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The pros and cons of EAC monetary union

The pros and cons of EAC monetary union

There has been very vocal interest in regional integration, including monetary integration, in Africa over the decades since independence. With Africa rapidly on the rise – home to seven of the world’s fastest growing economies – African leaders are looking to safeguard a future of sustained growth. A currency union, therefore, appears to be en vogue as (at least one part of) a solution, writes Abdirashid Duale*

However, the concept of a currency union is, perhaps rightly, perceived as inherently flawed. How can separate countries with widely differing economic performances and different languages be effectively tied to a common monetary policy and interest rate? The recent history of the European Union has also hardly been encouraging.

Nevertheless, the West African Monetary Zone (WAMZ) [The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone] is set to introduce a single currency, the eco, from 2015. The intention is that the new currency will eventually merge with the West African CFA franc to create a common currency for much of West Africa. Meanwhile the East African Community (EAC), which comprises Burundi, Kenya, Rwanda, Tanzania and Uganda, has announced its own proposals for a shared currency.

The prospect of a single currency in the EAC, following the trade bloc’s approval of plans to harmonise monetary and fiscal policies and establish a common central bank over the next 10 years, is very much a reality.

A currency union in the EAC will be attractive as it will provide a more stable currency in terms of purchasing power, while currency volatility and fluctuation will be minimised. A common currency can eliminate transaction costs, quicken cross-border payments and make investments and the movement of people more viable.

The prospect of a single currency in the EAC, following the trade bloc’s approval of plans to harmonise monetary and fiscal policies and establish a common central bank over the next 10 years, is very much a reality

One of the main factors which has hampered Africa’s economic progress over the years has been the very small scale of intra-regional trade, currently only about 12%. Therefore, given the relatively small size of individual economies, currency harmonisation could play a very significant role in increasing intra-African trade.

Should a currency union within the EAC come to fruition, trade will be fuelled by a reduction, albeit limited, in transaction costs, the elimination of exchange rate risk and region-wide price harmonisation – all of which will undoubtedly be underpinned by policy incentives.
Early evidence (such as the recently launched East African single tourist visa, designed to encourage greater international tourism for the region), suggests the EAC will not be shy about blurring national lines to encourage financial growth.

Amidst the great optimism and promise of economic development through greater integration and bilateral trade following a currency union, the fact that cross-border flows will be made easier and more efficient following a currency union has seldom been mentioned.

However, the unrestricted flow of capital, both regional and, more pertinently, overseas remittance finance, will undoubtedly continue playing a vital role in helping to sustain and drive development in the region.

While it is certainly correct to suggest that the EAC, which is home to approximately 135m people, and a new frontier for oil and gas exploration, will attract greater levels of foreign investment on the back of a monetary union, remittance finance and external aid will remain core sources of finance for the region.

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