July 27, 2013

EAC Sets Tough Conditions for Monetary Union

The East African Community countries have set tough conditions by which member-nations can join the community’s Monetary Union.

The Monetary Union is part of the process towards the full integration of the regional bloc comprising Uganda, Kenya, Tanzania, Burundi and Rwanda.

A report from the 3rd Sectoral Council on the East African Community Monetary Union (SCEAMU) sitting shows that some of the requirements for macro-economic convergence for the realization of the union include ensuring that headline inflation doesn’t rise beyond 8 percent.

Countries will also have to maintain a fiscal deficit, including grants, ceiling of 3 percent of Gross Domestic Product (GDP). This means that countries are not allowed to borrow beyond 3 percent of their capacity to pay back. The national debt must also not rise above 50 percent of GDP.

The EAC countries must also maintain a reserve cover of 4-and-a-half months of imports, which means that should a country fail to import, it should at least be able to continue to have essential imported goods for over 4 months.

The report, dated July 16 2013 came out of a meeting that was attended by officials from ministries of finance and planning, East African Affairs ministries and central banks among others, from all five member-countries.

The partner-states agreed to monitor, as early-warning indicators, a core inflation ceiling of 5 percent, fiscal deficit ceiling of 5 percent of GDP, and tax-to-GDP ratio of 25 percent.

According to the report, partner states must meet and maintain these convergence conditions for at least 3 years before becoming part of the union.

The Monetary Union can commence, as long as a minimum of 3 member-nations have become eligible and are in agreement on all the conditions.

For these conditions to be fulfilled and the Monetary Union to become a reality however, partner-states will have to coordinate their fiscal policies to ensure consistency with the EAC monetary policy, disclose their aid flows and disbursement programs to the East African Central Bank, and disclose the status of their domestic and external debts to the Council Of Ministers on a quarterly basis, among other conditions.

The realization of the Monetary Union will also include the establishment of an East African Monetary Institute and all member-states must harmonise their financial management systems.
But also important is the ability by member-nations to meet the requirements for macro and micro economic stability of the Monetary Union. For instance, Uganda’s headline inflation rose to over 30 percent in 2011, though it stands at 3.4 percent as of June 2013, according to the Bank of Uganda.

World Bank figures indicate Uganda’s GDP at 16.81 billion US Dollars as of 2011, and a March 2013 Uganda Debt Network report to the Parliamentary Committee on National Economy shows that the national debt had risen to 5.6 billion Dollars.

Figures from the Uganda Bureau of Statistics indicate that the country’s GDP growth is expected to be at 5-6 per cent over 2013, but is expected to recover by 2014. The fluctuation has been on-going since 2010/11, with real GDP growth at 6.6 percent and 3.4 percent in 2011/12.

This trend may prove a challenge to the 3 years’ consistent macro-economic status required for admittance in the Monetary Union.

The establishment of the East African Monetary Union is provided for by Articles 5 and 82 of the East African Community Treaty, with the main aim of reducing costs and risks of doing business across partner-states. A monetary union would mean the adoption of a single currency, which would do away with the costs of transactions in different national currencies, exchange rates and harmful taxes.

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