The East African Monetary Union
Heads of State of the East African Community (EAC) Partner States signed the EAC Monetary Union - 30th November 2013 at Munyonyo,
On 30th November 2013 at Munyonyo, Kampala, Uganda, the Heads of State of the East African Community (EAC) Partner States signed the EAC Monetary Union (EAMU) Protocol. The Protocol is the third pillar of the EAC integration process. The signing follows the ratification of the protocols for a Customs Union (2005) and the Common Market (2010). The Monetary Union Protocol itself has since been ratified by all Partner States.
The (EAMU) Protocol covers the entire financial sector, including; banking, insurance, capital markets and the pension sector.
Following the signing of this Protocol, the EAC adopted a set of macroeconomic convergence criteria which will be the benchmark on which EAC Partner states will be assessed prior to introduction of a single currency. It lays down a roadmap for introduction and full operation of Monetary Union by 2024. It is hoped that prior to entering the single currency in 2024, at least three Partner states should have achieved and maintained the set performance/primary convergence criteria for at least three consecutive years.
"Macroeconomic convergence" means the convergence by Partner States to low and stable levels of inflation, sustainable budget deficits, public and publicly guaranteed debt and current account balances.
The other key prerequisites for entry into a Monetary Union other than attainment of the agreed macroeconomic convergence criteria also includes full implementation of the Customs Union and Common Market Protocols to ensure sufficient trade integration and openness, labour mobility, capital mobility and exchange rate flexibility in order to make it possible to respond to economic shocks..
The institutional framework to monitor and enforce convergence includes the establishing of the East African Monetary Institute, as a precursor to the East African Central Bank, the East African Statistics Bureau and East African Surveillance, Compliance and Enforcement Commission.
The EAMU Protocol sets out the indicative/secondary and performance primary criteria. The indicative criterion is like an early warning mechanism while the performance criteria must be met or else a member is sanctioned or expelled from the single currency.
The agreed EAC indicative/secondary criterion is as follows:
- Maintenance of low and stable inflation<5%
- Maintenance of a high and sustainable growth rate of GDP>or=7%
- Reduction of current account/GDP ratio to a sustainable level
- Reduction of budget deficit excluding grants/GDP ratio<5%
- Raising of national savings/GDP ratio> or =20% in medium term.
- Gross reserves> or =six months of imports in the medium term
- Maintenance of low market determined interest rates
- Maintenance of stable market determined exchange rates
- Pursuit of debt reduction initiatives to reduce both domestic and foreign debt
- Maintenance of prudential norms of banking regulation, strict supervision, improved corporate governance and transparency of all financial transactions.
To create a path to achieve the agreed Macroeconomic convergence criteria, all Partner states are working towards developing their Medium term convergence programs(MTCPs) which will provide a baseline upon which they will attain the agreed performance/Primary convergence criteria and the progress towards the harmonization of policies and laws. These Medium term convergence programmes will be made annually and performance will be assessed against the previous program.
From 20121 onwards EAC countries will have to attain and maintain the following Performance Criteria.
- A ceiling on headline inflation of 8 %
- A ceiling on fiscal deficit (including grants) of 3%of GDP
- A ceiling on gross public debt of 50% of GDP in Net Present Value Terms
- Reserve cover of 4.5 months of imports
The EAC Single currency will be introduced /adopted if at least three partner states meet the criteria for at least three consecutive years.
Further still achieving the agreed set of macroeconomic performance criteria will be a continuous process and even after the admission into the single currency, Partner states will need to be keen to maintain the convergence criteria continuously.
The EAC monetary Union is not the first monetary Union in Sub-Saharan Africa. We already have the Economic and Monetary Community for Central Africa (CAEMC) with six Member states, The West African Economic and Monetary Union (WAEMU) with eight member states and the Common Monetary Area (CMA) with 4 members.
The EAC Monetary union model will follow the European Union Model where there will be a single Central Bank formulating monetary policy for the national central banks to implement in the respective partner states. This in essence means that the partner states will lose control on monetary and foreign exchange policy to the East African Central Bank.
The Partner States however will stay operating their own fiscal policies, but it will this time be done in a coordinated and harmonized way since both monetary and fiscal policies are mutually interdependent.