East african Business Week

 
ARUSHA, TANZANIA - The East African Community (EAC) Monetary Union programme will be based on the European Union (EU) model where all the partner states will finally relinguish their currencies that will then be replaced with a singe regional currency.
"Our proposed approach is to have a regional currency to replace all the other national currencies," said an industry expert who requested for anonymity.
"The EAC Secretariat with support from the International Monetary Fund (IMF) is carrying out a study that will determine the conversion rates of each of the partner states," the expert told East African Business Week in an interview last week in Arusha, Tanzania.
The expert revealed that replacing the currency will be among the last stages but the Monetary Affairs Committee (MAC) subcommittee is working preparatory works on convergence while another subcommittee is working on currency and bank notes.
The proposal also includes putting in place the East African Monetary Union (EAMU) or an authority depending on the outcome of the negotiations, but the institution will handle all aspects like conversion rates, payment systems, aggregated regional statistics, finance and accounting rules.
The proposal also includes partner states having a system of national central banks in which there will be one supra national bank which is the EACB with the existing banks as part of the system.
The EACB will in turn monitor the monetary and fiscal policy and bring on board all the financial institutions and financial markets.
EAMU will act as a precursor to the EACB and put in place a framework required for a Monetary Union.
It will also work on the design of the currency and its printing.
Then through the study on the conversion rates, the EAC currency unit will be determined according to the different rates at which the national currencies are to be converted.
So in the run to the changeover, pricing of goods will have the rate in the national currency and also an equivalent in the EAC currency unit.
This will give the opportunity to East Africans to get used to the new pricing before the currency unit saps all the other currencies.
At the changeover the old national prices will be dropped and East Africans will remain with the new currency pinned on the products for selling rates.
This means that in the meantime the national currencies will run parallel with the EA Currency while at the same time the banking system in the region is withdrawing the national currencies, as Uganda and Tanzania are currently doing with the introduction of the new notes.
"However this would require changes in the infrastructure for example Automated Teller Machines (ATM's) to accept the new notes and this is being addressed by the preparatory subcommittee on payments and settlements, and the currency and coins subcommittee," the expert explained.
This model, the expert explained is based on the EU model compared to the West African Monetary Union or the Caribbean and Central African monetary unions whose model makes the central banks in other countries becoming branches of the regional central bank.
EACB will be responsible for monetary and exchange rate policies among others while the national central banks will retain other functions like supervision.
The expert said the seat of the EACB will be determined by the EAC procedures on determining the seats for the EAC institutions while the name of the currency will be determined through a participatory approach that would include all the five partner states.
When the Monetary Union becomes operational, national central banks will be left with control of monetary policy which will be regulated by the central bank.
This calls for development of the regional capital and securities markets of the partner states since there will be a clause of no bail-out claims. This means all the budgetary deficits will be settled by the partner states without involving the EACB.
However efforts to develop the securities market are undergoing under the EAC Capital Markets Regionalisation Programme and since all these have financial implications, the World Bank has given East African Community (EAC) secretariat a total of $16m for the next three years to implement the programme.
"For the region to have an effective Monetary Union, we need economic convergence and market integration," said the expert.
He explained that market integration is handled through development of capital and financial markets while convergence will be developed depending on the EAC economic convergence criteria that sets out the basic fundamentals that an economy must meet before joining the Monetary Union.
These include inflation targets, up todate gross domestic product whose thresholds must be met by the partner states.
"So this criteria is very important since it's the basis for a state to join the Monetary Union and the union will only start if two out of the five states meet the set criteria," warned the expert.
The expert advised that this calls for a robust surveillance mechanism so that proper methodologies of compiling the different statistics' indicators that are set out in the economic convergence criteria are well compiled.
"A country that does not meet the criteria can't join the union and must work towards achieving the set criteria, there is need for strong surveillance mechanism so that we don't fall in the trap of the EURO zone and the Greece crisis," the expert advised.
Actually the High Level Task Force on the negotiations for the Monetary Union has identified a need for a strong surveillance mechanism and compliance to the convergence criteria.
It is for this reason that the Heads of State Summit in December last year directed EAC partner states to fast track economic convergence which is critical for the Monetary Union.
"The Monetary Union requires serious political will and commitment of the EAC Heads of State," the expert noted.
But there is a school of thought in establishing Monetary Unions on whether meeting the economic convergence criteria is a very necessary pre-requisite since a Monetary Union can be started without economic convergence which could be attained along the way.