By Salongo Matovu Joseph
The EAMU protocol was officially signed on November 31st 2013 and according to the plan, it is expected to fully be realized by 2015. However, Policy makers representing member countries are becoming frustrated due to the obscure process that shows little signs of progress.
Let’s take a glance at the background of this policy:
To ensure proper negotiations and implementation of the policy, different committees were established and assigned different tasks. These committees, as discussed by Dr. Enos. S. Bukuku, the Deputy Secretary General Dr., include:
The Monetary Affairs Committee (MAC), which harmonizes monetary policies as well as exchange rate issues; the Committee for Fiscal Affairs (CFA) dealing with fiscal policies; the Committee on Statistics working on statistics issues; and the Capital, Markets, Insurances, and Pensions Committee (CMIPC) harmonizing the financial sector. To some extent, the above committees have so far attained some achievements.
MAC has attained substantial achievement in among others creating frameworks for harmonization of:
– Monetary and exchange rate policies
– Payment and settlement systems (EAPS)
– Banking supervision
– Banking and currency (bank notes and coins)
– Accounting and finance
The committee on Fiscal Affairs has made the following progress:
– Excise Tax harmonization
– Value added Tax harmonization
– Conclusion on double taxation agreement.
– Coordinating pre-budget and post-budget consultative meetings of Finance Ministries on issues to do with the budget process. This has resulted into regional coordination of economic policies.
The committee on statistics has so far attained some progressive collaboration with different institutions such as central banks of partner states and through such approach the committee has initiated programs in harmonization of economic statistics emphasizing:
– Monetary and financial statistics
– Financial soundness indicators
– Harmonized consumer Price Index
– Government finance statistics
– Balance of payments statistics
– National accounts
CMIPC has made some remarkable progress on integrating financial market through regionalizing the capital markets, insurance, and pensions sector. The committee has also worked on the creation of a single financial market, which is being implemented through the Financial Sector on Development and Regionalization Project (FSDRP) to ensure market integration. This single financial market is to be achieved through; financial inclusion and strengthening of market participants, harmonizing financial laws and regulations, mutual recognition of supervisory agencies, integration of financial market infrastructure, as well as the creation of the Regional Bond Market. This list is not exhaustive.
The current situation
Following a series of negotiations with the assistance of European Union experts, the protocol of the EAMU was successfully signed by the Heads of State during the 15th summit in November, 2013. Prior to the signing, a progressive report on the negotiations of the draft protocol was submitted to the Summit. During the 11th Extraordinary Meeting held in Arusha in April 2013, the Summit of the East African Heads of States directed the Council of Ministers to expedite the negotiations and conclusion of the draft protocol. The protocol provides the regulatory framework for the operation of the EAMU. Some notable issues under negotiation include:
– Objectives and scope of East African Economic and Monetary Union.
– Macroeconomic framework including monetary, exchange rates, fiscal matters, and the macroeconomic convergence criteria.
– Payment and settlement system
– Financial system framework
– Statistics framework
– Institutional arrangements
– Transition arrangements
To deal with salient issues, Dr. Enos asserted that the EAMU policy makers are using experiences of existing monetary unions; especially the European Economic and Monetary Union (EMU) and the current challenges of EMU are providing lessons to the establishment of EAMU. These lessons include the following:
– Need for sounding framework to create fiscal discipline.
– Need for strong surveillance and enforcement mechanism of the macroeconomic convergence criteria.
– Need for reliable timely and robust statistics
– Need for strong regional institutions
– Creation of resilience of economies such as building reserves during the normal times that will support the hard times.
– Closer coordination of fiscal policies and the need to centralize some aspects of the fiscal policy.
– Monitoring the economic and social developments so as to address macroeconomic imbalances.
– Plans for reduction of existing national debts to sustainable levels.
– Need for a stabilization facility to manage external shocks.
– Full implementation of the customs union and a common market.
Dr. Enos concludes that in order for the policy makers to achieve the above, “a lot has to be done and strong institutions need to emerge, political commitments ensured, and close coordination of fiscal policies is paramount.”
The idea of Monetary Union
Monetary Union can be simply defined as two or more countries forming a single currency or having different currencies with a fixed mutual exchange rate being monitored and controlled by one or several central banks with a closely coordinated monetary policy. The idea of Monetary Union traces its routes from the 19th century when the nations that are now part of modern Europe began to trial with the first attempt to have a single common currency. For example, the Latin Monetary Union (LMU) in 1865 was a transient alliance among France, Belgium, Italy and Switzerland. Later was joined by Spain, Greece, Romania, Bulgaria, Venezuela, Serbia and San Marino. Members under the above union agreed to change their national currencies to standards of 4.5 grams of Silver or 0.290322 grams of gold and make them freely interchangeable. This union registered failures, and was dissolved in 1878. Another example can be the Scandinavian Monetary Union (SMU) formed by Sweden and Denmark in 1873 and later joined by Norway, and was officially dissolved in 1924.
There are typically two types of Currency unions; one where a client country adopts the money of an anchor country as its own currency and another where a group of countries create a new currency and a new joint central bank. The former is applicable to the use for example the US dollar in the Bahamas, Bermuda, Panama, Puerto Rico and recently Ecuador and El Salvador, the use of the Belgium franc by Luxembourg, the Swiss franc by Liechtenstein and the Italian lira by San Marino. Examples of the latter include the famous European Monetary Union (EMU), Eastern Caribbean Currency Area (ECCA), and the African French Franc zones (CFA) in West Africa. EAC is adopting this kind of currency union with a planned central bank to monitor its monetary policies.
