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.