TANZANIA ratified the East African Community Monetary Union protocol last month ahead of her regional peers to begin preparations for adoption of a common currency within ten years.
There is a new optimism on the prospects of the country as the regional integration process is moving a notch higher and slowly but steadily, people are increasingly becoming aware that the EAC integration is the right way for growth and prosperity.
I will attempt to look at the grounds for the increased confidence from the country once looked skeptical of the process and doubted by others of her commitment to the course.
The first is the progression of the regional integration process. The East African Monetary Union protocol outlines a ten-year roadmap toward monetary union, the third pillar of the integration agenda after customs union and common market.
It is aimed at promoting and maintaining monetary and financial stability to facilitate economic integration to attain sustainable growth and development in the region.
Its ratification by all member states will pave the way for the countries to begin preparations for harmonisation of their monetary and fiscal policies and establish a common central bank before adoption of a single currency by 2024.
The envisaged East African Central Bank (EACB) will govern a joint monetary policy with a system of national central banks as its operational arms. Its primary objective will be price stability.
The secondary objectives will be financial stability and economic growth and development. 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 harmonised.
Some works have already begun. The EAC states have launched their cross-border payment system, East African Payment System designed to harmonise payment systems with a view to ease intra-regional trade. This is seen as 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. A macro-economic convergence criterion is another area that gives grounds for confidence on Tanzania.
The protocol sets a number of macro-economic 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 8 per cent, fiscal deficit, including grants of 3 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 (5 per cent) and the fiscal deficit excluding grants (6 per cent of GDP) and a floor on the tax-to-GDP ratio (25 per cent).
It looks a tall order for countries to qualify for the monetary union which is good for the sake of the regional body. The EAC states will have to put their houses in order and thrive for prudent fiscal and monetary policies to foster sustainable growth. They will be subjected to check and balances from their peers, regional and international bodies.
From her impressive macroeconomic achievements, Tanzania is meeting most of the criteria set out in the protocol. The country is currently the fastest growing economy in the East African Community (EAC) region. It recorded a seven per cent growth in 2013 and for this year, the economy is projected to grow to 7.2 per cent.
The economy is projected to grow at an annual average rate of 7.7 per cent in the medium term. The inflation rate has been maintained at a single digit since it reached an all time high at 19.8 per cent in December 2011. It was recorded at 6.4 per cent for June, this year, dropping slightly from 6.5 per cent in May.
The foreign currency reserve is rising reaching to US$ 4.647 billion in April 2014 which is enough to provide cover for imports for 4.6 months.
Another reason for optimism come from the lessons learnt from the experience of the Eurozone crisis and mechanism put forward to help EAC member states to avoid repeating similar mistakes. EAC member states seem to have taken a leaf from countries that have established similar regional bodies and in particular from European Union countries that experience the Eurozone crisis.
They will establish an early warning system and a stabilisation facility to manage economic shocks and ensure economic resilience among economies of partner states.
The protocol provides for establishment of the early warning system to 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.
It also provides for establishment of the stabilisation facility that will provide assistance to partner state experiencing or threatened with severe exogenous economic shocks.
The protocol has also what technocrats call escape vaults where a country can pull out of the race and rejoin later on. The reasons for optimisms are many and the timing is proper. Let other member states ratify the protocol so that work towards the monetary union could begin in earnest.