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East African Nations on the Path to a Common Currency

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The presidents of 5 East African nations signed a monetary union protocol over the weekend that paves the way for a common currency within the East African Community (EAC).

The protocol signing happened in Uganda, where the presidents of Uganda, Kenya, Tanzania, Rwanda and Burundi had met to pave the way for a single currency for the Community that is slightly over a decade old.

Established in 1999, the EAC seeks the regional integration of East African nations by harmonizing policies, removing trade barriers, and promoting intra-regional commerce.  To this end, it has already established a customs union and a common market, both of which have increased the level of regional trade. With exception of Burundi, all EAC nations read their budgets in June, a clear effort at harmonizing regional policies.

The recently signed protocol will thus further enhance regional trade, as it will minimize the risks of doing business across the region due to influxes in exchange rates, or other monetary policies. The protocol envisions one Central Bank to coordinate all monetary policies across the region. This bank will offer

The shift to a single currency is expected to occur within a decade of ratifying the protocol, and ratification is set to take place in July 2014. There seems to be announcements that a single currency to be available as from 2015, but that seems like jumping the gun too soon; there are other countries set to join the EAC shortly, and the disparate economies still have some way to go before they operate at similar levels.

South Sudan is set to join the EAC in April 2014, 3 months before the Monetary Union protocol is ratified, while Somalia has also applied to join. While Ethiopia has not formally applied to join the EAC, it is involved in many projects within East Africa, such as the peacekeeping missions in Somalia, and bilateral agreements with Kenya, focusing on infrastructure such as power, roads, rail and pipelines (the LAPSSET project).

The other problem is in harmonizing the economies; one of the requirements of joining the monetary union is ensuring that the country’s inflation rate is kept at 8% or below. The 3 core members of the EAC, Kenya, Uganda and Tanzania, all have inflation rates very close to this ceiling(7.36, 7.2, 7.7, respectively) while Burundi is way above the ceiling (11.8%). South Sudan’s current inflation stands at 21%.  A lot of work will need to be done before all these inflation rates are stabilized.

 

By Matengo Chwanya

Sources: Aljazeera/ Newvision/ Standardmedia/ Trademarkea/ Newvision/ Trandingeconomics/

 

 

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