The plan to have a single East African currency within the next five years has collapsed, sending member countries back to the drawing board.
The East Africa Community (EAC) Council of Ministers, the central decision-making and governing organ of the EAC, has resolved that the 2024 deadline by which the region was supposed to have formed a monetary union and adopted a common currency is not attainable.
The Council, which was on Friday locked in a day-long meeting in Arusha, has therefore resolved to draw new timelines to achieve the ambitious target of creating an EAC Monetary Union, which is one of the four pillars of regional integration.
The EAC is way behind in setting up relevant institutions to support a single currency, most important being the East African Monetary Institute (EAMI), the equivalent of a regional central bank that was supposed to be up and running in 2015.
“It has been noted that there are some elements of the East African Monetary Union (EAMU) roadmap lagging behind the agreed timeless. So directive by the Sectoral Council on Finance and Economic affairs is to review the EAMU roadmap and advise accordingly,” the EAC director of Monetary and Fiscal Affairs Pantaleo Joseph Kessy said on Friday.
Member countries were also supposed to comply with the EAC macro-economic convergence targets on inflation, public debt, forex reserves and budget deficits.
Little progress has been made in harmonising the key economic policies, casting doubts on the region’s commitment to the Monetary Union dream.
The first two pillars of EAC integration; creating a Customs Union and Common Market have already been achieved, while the ultimate target of setting up a Political Federation was supposed to come after the creation of a Monetary Union.
Kenya’s Cabinet Secretary in-charge of EAC Affairs Adan Mohamed, who sits on the EAC Council of Ministers, in an interview said that there is still a lot of work needed towards implementation of the Monetary Union.
“I think the first thing to do is to set up the East African Monetary Institute (EAMI) then we take it from there in terms of making the necessary progress. However, the necessary instruments for the creation of this body have been approved by the heads of state,” Mr Mohamed said in an interview.
The EAC single currency is expected to create more economic unity among member countries and help eliminate transaction costs related to exchanging currencies and exchange rate volatilities.
The Protocol for the establishment of the EAC Monetary Union was signed by the heads of state in Kampala on November 30, 2013, providing a 10-year roadmap for member states to embrace a single currency regime.
The EAC Customs Union and the Common Market Protocols were signed in 2004 and 2009 respectively.
The EAC Council of Ministers has agreed to review the roadmap for the implementation of the single currency with the technical committees expected to draw new timelines.
“The review is on-going and we expect it will be completed by early next year. We will then know if new timelines will be proposed or not,” said Mr Kessy.
Under the Monetary Union Protocol, partner states agreed on the creation of four key institutions and for member states to attain and maintain a set of four primary convergence criteria for at least three years before joining the bloc’s planned single currency.
The institutions comprise the East African Monetary Institute (EAMI), the East African Financial Services Commission, East African Statistics Bureau and the East African Surveillance, Compliance and Enforcement Commission.
According to the Monetary Union Protocol, the EAMI was supposed to have been up and running by the year 2015 while the other institutions were supposed to be operational last year.
The EAMI is expected to be a transitory institution to do all the preparatory work for the activation of a single currency regime before eventually transforming into an East African Central Bank.
Member countries are required to meet and comply with a debt-to-gross domestic product (GDP) ratio of 50 per cent, fiscal deficit (including grants) of 3 per cent of the GDP, overall inflation of 8 per cent and forex reserves of 4.5 months of import cover for at least three years before the launch of the single currency regime.
Member countries have reported mixed performances on this front with the deadline for compliance (2021) less than two years away.
The delayed activation of these key institutions and the inability of member states to comply with the stipulated convergence indicators has slowed down the pace of creating the EAMU.
In May, EAC director of Monetary and Fiscal Affairs Pantaleo Joseph Kessy said compliance has been slower than expected.
Bank of Uganda Governor Emmanuel Tumusiime-Mutebile said several challenges stand in the way of fully implementing the single currency regime.
Mr Tumusiime-Mutebile said there has been progress towards the EAMU Protocol in terms of harmonisation of monetary policy frameworks, exchange rate policies, rules and practices governing bank supervision, and payment systems.
“However, there have been delays in realising targets set out in the EAMU roadmap and there are several challenges that could further impede the full implementation of EAMU Protocol.
“It is therefore imperative that we assess the realism of the timelines,” Mr Tumusiime-Mutebile said at the 23rd Ordinary Meeting of the EAC Monetary Affairs Committee in Kigali in July.
A common currency within divergent economies is fraught with challenges, as the fallout in the European Union has showed, with weak nations always threatening stability of the Euro.
According to United Nations Economic Commission for Africa (Uneca) report released last year, establishment of institutions to support the implementation of the EAMU protocol has been delayed due to the lack of clear commitment by partner states.
“The lack of firm commitment to implement decisions taken by different regional committees to fast-track the implementation of the EAMU protocol due to more focus on relative national gains and sovereignty is one of the big challenges in the journey towards full regional integration,” according to the Uneca report dubbed The East African Monetary Union: Ready or Not?
“In addition to the commitment to fiscal discipline, there is a need for the establishment of an institution or strong mechanism for enforcing and ensuring compliance by all countries.”
According to the report the experience of the European Monetary Union has shown that the European Monetary Institute (EMI) played a crucial role in the establishment of the monetary union by spearheading the harmonisation of policies, monitoring and convergence criteria, standardisation of statistical procedures and the conduction of relevant studies.
The report also notes that complying with fiscal convergence criteria for EAC countries is not easy considering their divergent macroeconomic contexts.
EAC countries are developing economies with significant need for investment and development spending.
In addition, member countries face significant macroeconomic shocks, such as terms-of-trade shocks from international commodity prices and agricultural productivity shocks from weather events.
“Furthermore, these shocks affect EAC countries differently,” said Uneca.
The EAC central bank governors in July noted that there have been delays in realising targets set out in the EAMU roadmap.