The East African Community projects to have a common currency by 2012.

According to the Community Secretariat, a joint study on the proposed harmonised Monetary Union has already kicked off and is expected to end later this month.

This week, the team spearheading the study team led by European central bank consultants is visiting Bujumbura, where it will hold a consultative meeting on the proposed unified currency. Similar meetings have already been held in Nairobi, Dar es Salaam, Kigali and Kampala. The last one will be conducted in Arusha next week.

Targeted in the study are the central banks of the EAC partner states and their, ministries of finance, planning, EAC Affairs and trade. Others are capital markets, bureaus of statistics and the banking fraternity.

“The purpose of these visits is to meet with the various stakeholders in the process towards Monetary Union and to make them acquainted to those matters which are likely to arise in this process,” Kenya’s EAC Minister Amason Kingi told The EastAfrican.

Critical to the study is the preparedness of the region to for a common Monetary Union.

Also featuring prominently are the legal implications of the proposed currency shift. The findings of the study are expected to be released next January.

The EAC Secretariat says the region will begin setting up the necessary legal and institutional framework.

Leading economists say it is time the region formed a common central bank and currency to be competitive in the global market and attract foreign investment.

African Union Commissioner for Economic Affairs Maxwell Mkwezalamba says that a common monetary system will enhance intra-East Africa trade, initiate competition and put the region in the global picture as a business hub.

“The creation of a Monetary Union can be seen as a fundamentally political issue, though with important economic implications. Currency unions are generally formed as part of a larger strategic push to integrate the countries entering such unions,” Mr Mkwezalamba said, adding, “The decision to embark on a currency union is a major policy decision.”

But is the region ready for the proposed union? Though a desirable move, analysts say the region should approach it cautiously. A unanimous argument is that the merger will create a more stabilised currency that will be less prone to inflationary pressures.

While a Monetary Union may improve the region’s economic policies, stimulate growth and foster good governance, observers say questions remain unanswered on the feasibility of the proposed union.

“The objective of regional integration seems well founded, but it is unclear whether forming a monetary union will contribute greatly to it. A currency that is ill-managed and subject to continual depreciation is unlikely to stimulate pride or give member countries any clout on the world stage,” says a report by the World Bank.

Today, the region’s currencies are weakening “asymmetrically” against the international ones. Although the three currencies of Uganda, Kenya and Tanzania have been falling against the dollar, the Ugandan currency has been hardest hit.

“In order to be strong and stable, EAC governments will have to institute measures to ensure they abide by strict fiscal and economic criteria. However, we must remember that the region once had a common currency. What will be required now is to check on the gaps that existed and improve on it,” Mr Kingi said.

To function smoothly and bring about economic benefits for all EAC partner States, experts say the Monetary Union should start with a high degree of sustainable monetary and economic convergence among partner states.

“The partner states should experience synchronous economic cycles, similar external shocks as well as similar inflation and growth rates. Income levels may also be important,” said Mr Kingi.

According to the minister, the talks on Monetary Union are progressing well among the member states.

“Our target is to ensure that once we have a harmonised market by November this year, we will immediately engage on striking an agreement on a merged currency from early next year. I am certain we will get there,” he said.

Analysts say if the pace at which the integration process has been taking place is maintained, then the region is “almost there” in achieving the preconditions, known as the optimum currency area, for the Monetary Union.

However, despite a positive outlook for the realisation of the union, debate still lingers on whether the region should instead sit back and wait for the proposed African Monetary Union which has been predicted to be in place by 2021.

The argument is that once the continent establishes a united currency system, regional and individual country currencies will be rendered redundant.

“One of the key pillars to the realisation of African Union is the successful integration of regional blocs. I don’t think our quest for a unified currency will conflict with what the continent is seeking,” Mr Kingi said.

The establishment of a common currency in East Africa comes a few months after East African central banks proposed a radical monetary policy regime that responds to the dynamics of the global economy.

In a meeting of central bank governors held in Nairobi in March to discuss the choice of monetary regime for the EAC economies, experts said the region should adopt a sound monetary policy that will accelerate capital flows.

“As East African economies are becoming sophisticated, central banks are running out of traditional monetary policy ammunition to fight the slowdown in growth and inflation.

This has compelled us to relook at the transmission mechanism of monetary policy. The region is becoming more integrated and capital movement across countries is increasing in volume,” Central Bank of Kenya Governor Prof Njuguna Ndung’u said.

Prof Ndung’u said the increasing influence of external factors on global inflation dynamics was also a driving force in policy choices. 

“The spike in oil and commodity prices last year, for example, which initially appeared as a supply shock at the individual country level, represented economic overheating at the global scale, and domestic monetary policy tightening may not have been the most effective way to deal with this situation in our context,” he said.