Foresight: Three Scenarios Regarding the Monetary Union

This article was originally drafted by the Society for International Development for the newsletter “GHEA Outlook” as part of the Rockefeller Foundation’s Searchlight Process. For more Searchlight content on futurechallenges.org, please click here.

The currency and inflation crisis and the EAC’s commitment to monetary union offers an opportunity to speculate about some potential paths to the region’s economic future. Three options are available to decision makers – maintain the current pace towards monetary union, slow it down or abandon it altogether.

1. Maintain current target of signing the Monetary Union protocol by December 2012

The official position of the EAC Secretariat on the Monetary Union was emphasized in a press release announcing the fifth round of negotiations on the to be held in Uganda between October 31 and November 9, 2011. It read in part,

“The EAC Summit of Heads of State has set a 2012 deadline for the achievement of the Monetary Union, and EAC Secretary General Amb. Richard Sezibera has on different occasions reiterated EAC’s commitment to have the Monetary Union Protocol concluded within the set timeline.”

In September, a senior official in the government of Rwanda stated his optimism that the monetary union would be achieved by the December 2012 deadline.

“Dr Thomas Kigabo, chief economist of National Bank of Rwanda and chief Rwandan negotiator, pointed out that the remaining period is enough for the single currency to be achieved within the framework of the East African Monetary Union (EAMU)… “We have been discussing different issues like planning but we are now on the real negotiation of monetary union and I’m absolutely optimistic that by next year we shall be having this protocol realized,” Kigabo said.

Another commentator notes in a blog that,

“The present slide in the currency values of Uganda, Kenya and Tanzania, though notably not in the more austere Rwanda, has given rise to hope that Central Bank chiefs and economists may be able to persuade their political masters that the time is ripe to make a final push for a common East African currency.”

Meeting the December 2012 deadline for monetary union would mean achieving economic convergence within the next 12 months. This would be a herculean task and it would almost certainly be done with, at best, scant attention paid to understanding its effects on the region’s poor. A major risk for them is the pain that result from efforts to reduce government deficits especially if these mean cutting back on public spending and any move towards cost-sharing for the provision of services such as health and education. In addition, raising interest rates to reduce inflation risks slowing economic growth, which would further hurt those least able to cope with it.

2. Delay the Monetary Union by several years

There are a number of important cautionary voices warning against an almost blind adherence to the stated timetable for achieving the Monetary Union. Outlining the legal, economic and technical steps that need to be taken to achieve it, the ECB report to the EAC notes,

“These steps will take several years, even if much of the work proceeds in parallel. Achievement of monetary union by 2012 is therefore unrealistic. It would already be a big step forward if the EAMI [East African monetary Institute] became operational by the beginning of 2012, giving a considerable impetus to preparatory work for EAMU [East African Monetary Union]. The EAC is thus rather advised to take the roadmap contained in this study as a basis for further reflection in order to establish a more realistic timetable. This is important, since unrealistic timetables and consequent postponements may undermine the credibility of monetary union and thus the support from market participants and the general public which is necessary to the whole process.”

In March 2011, an economist at the American University in Dubai was quoted as warning against the fast-tracking of the monetary union because,

“…the EAC countries vary so dramatically in terms of economic levels that there could be substantial costs for the member countries from a fast-tracked process. He said…that the process of monetary integration should be slowed down so that the countries involved can align their economies more closely before a currency union that is envisaged in 2012.”

Interestingly, a Tanzania government minister also expressed his concerns about the fast pace of monetary integration. The deputy minister for East African Co-operation, Dr Abdallah Abdallah said,

“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.”

The Permanent Secretary in the same ministry confirmed these sentiments when she was recently quoted as saying,

“We are still in the process. We can’t rush to introduce monetary union until those criteria are met, even as the deadline approaches, we will not rush.”

In expressing their reservations however, everyone is silent on the possible impact of the fairly mechanical process of achieving monetary union on the region’s poor. Such impacts may be ill understood. Slowing down the process buys time for careful analysis of how the deficit- and inflation-fighting policies may affect the region’s poor. Such deeper understanding of the equity effects improves the probability that appropriate mitigating measures (e.g., a Solidarity Fund to share the cost of integration more equitably across income levels) might be designed into the monetary union protocol and its execution.

3. Abandon the Monetary Union

A radical option would be to abandon the objective of a monetary union altogether, although it must be said that there have been no signs of this view emerging from any quarter.

Abandoning the monetary union may have some appeal. It would preserve some crucial elements of economic sovereignty, particularly taxing and spending, which would appeal to those who would want to maintain their (country’s) policy-making independence. Secondly, removing the pressure to achieve it as the next milestone, it would create room to focus on consolidating the customs union and common market processes. These have already been agreed and started, but are suffering from some inertia and lapses in implementation.

However, abandoning the monetary union altogether could raise some very significant political difficulties if it is seen as an early step towards stopping the entire EAC regional integration process. By appearing to suggest that the ultimate objectives enshrined in the EAC Treaty may not be achieved, such a view could seriously jeopardize the momentum driving the overall project. The economic consequences could be dire. It could damage confidence in the region, stop or reverse the significant flow of official assistance and private investment, slow economic growth and evaporate the job and income opportunities for the poor populations.