Challenges to EAC Monetary Union

Edris Kisambira (East African Business Week)—The Monetary Affairs Committee (MAC) of the East African Community (EAC) has said high interest rate spreads and budget deficits continue to be major challenges facing all the five central banks.

Other challenges are high domestic debt and relatively high levels of non-performing loans.

All these ingredients are part of a set of macroeconomic and economic policies that MAC thinks should be in place before a monetary union can be realised.

The governors have called on the EAC Secretariat to expeditiously commission a study aimed at reviewing the convergence criteria with a view to have it completed by end of December 2008.

In August last year, the heads of state decided to fast track the establishment of the monetary union to 2012 as opposed to 2015 as had earlier been agreed.

Bank of Uganda governor, Mr. Emmanuel Tumusiime Mutebile warned in an earlier meeting that meaningful monetary and financial integration could only be achieved only with a sustainable convergence of economic fundamentals, particularly price stability and sound fiscal, monetary and structural policies. Before the decision to bring the implementation of a monetary union was brought forward to 2012 from 2015, in stage one (2007-2010) governors had agreed to an overall budget deficit to GDP ratio (excluding grants) of not more than 6.0% and an overall budge deficit to GDP ratio (including grants) of not more than 3.0% and that annual average inflation rate not exceeding 5%.

Members had also agreed to the achievement and maintenance of stable real exchange rates, achievement and maintenance of market based interest rates, achievement of sustainable real GDP growth rate of not less than 7.0% and national savings to GDP ratio of not less than 20%.

In stage two (2011-2014), the criteria looked at an overall budget deficit not exceeding 5% and overall budget deficit to GDP ratio not exceeding 2%, annual average inflation rate of not more than 5%.

Others are maintenance of market based interest rates, a high a sustainable rate of real GDP growth of not less than 7%, sustained pursuit of debt sustainability and domestic savings to GDP ratio of at least 20%.

Stage three (2015) was initially meant to be the year when a single East African currency would be introduced and circulated.

At the 11th meeting of the MAC at the Commonwealth Resort Munyonyo just outside Kampala, the governors observed that the partner states had managed to achieve a considerable level of macroeconomic stability.

Governor Mutebile who read a joint communiqué at the end of a two-day meet said developments in the global economy would pose a challenge to the management of the five economies.

The challenges are the turbulence in the international financial markets that arose out of the collapse of the US sub prime mortgage market and world oil and commodities prices that have sky rocketed.

Others are China and India along with other strong emerging markets that have gained prominence in the global economy and inflationary pressures that pose a major risk to macroeconomic stability.

Governors also noted with satisfaction the progress made in achieving targets outlined in the EAC macroeconomic convergence criteria, particularly those relating to price stability and the soundness of the financial sector.

The EAC countries registered strong foreign exchange inflows, which coupled with the weakening US dollar to lead to strong appreciation of local currencies thereby complicating monetary policy and export sector competitiveness.

The governors expressed their confidence that while they could not insulate the EAC economies from the global economic developments, they could weather the storms by effective implementation of financial sector risk management.

The governors said entrenching sound monetary and fiscal policies and seeking a functioning financial system, among other interventions, could help insulate the EAC economies from the vagaries of a slowing down global economy.

The governors also deliberated the efficiency of the financial sector in the region, the status of the national payments systems and legal and regulatory frameworks particularly with regard to the banking and micro-finance sub-sectors.

Others were information technology including emerging issues of electronic banking and its impact on monetary policy, and the building of requisite technical capacity to facilitate effective implementation.

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