EAC integration

EAC single currency: careful studies required

Last week, Christine Lagarde , the IMF Managing Director, warned EAC countries not to precipitate the use of Single Currency as adopted by the Heads of States in November 2013. Therefore, Iwacu has met, Audace Niyonzima, one of the participants in the negotiation about the implementation. By Diane Uwimana

Audace Niyonzima, one of the participants in the negotiation about the implementation of the single currency. ©Iwacu

Audace Niyonzima, one of the participants in the negotiation about the implementation of the single currency. ©Iwacu

As a negotiator for the Establishment of Monetary Union in the community, what are the main advantages and disadvantages of the Single Currency?

The Monetary Union presents some advantages. To begin with the elimination of transaction costs with partners of Monetary Union: it is a direct gain for all operators. Secondly, there is the elimination of the risk of transaction exchange with partners: the payment area is settled in the common currency. Thirdly, uncertainty will be eliminated in the foreign exchange risk. You can take long investment decisions without wondering about the future exchange rate. The price mechanism gives a better quality signal. Therefore, there will be more competition and greater price comparability that allow the common market force. There aren’t more market segmentations and prices tend to be the same in the Monetary Union area. Monetary Union supports the Common Market. Fourthly, Monetary Union helps maintain the budget discipline: Member States agree to follow the same rules and harmonize macroeconomic policy instruments. Then, it should identify potential benefits that can be achieved only if each country is well-prepared economically and politically. However, Monetary Union will have some different costs such as loss of an instrument of sovereignty: i.e. the abolition of the national currency, funding and facilities provided by the National Central Bank. Moreover, the suppression of a powerful instrument of economic policy: interest rates’ fixing, exchange rate and monetary stocks fall under the regional Central Bank which will be independent. Next, in the event of asymmetric shock of demand and supply, we can no longer use the exchange rate or the interest rate to adjust the economy and must be through fiscal and budgetary measures (sometimes recession cures recession). The Seignorage will disappear and the Government will finance its deficits by more than taxes or borrowings; this can be costly because of the choice between the cost of inflation and taxes or borrowings. In addition, the budgetary discipline will be tough; something which can cause short-term unemployment.

EAC countries do not have the same monetary value and economy. What are the risks?

Assessing the appropriate opportunity for a country to join Monetary Union, it is not the monetary value that you consider. There are agreed macroeconomic indicators, macroeconomic convergence criteria, which will serve as retriever stability and economy’s strength of the candidate countries for the planned Monetary Union, and so make sure if a member country can join and take advantage of the union in a sustainable manner. These criteria focus on inflation (ceiling of 8%), the budget deficit (ceiling of 3% of GDP), debt (50% of GDP) and the level of foreign exchange value (4.5 months of imports).
What is the objective of the single currency?

The objective of EAC Monetary Union is specified in the signed Protocol. It is to promote and maintain monetary and financial stability favourable to economic integration in order to achieve growth and sustainable development and balanced community.

According to you, is the signature of the Protocol a political or strategic decision?

The signature of the Protocol is not a political decision or a strategic one. It is part of the agenda for the integration of EAC as provided for by the Treaty. It is the third pillar of the integration after the Customs Union and the Common Market. In addition, the signing of the Protocol on the EAC Monetary Union was preceded by technical studies and long negotiations by Member States. Finally, I would point out that the EAC countries are not trying to rush towards Monetary Union, since the Protocol has been completed with its implementation schedule, which will be effective after 10 years, in order to have sufficient time to complete all the necessary operations of the introduction of the single currency.