15 July 2014

East Africa Keen to Avoid Eurozone Monetary Crisis

EAST African Community (EAC) member states are hopeful their envisaged monetary union will not experience problems that befell the Eurozone, as they will establish an early warning system and a stabilisation facility to ensure economic resilience in partner states.

The EAC member states are set to establish a monetary union over a period of ten years to move further their integration agenda, aimed at boosting sustainable growth and development in the region.

A protocol for establishment of the EAC Monetary Union, the third pillar of the integration agenda after customs union and common market, was signed by leaders of EAC member states in Kampala, Uganda last November.

Tanzania last month ratified the protocol to set off preparations for the monetary union, ahead all other four members of EAC. The union will require EAC countries to have convergence in their economic, monetary and fiscal policies and establish a common central bank before adoption of a single currency by 2024.

The protocol provides for establishment of an early warning system and a stabilisation facility as mechanisms for managing economic shocks, that may arise from exogenous factors and ensuring economic resilience among economies of partner states.

According to the protocol, the early warning system will ensure that the risk profile of the economy of each partner state is regularly monitored and there are measures to mitigate any risks that may arise.

The stabilisation facility will provide assistance to partner state experiencing or threatened with a severe exogenous economic shocks. The protocol sets a number of macroeconomic convergence criteria to be met and sustained for three consecutive years by member states before qualification.

The primary convergence criteria are ceilings on headline inflation to eight per cent, fiscal deficit, including grants of three per cent of the Gross Domestic Product (GDP).

Others are ceilings of gross public debt of 50 per cent of GDP in Net Present Value terms and a reserve cover of 4.5 months of imports.

In addition, there are three indicative criteria: ceilings on core inflation (five per cent) and the fiscal deficit excluding grants (six per cent of GDP) and a floor on the taxto- GDP ratio (25 per cent).

The Bank of Tanzania (BoT) Director of Economic Research and Policy, Dr Joseph Masawe, said in Dodoma recently that lack of an early warning system to detect potential economic shocks was one of the weaknesses in the eurozone.

He said a team of experts from the EAC had learnt from the experience of the eurozone crisis and had suggested corrective measures that have been included in the protocol.

The eurozone, made up of 17 European countries that use the euro, in crisis after several countries in the eurozone borrowed and spent too much since the global recession began out of the US financial crisis of 2008-2009.

A slowing global economy that ensued exposed the unsustainable financial policies of certain eurozone countries. By 2007, Eurozone economies, on the surface, seemed to be doing relatively well - with positive economic growth and low inflation.

Public debt was often high, but apart from Greece it appeared to be manageable assuming a positive trend in economic growth.

However, by January 2010, Greece was found sitting on debts that were expected to hit 290 billion euro in 2012. Its budget deficit stood at 12.7 per cent of gross domestic product, more than four times the EU's 3 per cent limit.

The cost of servicing that debt rose, hitting the euro currency and prompting speculation over a bailout plan. The crisis sparked a wave of panic in financial markets which started spreading to other EU countries with sovereign debt problems, mainly Spain and Portugal.

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