Another factor is the issue of asymmetric shocks within a monetary union. A good deal depends on how similar, or different the production, economic and export structures are among the member states. In the case of the EAC, while the economic cycles and product diversification are reasonably aligned, the export structures are different within the five countries. Trade forms a much greater percentage of GDP in Kenya than in Rwanda or Burundi, which indicates that EAC countries may face asymmetric shocks. This would not support the rationale of a monetary union.
Equally, issues of national sovereignty, which African governments have been particularly reluctant to cede, will become more problematic if central bank policies are deemed to be less than favourable to their national interests.
Since it is not unusual for African governments to manage their exchange rates to meet short-term political goals – such as maintaining a stable nominal exchange rate to avoid price increases of food, fuel, luxury imports, or on payments of international debt – a monetary union might entail a major loss of political power.
In sharp contrast to the European countries, the bigger members of the EAC have spent more than a decade operating highly independent and flexible exchange rate regimes, and these have underpinned successful macroeconomic stabilisation.
More stringent exchange rate commitments imposed by a regional central bank may therefore be counter-productive. As Kenya’s President Uhuru Kenyatta boldly proclaimed, the continued integration of the EAC countries will mean they “cease to be a group of neighbouring nations and become one people”.
The EAC appears to be very much committed to regional integration, with leaders and policy makers publicly acknowledging the benefits, fiscal policy is not expected to present an immediate issue but nonetheless must be considered.
However, monetary union in the EAC is far from a done deal. The tough convergence benchmarks alone have many believing this is an impossible project. The experience of the Eurozone reinforces the point that successful economic and monetary union requires member states to relinquish sovereignty to a much greater degree than was, perhaps, initially thought.
However, if the EAC members continue moving in the same direction, with the right political support, guidance and motivation for a monetary union, then this deep political bargain can be navigated.
The objective of introducing a single currency into the EAC is principally to promote monetary and financial stability in aid of the wider integration agenda, which the EAC believes will foster further growth and sustainable development. While the feasibility of the monetary union has been called into question, many of the convergence criteria set out in the Protocol could yet still be met.
While progress towards a new regional currency, with the various implications it brings, may be slow, the process alone of policy cooperation and coordination between partner states will be hugely beneficial for the East African Community. Rapid progress is being made in areas such as the harmonisation of cross-border settlement systems, regulation, information exchange, and discussion on reserve pooling and policy coordination.
Similarly, as the EAC moves further along the course towards unionisation, by tackling macroeconomic and structural convergence, this process will undoubtedly advance fiscal, trade and labour market policies in the EAC – which, while not the ultimate objective, is certainly an invaluable payoff.
*Abdirashid Duale is the Chief Executive of Dahabshiil Group, Africa’s largest international payments firm.