East African Community moves toward a single currency

The EAC signed a Monetary Union Protocol at the end of last year, putting it on track to introduce a single currency by 2024.

The East African Community, made up of Kenya, Tanzania, Rwanda, Uganda and Burundi, signed an agreement on November 30, 2013 outlining a ten-year path toward the introduction of a single currency and unified monetary policy. This builds on previously signed deals that called for the creation of a customs union and a common market in the interest of drawing investment to a previously war-torn region.

Recent momentum

According to data from the African Development Bank, the EAC covers a regional population of over 146 million with a combined GDP of just over $100 billion. While admittedly starting from a low base, intra-regional trade jumped 22% from last year to $5.5 billion. Foreign direct investment in the EAC has risen as well, particularly over the last year or so, as investment in East Africa as a whole saw a marked increase.

A single currency offers the promise of low transaction costs between those countries, while a monetary union, if it achieves a modicum of stability, can also help attract further investment. Recently, both natural gas and oil fields have been discovered in the EAC and a single currency  – along with lower tariffs – would ease the purchase and transmission of those resources across the region.

Challenges

However, given the recent economic struggles of the European Union, this agreement should prompt closer examination of the state of each EAC economy and how unified monetary policy could help or hinder growth. In the EU, the imposition of a single currency has made it difficult for peripheral European economies to compete with the likes of Germany. A single currency makes currency devaluations impossible and, in a region with disparate economies, a single interest rate can hurt some countries. This is especially true when a country like Kenya accounts for close to 40% of the EAC’s collective GDP, dwarfing Rwanda and Burundi.

The World Bank’s Ease of Doing Business rankings make it clear that even despite gains in intra-regional trade, all EAC countries rank poorly in trading across borders. Of the five countries, none ranks higher than 139th (out of 189) in the ranking’s trade criteria. Most are towards the very bottom of the overall rankings. Rwanda is an unusual outlier, coming in at 32nd overall in the world (and above countries including France and Israel). This only speaks to the uneven state of the commercial sectors in the region, which might create strains under a more unified economic policy.

Yet, despite the struggles recently observed in monetary unions, the formation of the EU did lead to greater growth. If the EAC countries want to achieve middle income status, they need to boost their growth higher than its current trend (argued in a 2012 IMF paper). Greater trade will help accomplish that. But a single currency and cohesive monetary policy also demand good governance and strong institutions.

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Categories: Economics, Sub-Saharan Africa

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