Divergent monetary policies within the East African Community in the pre-pandemic era raise questions regarding feasibility of a monetary union as envisioned in the 2013 protocol on the establishment of a monetary union targeting adoption of a common currency by 2024.
This is one of the issues raised by a report by the United Nations Economic Commission for Africa, Uneca, titled Macroeconomic and Social Developments in East Africa 2020.
“It is critical to examine how economies are converging before forming a monetary union. The assessment includes ceilings for headline inflation, fiscal deficit, a gross public debt and a sufficient level of foreign exchange reserves,” says the report prepared under the guidance of Uneca’s Senior Economic Affairs Officer, Andrew Mold.
Article 6 of the protocol provides for ceilings on headline inflation to be set at eight per cent; gross public debt at 50 percent of GDP and a reserve cover of 4.5 months.
“There is only partial convergence among key macroeconomic variables suggesting that partner states need to align policies better to allow for a period of monetary policy coordination prior to forming a monetary union,” the report notes.
The region has stepped up measures towards realisation of the monetary union. In its 40th meeting in February, the EAC Council of Ministers directed that the Secretariat convenes a meeting of the sectoral council of finance and economic affairs to develop an institutional structure for the EA Monetary Institute by September 30, 2021.
The East African Monetary Institute is a transitional mechanism to the envisioned East African Central Bank that will be tasked with issuance of the single currency.
“Five partner states applied to host the institute. The Secretariat is in the process of constituting a verification committee to verify the applications,” EAC Secretary General, Dr Peter Mathuki, said on August 11 whilst marking 100 days in office.