Communication for Sustainable Development

East Africa: Single Currency to Strengthen EAC Regional Economy

Location of East African CommunityImage via Wikipedia
PROSPECTS are rife that the envisaged single currency would act as an East African Community language, improving communications around the bloc.
Financial analysts say the currency would purge the current problems of speculation, instability and uncertainty, providing a strong foundation for the growing EAC economy.
The currency is further expected to significantly reduce cost and risk of doing business, regionally.
Other impacts of the single currency include promoting regional economic justice, creating fairness between countries as well as protecting the poor - petty traders in the borders in particular against the impacts of currency fluctuations.

In the long run, such a step would do much to counteract the local harm that is sometimes induced by economic regionalization by putting everyone, everywhere, on a more "level" economic playing field.
Nevertheless the task to achieve the common currency in the bloc is not a child joke; macroeconomic convergence has to be reached.
One of the prerequisite to attain the convergence is harmonizing inflation that way stabilising each member state's currencies The EAC set 2012 as the year of adopting a common currency but first the bloc has a task of converging her member states' inflation rates to be around 4.0 per cent per year.
Going by the inflation figures of last December for five member states, all were on increasing mood fuelled most by petroleum and food price rises, amid dry spell looming.
Mzumbe University's Dar es Salaam Business School lecturer Dr Honest Ngowi said the region has set "a comparable inflation rate" which has to have a small discrepancy gap prior to 2012 common currency establishment deadline.
"The problem rises if one of the member states failed to tame inflation rate at agreeable ... like the case of Tanzania where at one time shot to double digit," Dr Ngowi said.

However, going by last December inflation figures, all EAC countries rates were on the increasing mood. Tanzania rose to 5.6 per cent from 5.5 per cent of November and Kenya 4.5 per cent, the highest in 2010.
Other partner states which also saw the inflation climbing were Rwanda 6.3 per cent from 5.3 per cent; Uganda rose from 1.4 to 3.1 per cent; and Burundi 6.3 per cent from 5.5 per cent.
"It is clear that the EAC is not ready yet for monetary union," indicates European Central Bank in their February 2010 Study on the establishment of a monetary union among the Partner States of the EAC, adding: "...and macroeconomic convergence among the economies of the EAC partner states is at present insufficient for a sound and sustainable monetary union."
However, the ECB study, instead, focuses on the roadmap towards monetary union, for instance, the steps which should be taken to lay the basis for a sound and sustainable monetary union.
These steps are including macroeconomic convergence, the need for political commitment and public awareness and economic integration among others.
Dr Ngowi said the important aspect for the partner states considering forming a monetary union should experience similar inflation rates, which is a way forward".
While there may be costs in getting inflation down to, for example, 5 per cent, if all are in a similar position a common approach could probably be found which balances speed of adjustment with the transitional costs of making the adjustment.
"The problem for the EAMU (East African Monetary Union) is acute, however, if partner states start with a wide range of inflation rates," the ECB reports indicates.
Taming the inflation at around 4.0 per cent prior to 2012 common currency establishment year is confronted by a number of challenges.
Some weathermen in the bloc already predicted drought. This will push food prices up to trigger inflation, which is a case of recent pressure on the rates in December.
But if that is not enough, there is imported inflation caused by the high oil prices at global future markets. To tame this is by increasing food productivity and lowering taxes on fuel, to absorb the exogenous inflation.
Among the partners of EAC Rwanda managed to see its inflation fluctuated one per cent in 2010. This is good news for common currency. "There is no surprise, inflation in 2010 was less than 1 per cent," Francois Kanimba, the central bank Governor, was reported by Rwandan media.
Generally Rwanda has been experiencing low inflationary pressure since December 2009.
Uganda's annual inflation rate rose to 3.1 per cent in December as prices of some food items increased.
To curb the trend, central bank plans to introduce policies that will enable it to target a specific inflation rate over the next five years, starting with repurchasing government debt in the secondary market to control money supply.
Kenya's inflation rate rose to 4.5 per cent in December, the highest in 10 months, led by food and transportation costs. To slow down the inflation Kenya, East Africa's biggest economy, reintroduced fuel price controls.
Burundi's year-on-year inflation rate rose for the third straight month to 6.3 per cent in December from 5.5 per cent a month earlier, partly due to higher transport costs. The central African nation's government has revised fuel prices upwards four times since mid 2010.
However, there is a negative side of common currency, among them are over estimation of trade benefits, loss of sovereignty and deflationary tendencies.
The idea of a world currency is not new. Economist John Maynard Keynes proposed an "international currency union" in the 1940s.
His idea was watered down at the Breton Woods Conference by diplomats afraid of something quite so dramatic, and in its place emerged the International Monetary Fund and the World Bank.
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