Strengthen integration, regional states advised

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Edge. The Central Bank says regional integration will help the East African countries enjoy the benefits of the monetary union.


The Deputy Governor Bank of Uganda, Mr Louis Kasekende, has advised policy makers to strengthen regional integration to pave way for East African Monetary Union and subsequently the single currency.
The East African Community (EAC) countries have signed a protocol committing them to introducing the East African Monetary Union (EAMU) in 2024.

The economic rationale for monetary union is to facilitate transactions within an integrated economic area, eliminate risks which might arise from unforeseen currency movements and the costs of exchanging currencies in order to complete transactions.

Mr Kasende said this implies that the benefits of EAMU can only be fully realised when there is comprehensive economic integration within the EAC, not just free trade in goods but also free trade in services and free movement of factors of production.

Speaking in the Kenyan capital, Nairobi, on Tuesday, Mr Kasekende said: “We should acknowledge that economic integration in the EAC needs to be further strengthened as a precursor to an optimal common currency.”

Mr Kasekende said although the EAC partner states have implemented a customs union, trade in goods within the region still comprises, only 10 per cent of the total merchandise exports and imports of the five partner states.

“The five partner states have a combined Gross Domestic Product GDP of $147 billion (Shs497 trillion), but their combined intra-EAC exports amount to only $3.2 billion (Shs10.8 trillion), or two per cent of their combined GDP,” he said.

“This is partly attributed to the obstacles to intra-regional trade created by non-tariff barriers but mainly because of the structure of the region’s economies, which can only produce a fraction of the traded goods consumed in the region,” Mr Kasekende added.

He said although the EAC Common Market came into force in 2010, some of its key provisions have not been fully implemented, adding that there are residual barriers to the free movement of capital, the free movement of services and especially to the free movement of labour.

While he agreed that there may be legitimate reasons for such barriers, they are not compatible with comprehensive economic integration and monetary union.

Addressing risks of East African Union and ensuring fiscal sustainability amidst monetary union, Mr Kasekende said as the experience of the European Union has demonstrated, the adoption of a common currency has profound implications for the fiscal policies of the member states.

He argued that if the common currency is to command the confidence of the public and the markets, there must be strict rules to prevent the common central bank from having to finance the fiscal deficits of the member states.

“If the Central Bank could be used as a common budgetary resource by the partner states, each of them would have strong incentives to borrow from the central bank, which would obviously be ruinous for macroeconomic stability,” he said.