Abstract

  This paper assesses plans of the East African Community (EAC) to create a single currency for the five countries making up the region, and considers how best to achieve it. While the benefits of lower transactions costs from a common currency may be significant, countries will also lose the ability to use monetary policy to respond to different shocks. Evidence presented shows that the countries differ in a number of respects, facing asymmetric shocks and different production structures. Countries have had difficulty meeting convergence criteria, most seriously as concerns fiscal deficits. Preparation for monetary union will require effective institutions for macroeconomic surveillance and enforcing fiscal discipline, and euro zone experience indicates that these institutions will be difficult to design and take a considerable time to become effective. This suggests that a timetable for monetary union in the EAC should allow for a substantial initial period of institution building. In order to have some visible evidence of the commitment to monetary union, in the meantime the EAC may want to consider introducing a common basket currency in the form of notes and coin, to circulate in parallel with national currencies.   Key words: EAC monetary union, fiscal surveillance, optimum currency areas, parallel currencies, regional integration.

Highlights

  • The interest in regional integration—including monetary integration—in Africa has been high over the decades since independence and various regional groupings have been formed

  • This includes steps to implement the customs union and common market protocols, and the ongoing work of the Monetary Affairs Committee (MAC) to complete the harmonization of banking regulation, payment system integration, and harmonization of monetary and exchange rate policy formulation and implementation.important challenges remain in building the solid foundation needed to support an East African Community (EAC) single currency

  • There is no clear evidence that the EAC is an optimum currency area despite some similarities in structure of EAC economies

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Summary

Introduction

The interest in regional integration—including monetary integration—in Africa has been high over the decades since independence and various regional groupings have been formed. Those initiatives were stimulated by the generally small size of individual economies leading to a desire to exploit economies of scale in production and distribution, as well as having more influence on the world’s stage. Several regional monetary union projects are planned, for the Economic Community. The major benefits of a monetary union are the reduction of transaction costs, economies due to the pooling of international reserves, elimination of exchange rate risk and region-wide price harmonization.

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