NAIROBI, Kenya, Jan 30 – Determined to start making progress on the Monetary Union, the third pillar of the EAC integration, this week the EAC contracted the European Central Bank (ECB) to work with national experts from the five EAC Central Banks to undertake a comprehensive study on the proposed EAC Monetary Union.
This move is a result of the Directive of the Summit to set off the process of attaining the goal of an East African Monetary Union (EAMU).
The role of the European Central Bank (ECB) is to take stock of the current state of preparedness of the EAC Partner States for a Monetary Union (MU); to make proposals on the institutional framework and structure of the proposed EAMU; to design a model protocol for the EAMU that will form the basis for the MU negotiations among the EAC Partner States and propose an institutional framework for the East African Monetary Institute (EAMI) which will precede the creation of an East African Central Bank (EACB) as well as propose a mechanism for the monitoring and enforcement of the macroeconomic convergence criteria among the EAC Partner States.
At the recent validation Workshop on the Study, held in Kampala Uganda from Januray 18 to 20, ECB consultant made a detailed presentation on the proposed EAC Monetary Union (EAMU), focusing on the prerequisites for the establishment of the EAMU where it was noted that the following are key for the proper functioning of a monetary Union namely; Market integration in terms of a properly functioning Customs Union and Common Market and that a monetary union should be seen as a “crown” or ultimate result of the market integration and Economic convergence across the single currency area in terms of compatibility of the economies which would ensure that the single monetary and exchange rate policy is maintained. Some aspects of convergence include; growth rates of GDP, inflation rates (headline and core), exposure to external shocks, public finance, Balance of Payments, interest rates and exchange rates.
On harmonisation of the legal framework it was agreed that a Protocol on the establishment of a monetary union among the Partner States of the East African Community (EAMU Protocol) needs to be negotiated and concluded before the establishment of the Monetary Union. There is also need for the establishment of the East African Monetary Institute (EAMI), East African Central Bank (EACB) and a forum for coordination of Partner States’ economic policies.
And on the issue of timing, it was noted that the achievement of a functional monetary union is dependent on the achievement of appropriate levels of macroeconomic Convergence (implies harmonisation of inflation rates, exchange rates, monetary and fiscal policies, interest rates, and growth rates in GDP among others), Preparation, adoption and ratification of necessary legal instruments and preparatory work for the Monetary Union-this entails setting a realistic timeframe and working on achieving these convergence issues.
There was therefore a suggestion that there needs to be a gradual approach, ensuring that the prerequisites are fulfilled by setting a date by which the Partner States should fulfil the requirements and having a review clause, to allow for flexibility on the timelines.
However, there will be need for the preparatory work for the establishment of the Monetary Union, and this requires coordination among all relevant stakeholders and the establishment of the East African Monetary Institute which would act as the central hub for coordinating, synchronising, and monitoring all the preparations for the Monetary Union.
It was therefore observed during the Kampala workshop that Market integration and economic convergence will guide the establishment of EAMU and the success of establishing the Monetary Union will depend on the establishment of a sectoral council of ministers for Finance to guide the EAMU process.
There is need to operationalise the Common Market Protocol as a precursor for the EAMU and the Partner States need to consult widely on the study report and the draft Protocol on EAMU.
However, the EAC Secretariat should convene a joint meeting of Monetray Affairs Committe, Fiscal Affairs Committe and Capital Markets Insurance and Pensions Committee by February 2010 to discuss the report in details and agree on the roadmap towards the Monetary Union.
It is important however to realise that the main pre-occuptauion of the Community is to ensure smooth transition from the Custom Union to the Common Market, and proceeding with some of the macro economic convergence issues. This means that all efforts should be made to ensure that the Common Market Protocol is fully understood by all stakeholders (Government Departments and Agencies, the Private sector, and Ordinary citizens), get the procol ratified and implemented, inform the public about its opportunities, benefits and implementation challenges.
Therefore energy, time and resources should be spent in achieving the latter while keeping track of the preparatory work on the Monetary Union.
(Dr David Nalo is the PS, Ministry of East African Community)