The East African Monetary Union: Is the Level of Business Cycle Synchronization Sufficient?

William Miles

doi:10.2139/ssrn.2613628

Abstract

The East African Community (Burundi, Kenya, Rwanda, Tanzania and Uganda) has a goal of a currency union, as part of a movement toward eventual political union. A key factor in making a currency union desirable is a high level of business cycle synchronization (BCS) among member countries. In this paper we undertake a new approach to this topic with a recently developed set of tools. These tools have the advantage of yielding time-varying estimates, and, unlike previous metrics, allow us to gauge both differences of the phase of the business cycle between countries and differences in business cycle amplitude. We find BCS among the five countries does compare reasonable well with that found for euro zone nations before euro adoption. However, given the euros’ difficulties, this is not strong evidence in favor of the desirability of a currency union. Moreover, Rwanda appears less well-suited, in terms of BCS, than the other four countries. In addition, all five nations have experienced sharp drops in BCS in recent years. Lastly, there has been no significant increase in BCS since the 2000 EAC Treaty, or the 2005 customs union. Overall, our results cast doubt on the desirability of an East African currency union.

Highlights

The East African Community (EAC) was created through a treaty, signed in November 1999 by officials from Kenya, Tanzania and Uganda (Burundi and Rwanda would eventually sign on as well) which called for the establishment of a monetary and eventually political union among the five nations
We find that the individual countries have had major declines in business cycle synchronization (BCS) during some recent years, even after the 2000 EAC Treaty and 2005 customs union
Some previous papers on the East African currency union (CU) have estimated only one measure of BCS for the entire sample (Kishor and Ssozi are a notable exception, as they employ time-varying methods to assess the impact of the 2000 EAC Treaty on BCS for the five nations)

Summary

Introduction

The East African Community (EAC) was created through a treaty, signed in November 1999 by officials from Kenya, Tanzania and Uganda (Burundi and Rwanda would eventually sign on as well) which called for the establishment of a monetary and eventually political union among the five nations. Along the path to a common currency, a customs union among the EAC nations was created in 2005. Monetary union for the EAC countries is still an objective. In November 1999, the East African Community (EAC) was founded by a treaty among Kenya, Tanzania and Uganda. A customs union was to be formed among the member countries-this was accomplished in 2005. A CU still remains an objective; political union has been stated as an ultimate goal (United Nations, 2011)

Methods

Results

Conclusion