IMF Survey : New Pacts Ease Path Toward East African Single Currency

IMF News, December 30, 2013

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Monetary Union Protocol signed by community heads of state in Kampala, Uganda, on November 30, outlining a ten-year roadmap toward monetary union.
Formal launch of the East African Cross Border Payment System on November 25 as an operational step toward monetary and economic integration.
IMF has supported the EAC regional integration process since its origins through technical assistance (regional workshops), participation in policy dialogue (meetings of EAC central bank governors and conferences), and by hosting meetings on the sidelines of the IMF-World Bank Annual and Spring Meetings.
IMF has supported the economic programs of all EAC countries and continues engagement to back policies pursued under the Monetary Union Protocol.

Real economic growth averaged 6 percent over the past decade for the EAC region.
Region population: about 140 million.
Combined GDP: more than $100 billion.
Deeper integration is expected to:
- Sustain strong economic growth.
- Improve economic efficiency.
- Lead to economies of scale, lower transaction costs, increased competition, and greater attractiveness for foreign direct investment.

The EAC Monetary Union Protocol sets out the process and legal and institutional framework for establishment of a single currency, including macroeconomic convergence criteria.
Previous milestones:
- Customs union protocol (2005): introduction of a common external tariff and gradual elimination of internal tariffs.
- Common market protocol (2010): allowing free movement of goods, persons, labor, services, and capital.
Target for single currency introduction: by 2024 by member states that comply with the convergence criteria.
Joint monetary policy governance:
- Independent EAC central bank with national central banks as operational arms.
- Primary objective: price stability.
- Secondary objectives: financial stability and economic growth and development.
- Single exchange rate regime: free floating.
Qualification requirement: countries must meet convergence criteria and comply for at least three years.

Primary convergence criteria:
- Headline inflation: ceiling of 8 percent.
- Fiscal deficit including grants: ceiling of 3 percent of GDP.
- Gross public debt: ceiling of 50 percent of GDP in net present value terms.
- Reserve coverage: floor of 4.5 months of imports.
Indicative criteria:
- Core inflation: ceiling of 5 percent.
- Fiscal deficit excluding grants: ceiling of 6 percent of GDP.
- Tax-to-GDP ratio: floor of 25 percent.

EAC Monetary Institute planned to be established in 2015 to direct preparatory work for monetary union.
East African Surveillance, Compliance and Enforcement Commission to be created by 2018 to monitor and enforce convergence.
From 2018 onward, monetary and exchange rate policies will be coordinated and harmonized.

System launched and operational in three EAC members: Kenya, Tanzania, and Uganda; Rwanda and Burundi are preparing their systems.
Multicurrency mechanism linking real time gross settlements of EAC member countries via automatic payment messages through the Society for Worldwide Interbank Financial Telecommunication.
Central banks maintain accounts with each other and host prefunded settlement accounts in the currencies of partner states.
Roles:
- Central banks: provide infrastructure, operating rules, and oversight.
- Commercial banks: run the system.
Expected benefits:
- Faster and more reliable cross-border payments.
- Promotion of regional trade.
- Contribution to monetary, financial, and economic integration.

Further efforts to speed up trade liberalization and harmonize policies will increase benefits of monetary union.
Implementation of initiatives and further integration during the next decade will help reduce vulnerabilities and maximize benefits of monetary union.

Source: IMF Survey : New Pacts Ease Path Toward East African Single Currency (December 30, 2013)