from Leila Abdul
The East African Community (EAC) is not ready for a common currency, a University of Oxford economist has told delegates at the ongoing monetary union summit in Arusha.
Paul Collier, director of the Centre for the Study of African Economies at Oxford, said that economic imbalances among EAC member countries could create regional instability similar to the current crisis facing the eurozone.
The Arusha summit is a precursor to the signing of an EAC monetary union charter later this year, which is expected to pave the way for a single currency for member states.
“Don’t do what Europe did, you need an independent voice saying let’s be careful,” Prof Collier told delegates who included regional finance ministers and central bank governors.
A major pre-requisite for the formation of a monetary union is the establishment of a regional central bank and guaranteeing the independence of central banks of member states.
Prof Collier said that the eurozone experience had shown that it is difficult to enforce spending limits among members of a monetary union such as the one proposed by the EAC.
Some European Union countries reneged on agreements to maintain low budget deficits since there were no rules for enforcing fiscal discipline.
Heavily indebted countries such as Greece, Italy, Portugal, Spain and Ireland have deepened the eurozone crisis, raising fears among lenders that their weak economic growth cannot sustain repayments.
“If you are not confident of the structures for enforcing national budgets then you are not ready for a monetary union,” said Prof Collier.
The economies of EAC member countries are also too divergent to support a common currency, according to the widely published economist.
South Sudan is entirely dependent on oil, Uganda and Tanzania have recently discovered commercially viable oil and gas reserves respectively while Kenya and Rwanda are less reliant on natural resources.
This potentially makes it more difficult for the member countries to have similar fiscal objectives, as resource rich countries have more spending power than agricultural and service based economies.
The EAC, however, stood to gain from closer trade integration and better infrastructure funded jointly by the member countries, said Prof Collier. Permanent secretary in the Ministry of Finance, Joseph Kinyua, said that a strong fiscal policy of the kind that would support a monetary union would require politicians to “bite the bullet” and guarantee independence of institutions such as the Central Bank.
He, however said that it is important for the EAC to sign the monetary union protocol this year even as negotiations for policy rules for the eventual single currency continue.
“What we will be signing is a framework for building the union but it will not mean that we will have a single currency by the end of this year,” said Mr Kinyua.
The EAC was revived 12 years ago following collapse of the first union between Kenya, Uganda and Tanzania in 1977.
Rwanda and Burundi have joined the expanded EAC with an estimated population of 130 million, while an application from South Sudan is under consideration.
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