Single East Africa currency due by 2012
Jan 27, 2008
THE Central bank governors of the five East African Community (EAC) member states face a tough test of achieving a Monetary Union and single currency for the regional bloc by 2012.
By Sylvia Juuko
THE Central bank governors of the five East African Community (EAC) member states face a tough test of achieving a Monetary Union and single currency for the regional bloc by 2012.
On paper, there seems to be political will. It’s the EAC heads of state that directed that the process be fast-tracked to 2012 from 2015 during their 6th extra-ordinary meeting in Arusha, Tanzania on August 30 2007.
A special meeting of the EAC monetary affairs committee (MAC) that brought together five central bank governors that included Prof. Tumusiime Mutebile from Uganda, Prof. Njuguna Ndungu from Kenya, Prof. Ben Ndulu from Tanzania, Gaspard Sindayigaya from Burundi and Francois Kanimba from Rwanda was held in Kampala recently to map out a framework for fast-tracking the ambitious targets. The secretary general Juma Mwapachu also attended the meeting.
The governors and the EAC secretary general, however, noted that the political impasse in Kenya, which was not envisaged at the time of putting the plans in motion, had to be resolved urgently.
“The very viability of the EAC project has now been put under heavy test. As you deliberate on deepening our integration process, we cannot be oblivious of these testing events,†remarked Mwapachu.
As part of the process, the governors recommended that an international expert undertake a study within the next six months to give an independent assessment of the progress towards macro-economic convergence and recommend actions for fast tracking the EAC monetary union.
“It is necessary to carry out a comprehensive study to review the convergence criteria earlier developed, take stock of the current state of preparedness of each partner state for the monetary union and make proposals on the institutional framework and operational structure of the EAC monetary union,†the governors said in a communiqué.
They said the study would also draft a model protocol for the EAC MU and recommend a mechanism for monitoring and enforcing compliance with convergence criteria among partner states.
For a monetary union to be actualised, individual EAC countries have to fulfill several benchmarks.
The benchmarks that countries have to achieve within primary criteria in the period 2007-2010, include achieving an overall budget deficit to GDP ratio (excluding grants) of not more than 6%.
Other secondary creteria include achieving an overall budget to GDP ratio (including grants) not exceeding 3%, an annual inflation rate not exceeding 5% and external reserves of more than four months of imports of goods and non factor services.
The EAC countries also have to achieve exchange rate stability, market based interest rates, real GDP growth of not less than 7%, increase national savings to GDP ratio of not less than 20% and reduction of current account deficit (excluding grants) to GDP ration to sustainable levels that are consistent with debt sustainability.
Having in mind that the convergence criteria are quite ambitious, the governors have allowed flexibility. But they observed that it was critical to be strict about the macro economic convergence criteria.
This puts into perspective the prevailing environment in most partner states which need to increase fiscal space to address the critical energy and infrastructure constraints to growth.
Further, a MAC economic affairs subcommittee report noted that as countries wean themselves of donor support for their national budgets, their capacity to accumulate reserves would decline since most use these proceeds for reserve build-up.
They noted that while the current convergence criteria was adequate, the levels and timing pause challenges.
Another oversight was the lack of publicity for a project that will include giving up sovereign currencies, a move that always elicits different views if the lesions from the European Union countires are to be put in perspective.
However, the governors proposed that the level of public awareness of progress towards monetary union be increased by inclusion of assessments in the EAC national budget for 2008/009 fiscal year.
The also suggested that partner states design public awareness campaigns to outline the benefits of a monetary union to the EAC population.
Despite the challenges, governors are optimistic that actualising a monetary union and central bank by 2012 is within reach.
THE Central bank governors of the five East African Community (EAC) member states face a tough test of achieving a Monetary Union and single currency for the regional bloc by 2012.
On paper, there seems to be political will. It’s the EAC heads of state that directed that the process be fast-tracked to 2012 from 2015 during their 6th extra-ordinary meeting in Arusha, Tanzania on August 30 2007.
A special meeting of the EAC monetary affairs committee (MAC) that brought together five central bank governors that included Prof. Tumusiime Mutebile from Uganda, Prof. Njuguna Ndungu from Kenya, Prof. Ben Ndulu from Tanzania, Gaspard Sindayigaya from Burundi and Francois Kanimba from Rwanda was held in Kampala recently to map out a framework for fast-tracking the ambitious targets. The secretary general Juma Mwapachu also attended the meeting.
The governors and the EAC secretary general, however, noted that the political impasse in Kenya, which was not envisaged at the time of putting the plans in motion, had to be resolved urgently.
“The very viability of the EAC project has now been put under heavy test. As you deliberate on deepening our integration process, we cannot be oblivious of these testing events,†remarked Mwapachu.
As part of the process, the governors recommended that an international expert undertake a study within the next six months to give an independent assessment of the progress towards macro-economic convergence and recommend actions for fast tracking the EAC monetary union.
“It is necessary to carry out a comprehensive study to review the convergence criteria earlier developed, take stock of the current state of preparedness of each partner state for the monetary union and make proposals on the institutional framework and operational structure of the EAC monetary union,†the governors said in a communiqué.
They said the study would also draft a model protocol for the EAC MU and recommend a mechanism for monitoring and enforcing compliance with convergence criteria among partner states.
For a monetary union to be actualised, individual EAC countries have to fulfill several benchmarks.
The benchmarks that countries have to achieve within primary criteria in the period 2007-2010, include achieving an overall budget deficit to GDP ratio (excluding grants) of not more than 6%.
Other secondary creteria include achieving an overall budget to GDP ratio (including grants) not exceeding 3%, an annual inflation rate not exceeding 5% and external reserves of more than four months of imports of goods and non factor services.
The EAC countries also have to achieve exchange rate stability, market based interest rates, real GDP growth of not less than 7%, increase national savings to GDP ratio of not less than 20% and reduction of current account deficit (excluding grants) to GDP ration to sustainable levels that are consistent with debt sustainability.
Having in mind that the convergence criteria are quite ambitious, the governors have allowed flexibility. But they observed that it was critical to be strict about the macro economic convergence criteria.
This puts into perspective the prevailing environment in most partner states which need to increase fiscal space to address the critical energy and infrastructure constraints to growth.
Further, a MAC economic affairs subcommittee report noted that as countries wean themselves of donor support for their national budgets, their capacity to accumulate reserves would decline since most use these proceeds for reserve build-up.
They noted that while the current convergence criteria was adequate, the levels and timing pause challenges.
Another oversight was the lack of publicity for a project that will include giving up sovereign currencies, a move that always elicits different views if the lesions from the European Union countires are to be put in perspective.
However, the governors proposed that the level of public awareness of progress towards monetary union be increased by inclusion of assessments in the EAC national budget for 2008/009 fiscal year.
The also suggested that partner states design public awareness campaigns to outline the benefits of a monetary union to the EAC population.
Despite the challenges, governors are optimistic that actualising a monetary union and central bank by 2012 is within reach.