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EAC seeks IMF help in reviewing macroeconomic targets for single currency
The EAC member states are persistently borrowing to plug infrastructure gaps occasioned by falling domestic revenue collections.
The East Africa Community has sought the services of the IMF and researchers from the London-based International Growth Centre to review the macroeconomic convergence targets for adopting a common currency, even as member states continue to grapple with growing debt and budget deficits.
The review, which was mooted in May 2023, offers relief to the partner states that failed to comply with the thresholds on inflation, foreign reserves, budget deficit and national debt by 2021, prompting the EAC Council of Ministers to extend the deadline to a single currency by seven years, from 2024 to 2031.
The ministers are particularly keen on reviewing the thresholds on national debt and budget deficit after questioning the requirement of three percent of GDP, and the borrowing target of 50 percent of GDP.
The EAC member states are persistently borrowing to plug infrastructure gaps occasioned by falling domestic revenue collections and diminishing foreign aid putting them in a difficult position.
The 15th meeting of Sectoral Council on Finance and Economic Affairs on May 12, 2023 in Arusha directed the Secretariat to facilitate a study on EAC macroeconomic convergence criteria, particularly the “validity of the overall Fiscal Deficit of 3 percent of GDP as well as the public debt target of 50 percent of GDP in net present value.”
“Pursuant to the directives of the ministers, the EAC Secretariat has already initiated the review process and is working in collaboration with the International Monetary Fund (IMF) and the International Growth Centre (IGC) to facilitate the study,” Kenya’s Principal Secretary in the State Department for the East African Community Abdi Dubat told The EastAfrican this week.
The EAC member states signed the Protocol on the Establishment of the East African Community Monetary Union (EAMU) in November 30, 2013 in Kampala, aiming to launch a single currency by 2024 and completing the third pillar of regional integration after the Customs Union and Common Market. The fourth and last pillar is Political Federation.
But the timelines have since been revised to 2031 from 2024 after member states failed to comply with the macroeconomic pre-conditions, with enabling institutions also falling behind schedule.
The EAMU Protocol provides for four primary convergence criteria which must be attained and maintained by each partner state, for at least three years before joining the Monetary Union.
These include a ceiling on headline inflation of 8 percent, reserve cover of 4.5 months of import, a ceiling on the overall deficit of 3 percent of GDP, including grants, and a ceiling on gross public debt of 50 percent of GDP in net present value terms.
It also provides for the creation of four key institutions, including the East African Monetary Institute, the East African Financial Services Commission, East African Statistics Bureau and the East African Surveillance, Compliance and Enforcement Commission
An assessment of progress towards achieving these primary convergence criteria shows that most partner states were unable to achieve the targets by the initial deadline of 2021, partly due to the economic fallout of the Covid-19 pandemic and the need to close infrastructure gaps.
Tanzania, Kenya, Rwanda and Uganda attained the headline inflation target of less than 8 percent in 2021; Tanzania, Rwanda and Kenya attained the official foreign exchange reserve target of 4.5 months of imports cover; while Tanzania, South Sudan and Uganda attained the debt-to-GDP target of less than 50 percent in net present value.
No partner state attained the fiscal deficit criterion of three percent of GDP (including grants).
The review of the macroeconomic convergence criteria is expected to open a window for countries to take up slightly more debt and run slightly bigger budget deficits while remaining on course to complying with the pre-requisites for a single currency regime.
Mr Dubat said while the new timeline is achievable, it will require partner states to continue implementing prudent macroeconomic policies including enhanced revenue mobilisation efforts and expenditure rationalisation.
“In line with the revised Eamu roadmap, the new timeline for attaining the EAC macroeconomic convergence criteria is 2028 and we have to maintain it for three consecutive years before establishment of the EAC Monetary Union,” he said.
The implementation of a single currency regime is expected to help member states to eliminate transaction costs related to currency conversions and volatilities and boost intra-regional trade that has been bogged down by both tariff and non-tariff barriers.
The United Nations Economic Commission for Africa (Uneca) warned in 2018 that the EAC economies remain susceptible to asymmetric (country-specific) shocks and adopting a common currency before attaining a greater level of convergence may be damaging to these countries.
The commission, in a paper titled “The East African Monetary Union; Ready or Not?” in 2018, said that despite some structural similarities, EAC economies remain susceptible, with empirical analysis pointing to only partial convergence among inflation and exchange rates, suggesting that these countries need to better align their monetary policies and allow a period of monetary policy coordination
“Therefore, it is advisable to undertake measures to fast track the full implementation of the common market and customs union protocols, further harmonize policies, and increase intra-regional trade before adopting a common currency. Adopting a common currency before attaining a greater level of convergence may be damaging to EAC countries,” Uneca said.
“While drawing from the experiences of other currency unions, it will be important that the EAC continues to direct efforts to designing and putting in place adequate mechanisms that can help member countries adjust to future shocks once the common currency is adopted.”
Uneca noted that complying with the fiscal convergence criteria is challenging considering the macroeconomic context of EAC countries, with significant need for public investment and development spending.
In addition, the countries face significant macroeconomic shocks, such as terms-of-trade shocks from international commodity prices, agricultural productivity shocks from weather and international aid shocks.
“This calls for not only for agreement on fiscal convergence criteria and commitment for fiscal discipline, but also the establishment of an independent institution or strong mechanism for enforcement and ensuring compliance by all countries,” it said.
According to Uneca, there is a need for the EAC Secretariat to establish an institution, or a strong mechanism, for enforcing and ensuring compliance with macroeconomic convergence targets by all EAC member countries.
“Firm commitment, discipline among members, and reduction of the risk of bad policies are results of a more rule-based framework. These measures should be agreed among member countries before the introduction of the single currency, to reduce risks and signal early commitment to macroeconomic stability,” it says.
“The lack of firm commitment to implement decisions taken by different regional committees to fast-track the implementation of Eamu protocol – due to more focus on relative national gains and sovereignty – is one of big challenges in the journey towards full regional integration.”