Some merits and challenges of monetary consolidation
1. A joint currency increases the degree of intra-region trade and investment as well as the degree of symmetry of economic shocks, which call for a corrective concern among currency partner states. These symmetric economic concerns help to eliminate the problem of troubled currencies because there is assurance of each nation protecting the joint currency in case of any crisis. This reduces currency risks among member nations. A very recent example was the particularly influential role played by Germany in saving the Euro during the crisis that left the PIGS with big economic frustrations; Germany’s superior economy enabled it to support these financially unstable economies.
2. A joint currency can enhance political proximity among member states because it not only increases mutual economic dependency, but also shapes political performance. Due to the call for cooperation and peaceful resolution of conflicts among member states, all nations involved agree to limit the use of military force in interstate relations. This partly explains why European countries that are attached to the Euro have experienced long-term peace with no recent tensions or conflict.
3. Monetary union ends the transaction costs, which allow free and easy flowage of money since it eliminates all the costs and fees that are buried with transactions. The money saved can then be used to invest in other ventures such as public service.
4. Currency union can act as a guarantee to countries in debt. In this global world, it is very easy for countries to borrow from one another. However, the volatility in exchange rates scares away many creditors to give out loans because they are concerned with the possibility of depreciation in the value of their loans in case of any crisis. This fluctuation benefits the debtor nations but essentially the creditors will be losing money. Therefore, this joint currency eases the fears and might even encourage more lending between nations.
On the other hand, a monetary union has also got its costs, an example of this:
1. Having a single currency means having one monetary policy. The biggest challenge here is that at any given time, economies will be at different points in natural business cycles. For example, some economies may have faster economic growth than others and this economic-overheat may be followed by the desire to tighten the country’s interest rates. A shared currency makes this more difficult.
2. Additionally, some countries often utilize the exchange rate system as a “Shock Absorber” during economic troubles as explicitly demonstrated by Mundell’s OCA theory. On the other hand, poorly performing nations could be from suffering heavy recessions that might need a reduction in interest rates to stimulate their economies. It is likely to make decision-making for the central authority difficult as there is always a need to compromise to reach a symmetric economic decision.
Consequently, a country has no any ability of using the exchange rate as a “Shock Absorber” once it joins a monetary union.
3. Joining a currency union involves the loss of an independent monetary policy. This clearly shakes the governance on the national level because this new system is linked to the joint central bank that deals with monetary issues. Individual countries lose direct control of their monetary policy.
Additionally, any failure of symmetric representation in central authority is likely to affect weak nations. This can be clearly observed in East African fragile economies where nations like Burundi can easily be affected.
4. This joint currency union stimulates reluctance in some partner nations since it increases dependence. Some member countries can become reluctant and careless to respond to critical economic challenges. This could negatively impact the financial situation of the region. In the case of the EMU, Greece demonstrates a very clear example of an irresponsible member whose mistakes were very costly to correct.
5. Lastly, national currencies are in most cases drivers of nationalism. Pictures of heroes and leaders are illustrated on current monies causing people to believe that their currencies represent their sovereignty. In fact, losing this individual identity was one of the key reasons why United Kingdom did not adopt the Euro.
The speed is high
The Monetary Union is a productive approach towards economic development among East African economies. Its benefits with no doubt contribute to economic growth as already discussed. Nevertheless, issues to do with a joint fiscal policy can be challenging and economically costly especially in East African fragile economies. The process of monetary unification has always been a complicated one in every region that has tried it. Initially, when the Euro was suggested, many economists were skeptical about its prospects. When it gets down to weak economies, it is contentious due to interrelated economic and social challenges.
It is evident that it was not the right time for the region to assure its commitment for the joint currency union. The speed is high and politics takes up a large share in the whole process, which has left some partner states like Tanzania and Burundi suspicious. In policy making, implementation stage is the most complicated because it is when ideas on papers are expected to be implemented practically and it is uncertain if this one year will be enough to set the institutions needed for the consolidation of EA joint currency. This high speed does not only scare away some members hence reducing their commitment to cooperate but also affect the decisions made. Therefore, the move taken by some countries like Tanzania and Burundi to slow down the process is valid because they needed more time to carefully study the policy so as to minimize unintended consequences that might hit their individual economies. Besides, the prevailing Customs Union and the Common market have not worked according to expectations. The experts in the field have also demonstrated concern towards this obscure policy. For example, after the signing of the protocol on EA Monetary Union by Heads of States, Rashid Kibowa the Commissioner Economic Affairs Ministry of East African Community Affairs demonstrated his worry on the already poor market as well as minimal liberalization. He further conceded that “The border operations are still problematic. We need to improve this before we can go ahead to implement the single currency” Similarly, Dr. Jacklyn Makaaru an economics expert also challenged that there cannot be a monetary union without increased production. She contended that “Most of the goods on the EAC market are imported from outside. Let us first invest in production so that we know that Uganda produces Bananas while Kenya produces milk that is sold in the region. Before this is done, we cannot think of a single currency for trading in EAC,” Therefore, as many experts concede, moving on to the next step without working on the failures of the existing policies will negatively affect the region in the long-run.
It is crucial to set priorities and the target should be effective policy implementation in order to ensure sustainable economic growth rather than rushing this complicated policy.
by Salongo Matovu Joseph