetary Union;" otherwise, "it will fall apart in acrimony."
It also has to be noted that the concept of a monetary union is currently being put to the test in the Eurozone which, more than a decade after its creation, finds itself in an unprecedented crisis that might see some countries abandon the common currency or, in the worst-case scenario, see the entire zone fall apart. For Collier, this disaster even in the Euro zone should instill caution when it comes to establishing the EAC monetary union.
Learning from Eurozone mistakes
But officials of the East African bloc say that they are learning a lot from what is happening in Europe. "We are watching the Euro zone very carefully to take note of the mistakes they have made and to make sure that we have mechanisms to prevent the same from happening to us," pointed out Maria Kiwanuka, Uganda's Finance and Economic Development Minister.
In 2010, the European Central Bank commissioned a study on the establishment and functioning of the monetary union. "As the experience of the European Union shows, the road towards a monetary union is challenging," the study stated. "The achievement of a sound and sustainable outcome requires a number of different steps to be taken, all of which require strong political commitment and significant lead times."
As for the EAC, although the protocols implementing the first two stages of the regional integration have been signed long ago, the two protocols have not yet been fully implemented, with for example some partner states remaining reluctant when it comes to remove some non-tariff barriers.