Tuesday, July 29, 2014

(MONITOR UG) IMF boss cautions East African countries on monetary union
By George Omondi
Posted Thursday, January 9 2014 at 02:00
Monitor Correspondent

In Summary

The world financial body called the move “very ambitious” and prone to multiple challenges.

The International Monetary Fund (IMF) has asked East African Communicty (EAC) countries to tread carefully on their monetary union plan even as it offers to provide technical assistance for envisaged single currency. IMF managing director Christine Lagarde said the Monetary Union Protocol signed a month ago by the bloc’s heads of state is “very ambitious” and prone to multiple challenges ahead.

“The recently signed road map to East African monetary union is very ambitious. Don’t rush, take all the steps and learn from the mistakes of Europe and other monetary unions,” Ms Lagarde told a forum organised by Kenya Private Sector Alliance (Kepsa) in Nairobi on Monday.

“The EAC is lucky to have multiple lessons out there, the gaps and pitfalls of other monetary unions across the world that it can learn from,” she added.

In Europe, for instance, failure to provide European Central Bank with cross-border supervisory powers created loopholes that States such as Greece, Spain and Italy exploited to exceed sustainable borrowing levels, plunging the whole union into debt crisis.

“The regional monetary union will only hold when all the member States are able to respect and strictly observe the convergence criteria,” Ms Lagarde said. She becomes the second top-ranking IMF official to caution on the East Africa’s single currency plan. In between, the countries have to harmonise payment and settlement system as well as fiscal and foreign exchange policies by 2018.

Kepsa expresses optimism

On Monday, Kepsa members expressed optimism that integration of financial services would be much easier and faster in East Africa compared to experiences of other blocs.

“In East Africa, most of the financial transactions are already being conducted through mobile phones, the level of technology and innovation that the European Union did not have when it began to implement its monetary union,” Kepsa chairman Vimal Shah said.

In EAC where domestic saving pool is much smaller, the monetary union protocol envisages a Stabilisation Facility to be set up by 2022 to finance adjustment of weaker segments of the economy.

If followed to the letter, EAC will have its central bank and a single currency by 2024. or in 25 years since it revived its integration in 1999. It took the EU 40 years to achieve similar milestones.

About the EaC monetary union schedule

Under the East African Community monetary union schedule, Kenya, Tanzania, Uganda, Rwanda and Burundi hope to implement preliminary stages of integration in two years and build the fiscal foundation for a common currency in 10 years.

The preliminary stages—fully fledged customs union and a common market—have eluded the East African countries in the last 13 years of integration. The member states have also gone ahead to set fiscal and monetary convergence criteria to be achieved in the next seven years.

Each member state has undertaken to keep headline inflation below eight per cent, fiscal deficit at three per cent, gross public debts below 50 per cent and foreign reserve cover equivalent to four and ahalf months of domestic import, all by the year 2021.

2012 warning

In 2012, IMF deputy managing director Naoyuki Shinohara warned East African states against basing its single currency plan on EU experience. “The macro-economic landscape and risks between EU and EAC are potentially different,” Mr Shinohara said in a podcast message.

The message added: “The EU single currency plan provided members with access to very large internal and global pool of savings at low rates of interest that allowed some countries to sustain private sector imbalances for a long period of time.”

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