International Monetary Fund (Washington, DC)

30 December 2013

East Africa: New Pacts Ease Path Toward East African Single Currency

Photo: IMF/Stephen Jaffe
International Monetary Fund Managing Director Christine Lagarde (L) meets with Mali's Minister of Economy and Finance Bouare Filly Sissoko (R) at the Bamako International Airport January 8, 2014 at in Bamako, Mali. Lagarde is on a two country visit to Africa.

press release

Moves toward deeper economic integration among the countries of the East African Community (EAC)-Burundi, Kenya, Rwanda, Tanzania, and Uganda-have gained new impetus from agreements sealed in recent weeks.

The signing of a Monetary Union Protocol by community heads of state in Kampala, Uganda, on November 30 is a milestone outlining a ten-year roadmap toward monetary union.

The formal launch of the East African Cross Border Payment System on November 25 is a significant operational step increasing monetary and economic integration.

The IMF has supported the EAC regional integration process since its origins. IMF staff have provided technical assistance such as regional workshops and participated in the policy dialogue, including in meetings of EAC central bank governors and several conferences, and hosting meetings on the sidelines of the IMF-World Bank Annual and Spring Meetings.

Moreover, the IMF has supported the economic programs of all EAC countries. Continued engagement provides an opportunity to back the policies that member countries are pursuing to meet the objectives they have set for themselves in the Monetary Union Protocol.

The EAC region has increasingly attracted interest from international investors, with real economic growth averaging 6 percent over the past decade-an impressive performance sustained while much of the world economy was affected by the global economic and financial crisis that began in 2007-8.

Greater integration not only into the global economy but also within the EAC region is expected to help sustain strong economic growth and improve economic efficiency.

Investment destination

A larger regional market will lead to economies of scale, lower transaction costs, increased competition, and greater attractiveness as a destination for foreign direct investment.

Ultimately, the objective is to optimize the production of goods and services in a region with a population of about 140 million and a combined GDP of more than $100 billion.

The EAC Monetary Union Protocol sets out the process and legal and institutional framework for the establishment of a single currency, including macroeconomic convergence criteria.

Previous milestones in the EAC economic and financial integration agenda were a customs union protocol, established in 2005 with the introduction of a common external tariff and gradual elimination of internal tariffs; and a common market protocol signed in 2010, allowing free movement of goods, persons, labor, services, and capital.

The implementation of these initiatives is far from complete, but important progress has already been achieved. Further efforts to speed up trade liberalization and to harmonize policies are desirable in themselves and will also help to increase the benefits of monetary union.

Target: single currency

The EAC single currency is expected to be introduced by 2024 by member states that comply with the convergence criteria. Joint monetary policy will be governed by an independent EAC central bank with a system of national central banks as its operational arms.

The central bank's primary objective will be price stability; secondary objectives will be financial stability and economic growth and development. The single exchange rate will be free floating.

To qualify, countries are expected to meet the convergence criteria and comply with them for at least three years. The primary convergence criteria are ceilings on headline inflation (8 percent), fiscal deficit including grants (3 percent of GDP), and gross public debt (50 percent of GDP in net present value terms); and a floor on reserve coverage (4.5 months of imports).

In addition, there are three indicative criteria: ceilings on core inflation (5 percent) and the fiscal deficit excluding grants (6 percent of GDP); and a floor on the tax-to-GDP ratio (25 percent).

Monitoring and enforcement

The EAC Monetary Institute is planned to be established in 2015 to direct preparatory work for monetary union. An East African Surveillance, Compliance and Enforcement Commission to monitor and enforce convergence will be created by 2018. From that point on, monetary and exchange rate policies will be coordinated and harmonized.

The launch of the East African Cross Border Payment System, an integrated payment and settlement system within the EAC, is a concrete operational step that will help toward monetary, financial, and economic integration.

The system is so far operational in three EAC members-Kenya, Tanzania, and Uganda; two additional members-Rwanda and Burundi-are working on the preparation of their systems.

The payments system is a multicurrency mechanism that links real time gross settlements of EAC member countries through the generation of automatic payment messages through the Society for Worldwide Interbank Financial Telecommunication.

The central banks maintain accounts with each other, and also host prefunded settlement accounts in the currencies of partner states.

The central banks are responsible for providing the infrastructure, operating rules, and oversight of the system, while commercial banks would run it. The payments system is expected to make cross-border payments faster and more reliable, promoting regional trade.

Implementation of these initiatives and further efforts to improve integration during the next decade will help to reduce vulnerabilities and maximize the benefits of monetary union.

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