1989). Looking at current EAC partner states, the three founding members Kenya, Tanzania, and Uganda could be considered to be such anchor as they are the largest economies in terms of GDP. Unfortunately, none of them has a long or outstanding successful history of low inflation rates or stable, independent monetary policy (see Section 6.1 and Buigut (2010)). Hence, one might argue that the possibility to import credibility would be rather limited for the East African countries. However, Buigut and Valev (2009) show that monetary unification between emerging and developing economies can still enhance price stability significantly even if no anchor country with a long history of commitment to low inflation rates exists. They argue mutual restraints and checks on monetary policies provided by a common independent central bank are important in determining the benefits of monetary unification for the EAC members.
This is because opportunistic goals of one country can be kept in check at the supra-national level by the other partner states, as long as they have disparate goals. Assessing the five EAC countries, Buigut and Valev (2009) conclude that due to different preferences among the East African countries, especially Uganda and Tanzania can significantly benefit from monetary unification with the other EAC partner states. Similarly, Debrun et al. (2011) find that those supra-national institutions are arguably more credible and more difficult to influence due to the implied coordination efforts than policies made independently and on a national level.
Though agreeing on the benefit of monetary unification from a credibility and stability point of view, Guillaume and Stasavage (2000); De Grauwe (2018) add crucial conditions, especially for developing countries in Africa. First, the institutional design of the East African Monetary Union must support a strict enforcement of monetary rules. Second, the exit of a member state from the union must be made sufficiently costly. This can be achieved by regional agreements on trade, financial assistance or security commitments conditional on the membership in the Monetary Union. Third, the partner states’ governments must actively oppose attempts of countries trying to break rules imposed by the union. Fourth, only a full monetary union between the partner states is able to establish the required credibility between its members – currency boards or fixed exchange rate regimes are not sufficient. Furthermore, De Grauwe (2018) points out that East African countries, which were more stable and credibly committed to low-inflation targets than others, might lose from a new monetary institution with less credible partner states.
9 Policy Recommendations
The objective set out in the Protocol on the Establishment of the East African Community Monetary Union is "to maintain monetary and financial stability aimed at facilitating economic integration to attain sustainable growth and development" (EAC, 2013a, p. 7). As Owino (2014) argues, this does not necessarily mean that forming a monetary union would be the superior policy choice for achieving financial stability and economic growth, pointing towards difficulties associated with the implementation of weaker forms of integration such as the Customs Union and Common Market, among others. However, Juncker et al. (2015) make a case for the euro being more than simply a common currency which can be easily translated into the context of East Africa. From the political and economic integration inevitably arises a shared destiny, which requires solidarity, responsibility, and respect for the commonly agreed rule in order to withstand times of crisis. To achieve a sustainable union that benefits all its members, progress must be made on four fronts. First, a genuine economic union must be established, ensuring that individual members have the structural features to prosper within the union. Second, the integrity of the common currency and risk-sharing must be in place in form of a financial union.
Third, a fiscal union would deliver both, fiscal sustainability and stabilisation. Finally, a solid foundation for the three aforementioned areas can only be provided through an accountable and legitimate political union. While the first theme is mainly addressed in Section 9.1, the remaining three areas are the focus of Section 9.3.
9.1 Short-term Focus of EAC Efforts
As Durevall (2011) outlines, when the European Union decided to move forward with its plans for a common currency, among the main motivators were the creation of exchange rate stabilisation to further enhance the already strong trade integration and the better administration of transfer mechanisms within the economic area.67 This is not necessarily the case for the EAC. Instead, politicians are mainly motivated by a vision to end the artificial separation of peoples in East Africa, boost economic development in the region, attract investment, and create monetary stability. While the transfer of national sovereignty has never been unopposed in Europe, East
67This mainly concerns the Common Agricultural Policy (CAP) including a price support system and considerable subsidies (Durevall, 2011).
African leaders are probably more hesitant due to differing motivations. This is an important distinction as it provides a rationale for weaknesses of the current integration agenda.
As outlined in previous sections, fiscal discipline is widely considered a key factor for the successful implementation of a monetary union (Drummond et al., 2015). While the EAC acknowledges the importance of fiscal discipline by formulating convergence criteria closely related to the EMU’s Maastricht treaty, the partner countries currently mostly fail to meet the targets for deficit and gross public debt. The underlying problems are two-fold. First, the Protocol on the Establishment of the East African Community Monetary Union distinguishes between non-binding indicative convergence criteria and binding performance criteria. The indicative criteria are solely intended as orientational benchmark for the partner states before the performance criteria become binding three years prior to the introduction of the common currency. Second, the EAC currently does not have any institutions in place tasked with the surveillance and enforcement of the convergence criteria. Masson (2015) puts it in simple terms:
better policy coordination is required throughout the EAC, in order to prevent consequences of weakly enforced rules and inadequate policies which is often thought to be the root cause of the recent euro zone debt crisis. Therefore, a supra-national institution equipped with the required authority to effectively monitor and enforce binding fiscal convergence criteria already before the three year period leading up to monetary unification would significantly contribute to mitigate the risks at hand. Furthermore, Anand et al. (2011) underline the importance of independence and sufficient budgetary capacity of such institution in order to effectively carry out its responsibilities.
With the first two pillars of economic integration, the partner states outlined a promising foundation for monetary unification. While the Customs Union is approaching full implementation, with the exception of non-tariff barriers to trade, progress has been sluggish for the Common Market as outlined in previous sections. However, a fully operational Common Market is a required pre-condition for a sustainable currency union in order to improve the currently weak economic integration of the region. According to the reasoning outlined by Kigabo (2018), the asymmetry of shocks found in the earlier analysis could be of endogenous origin rather than being caused exogenously, additionally underlining the requirement for coherence within the region. Therefore, the completion of the objectives outlined in the Common Market Protocol should be the first and foremost priority of EAC efforts. Moreover, as the countries
will likely remain to be susceptible to asymmetric shocks even after the full establishment of the Common Market, they should start thinking of ways to resolve this issue, such as establishing fiscal transfer systems as risk-sharing mechanism which will be covered to greater extent in Section 9.3.
Many of the initiatives pooled under the Monetary Union Protocol are aimed at the harmonisation of regulations of the six partner states. While the MAC notes important results with regard to monetary and exchange rate policies as well as payment systems, challenges remain especially in the areas of taxation, non-banking financial sector across all six nations, and the establishment of the EAMI (EAC, 2018). Here, the absence of agreed rules and enforcement mechanisms represent a challenge when it comes to the implementation of decisions by the MAC and other committees of the EAC (Kigabo, 2018). Therefore, the focus of the EAC must be the timely implementation of initiatives laid out in the Monetary Union Protocol, especially the fast-tracked full operationalisation of the EAMI as key institution of the upcoming currency union.
However, due to the identified deficiencies, it ultimately remains questionable whether the current target of 2024 can still be met. The transition towards a monetary union is a medium-to-long-term process, which requires firm commitment by all parties involved (Drummond et al., 2015). The failure of the Monetary Union would likely have severe consequences for the entirety of the EAC, putting the development of past decades at risk. Therefore, member states are ill-advised to rush into monetary union and should rather re-evaluate the current frameworks, resolve above stated shortcomings, and potentially update the integration schedule which would result in significantly increased chances for success of the East African Monetary Union.