Monetary union dream long shot for East African partners

East Africa might take longer to realise its dream of an effective single currency by 2012, with growing concerns that varying levels of financial openness and inadequate political will could derail faster integration of the five economies.

Research has shown that in the three key economies in the region surveyed — Kenya, Uganda and Tanzania — the differential in financial markets needs to be bridged before a meaningful drive towards monetary convergence can be achieved.

The monetary union is intended to set up a single currency that is critical in reducing cross-border transaction costs which are still high despite the rising amount of trade conducted in the region.

A new study by the International Monetary Fund (IMF) calls for intense financial sector openness in Tanzania and Uganda and even more so for both Rwanda and Burundi.

While Kenyan financial markets are the most open in the region, the paper, titled Measuring Financial Barriers Among East African Community Countries, shows that of the three original members of the EAC, Tanzania has the most barriers in its financial sector.

This corroborates a long-held view in the financial and investment circles that it is the least prepared of the three countries for the more advanced forms of integration in the region.

Monetary integration leaders in the region do not underestimate the work ahead.

Speaking at a forum on monetary integration, E. Tumusiime-Mutebile, Governor Bank of Uganda (BoU), anticipated setbacks in view of the enormity of the task ahead.

“The issue we must address… is how to achieve the monetary union. We should, however, recognise that setting up a monetary union is a very challenging project that will require a lot of hard work and careful design. We will need to keep our nerves in the face of inevitable setbacks,” Prof Tumusiime-Mutebile said.

He noted the benefits of the union.

He said: “The primary rationale for the monetary union is to reduce the costs and risks of transacting business across the national boundaries of those countries which comprise the members of the monetary union.”

Speaking to Business Daily in a past interview, the BoU governor said it was anticipated that all countries in the region would be able to meet the criteria set out for monetary convergence by 2012.

Such criteria include having harmonised fiscal policies such that no country has more than five per cent of budget deficit as a percentage of the GDP.

He said that having a six-month import cover in terms of foreign exchange was a criterion that already agreed on even though the EAC countries were at different compliance levels.

Prof Tumusiime-Mutebile said he believed the project was “worthwhile and once monetary union comes to fruition, it will be one of the most important institutional foundations for the economic prosperity of East Africa in the 21st century.”