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East Africa edges towards monetary union – safeguards in place to avoid Eurozone type of crisis
The five East African Community countries including Burundi, Kenya, Rwanda, Tanzania and Uganda are edging closer to establishing a single currency.
The creation of the monetary union is the next step in the integration of the East African Community after the adoption of a common market and a customs union which provides for the free movement of capital and labor.
The monetary union protocol, to be approved in November this year, concludes years of negotiations that often exposed the deep nationalistic misgivings that continue to frustrate the quest for closer regional cooperation.
The approval of the protocol will begin the process for the eventual phasing out of all the national currencies and the establishment of a single regional currency.
A major prerequisite for the formation of the monetary union is the establishment of a regional central bank that guarantees the independence of central banks of member states.
Negotiators and planners from all the member states, have been banking on the experiences of other blocs in crafting the protocol and have put in place safeguards that ensure that countries joining the monetary union meet specific targets in order to avoid a situation where members whose macroeconomic indicators are inadequate join the union and trigger the kind of crisis currently plaguing the Eurozone.
The safe guards demand that member states joining the monetary union are expected to sustain their debt to gross domestic product (GDP) ratio at not more than half, and a tax to GDP ratio of 25 percent and must meet these targets consistently for 3 years before they can join the common currency.
All countries in the East African Community will struggle to attain the tax to GDP ratio of 25 percent, given their relatively narrow tax bases, the different tax collection regimes and the fact that most of the region’s businesses are informal and thus do not pay tax.
Presently, Kenya has the highest tax to GDP ratio at about 23 percent, Tanzania is at 18 percent, while Uganda and Rwanda tie at 12.6 percent.
Source: Africa Review