The Hidden Truth On EA Single Currency

The Citizen (Dar es Salaam)

Costantine Sebastian

3 April 2011

Dar Es Salaam — The East African Community’s dream of establishing a single currency by next year might not be realised, after all. Experts are warning that the bloc risks serious consequences by rushing into a monetary union.

Despite the launch in January of the process towards introducing the single currency, East Africans have not been told the whole truth about the project, especially the danger of fast tracking it, which the consultants assigned to draw up the roadmap towards the monetary union, have advised against.

What even the presidents of the five EAC partner states – Kenya, Uganda, Tanzania, Rwanda and Burundi – are not telling their people is that under the prevailing circumstances, it will not be possible to have a common currency by next year.

The consultants have strongly warned that should the monetary union be hurried, it could cost the EAC and the partner states dearly and correcting the mistake won’t be easy. Local, regional and international experts concur with the European advisers that the EAC is not ready yet for a monetary union.

The European Central Bank (ECB), which carried out a feasibility study on the proposed union, has hinted that the EAC is not ready for financial integration. The bank’s officials were quoted in the just released report of the Economist Intelligence Unit (EIU), as saying that it would not be possible to set up the monetary union.

EAC Secretariat officials declined to comment on the fears that the monetary union might not take off next year, as envisaged. However, a desk officer at the Arusha Secretariat would not disclose what measures would be taken by the regional body in case of a delay in realising the currency union.

“We are aware of the reservations expressed by the ECB. But those are their views. The negotiations are still on schedule,” he told The Citizen on Sunday.

The official, who asked not to be named because he is not the community’s spokesperson, said the EAC had not yet responded to the ECB’s findings.

Efforts to reach the EAC’s deputy secretary general (Planning and Infrastructure), Mr Alloys Mutabingwa, who is leading the monetary union negotiations, failed.

For his part, the deputy minister for East African Co-operation, Dr Abdallah Abdallah, The deputy minister for East African Cooperation, Dr Abdallah Abdallah, said a feasibility study was being done on having a common currency and that some issues had not been agreed upon.

“In my view, next year is too soon to have this implemented. Our counterparts accuse us of dragging our feet towards achieving a monetary union, but I believe we should not rush into it.”

In its latest Tanzania country report, the influential Economist Intelligence Unit (EIU) says the European Central Bank warned the EAC that the target of having a single currency by next year is unrealistic. The bank, which was consulted because of the success of the euro, said it was impossible to set a timetable for the achievement of a single currency.

“Although the EAC member governments had clearly shown a strong degree of political resolve to form a monetary union, the reality was that in purely economic terms they were not yet ready to do so,” the EIU notes in its February report referring to the ECB study.

Contacted by email to explain its pessimism, the ECB directorate of communications declined to comment. However, the bank conceded it was engaged by the EAC Secretariat on June 2, 2009 to advise the bloc on how to better and viably establish a monetary union.

“Please be informed that the European Central Bank (ECB) prefers not to comment on the establishment of an East African Monetary Union. However, in February, last year, ECB experts prepared a report on the topic. The views expressed in the report are those of the authors,” the directorate said in its March 30 response also by email.

On January 14, the EAC announced the start of negotiations to create the protocol to establish the monetary union. In late February, the second round of negotiations was held for five days in Bujumbura.

“Although the European Central Bank (ECB) report highlighted that economic convergence between the three countries was currently insufficient to be promising for a currency union, the political commitment was strong, the Economist Intelligence Unit is less convinced of the political commitment,” the EIU notes in its report.

“While the governments of the smaller, more open economies such as Uganda and Rwanda may see the political benefits of a common currency and its role in boosting trade, we are less convinced of the Tanzanian government’s real commitment to giving up sovereignty over its currency, as required for full monetary union. As such, although it is easy to make commitments such as to accept other East African currencies as payment and to have studies on the way forward, it will be another issue altogether to sign up to full monetary union,” it adds.

Doubters of Tanzania’s commitment cite the introduction of new currency notes late last year as proof of its lack of interest. Mzumbe University lecturer Honest Ngowi, warning that “too rapid” deeper integration should be avoided, said the introduction of the notes was an indication the region was not ready for the union.

Development consultant Aidan Eyakuze, of Serengeti Advisers Limited, said that in principle, a well-functioning union would mean the EAC having one currency and one monetary authority (central bank).

That, he argued, called for the regional economies to have at least two ‘numbers’ within a reasonable range of each other. The first is inflation, so that the currencies values are not wildly different from each other when they become one currency and the second is the fiscal deficit (how much each government’s budget is in deficit compared to GDP).

According to Dr Iqbal Zaidi, of Princeton University, the transition to a single currency will not be easy but the EAC has the potential to become a leading example of a monetary union in sub-Saharan Africa. He said the union would foster development, stability, and economic growth, but its success would depend on sound fiscal monetary interactions.

“While this presents an opportunity for the countries to create a fully independent regional central bank, achieving more independence at the national level is an important first step,” he argued last December in “Moving Toward a Monetary Union and Forecast-Based Monetary Policy in East Africa” report.

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