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Regional states differ over articles in draft monetary union protocol

Saturday November 16 2013
eapesa

Minimum macroeconomic benchmarks for inclusion relating to inflation, public debt and foreign exchange reserves go missing in the East Africa Monetary Union protocol. TEA Graphic

Fresh cracks emerged within the East African Community last week after member states differed on the East African Monetary Union Protocol that was expected to be signed by the Heads of State Summit at the end of this month.

Kenya and Rwanda are opposed to the deletion of and changes to some key articles in the newly drafted protocol, saying the alterations by the drafters may complicate the implementation of the document, according to formal documents filed by the two countries and people familiar with the ongoing negotiations.

The EAC Council of Ministers had referred the draft EAMU Protocol to the Sectoral Council on Judicial Affairs for screening and legal input in July. The legal team released the draft early this month, incorporating the changes that have triggered the new divisions.

READ: Legislative Assembly adopts EA monetary union report

It has emerged that Uganda is also opposed to the changes but has not officially complained like Kenya and Rwanda.

The EAMU Protocol is intended to pave the way for the transition to a single currency over the course of the next 10 years and then put in place legal, institutional and economic reforms to support financial integration across borders.

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Replacing individual currencies with one single common currency is expected to reduce the costs and risks of transacting business across the national boundaries of the partner states of the EAC.

But member states have been jittery about the adoption of a single currency, considering the different economic circumstances of the various EAC countries.

Experts now fear the new changes to the draft protocol could worsen the risk for individual economies, as happened in the Eurozone.

To participate in the EAMU, the previous draft had required that countries maintain a headline inflation of not more than eight per cent, keep total gross public debt under 50 per cent of GDP, and maintain foreign exchange reserves equivalent to 4.5 months of imports. But the new draft says that these rules do not need to apply to all partner states.

“This could lead to countries like Kenya having to bail out the weaker economies like Burundi that may not have met the set criteria,” said a Kenyan expert involved in the negotiation.

Rwanda, in a report on the EAMU seen by The EastAfrican, says the protocol must be amended for consistency to provide for policy orientation and guiding principles for establishing a monetary union.

In the Eurozone, problems are being experienced by Greece, Portugal and Spain, which have lost competitiveness in international markets and can no longer use currency depreciation to restore their economic standing, because the Eurozone did not effectively harmonise economic and fiscal rules before launching the single currency.

As a result, the euro, instead of being the basis for broader integration, has ended up worsening the imbalances and inequalities between countries with different levels of productivity and competitiveness.

Experts fear that with similar loopholes now introduced into the EAMU Protocol, the EAC’s monetary union could do more harm than good.

The previous protocol was specific on the nature of the broad rules that each country had to adhere to.

The monetary union was to create a zone of monetary, financial and economic stability; establish and maintain sustainable, low-risk budgeting and financial mechanisms; promote harmonious, sustainable and balanced development of economic activities; promote macroeconomic stability and non-inflationary economic growth; promote intraregional economic and financial system integration and promote financial deepening and inclusion.

This has since been weakened considerably, and the deletion of many of these clauses now means that only the overall objective of the EAMU has been retained: To promote and maintain sound monetary and exchange rate policy; prudent fiscal policies and financial stability to facilitate the achievement of sustainable growth and development of the community.

In the new draft, the role of the East African Central Bank has also been changed and most clauses on its role have been deleted.

The deleted provisions include its role in setting exchange rate policy, formulation of monetary policy, and a provision where national central banks shall relinquish their powers to formulate monetary policies to the East African Central Bank.

In addition, although the previous protocol required countries to abandon their national currencies when the new EAC currency came into circulation, the new draft only stipulates that partner states shall agree to introduce the single currency.

READ: Rules for EAC single currency finalised

“This means that a partner state can choose to maintain its national currency and at the same time have the single currency,” said another Kenyan official who attended the meeting, adding that if the partner states choose to maintain their national currencies, the EAC single currency will not be as strong as anticipated.

The roadmap had indicated that the protocol would be implemented over a 10-year period, with a single currency to be launched as the last stage, culminating in the integration of member states’ financial markets.

However, the legal drafters have changed this provision to read that the Summit shall pronounce the date on which the monetary union shall commence.

“This is very tricky, because the presidents could choose to compromise with a country that will not have met all the requirements to be a member by the date they set,” said the official. “In such a scenario, no government will work hard to meet the set criteria to be a member of the EAMU.”

He said that in the previous negotiations, Tanzania had asked for the inclusion of a clause that would allow a partner state to be a member of the monetary union even if it pulls out of the Community. This was rejected, hence the roadmap that also indicated that unless a country is an EAC member state, it cannot be part of the EAMU.

The other critical clause deleted under the road map is the requirement that the monetary union be managed in accordance with the provisions of the protocol and other relevant laws of the Community.

Sectoral Council meets

The Sectoral Council on Finance met on Tuesday and Wednesday in Arusha and at the end of the meeting took the position that the draft protocol if approved in its current form may face the same challenges of implementation as the Customs Union and the Common Market Protocol. They forwarded their recommendations to the Council of Ministers.

The Council of Ministers will meet on November 28 and 29 ahead of the summit on November 30.

According to a Kenyan EAC official, Kenya and Rwandan experts have since proposed to maintain the version of the draft EAMU Protocol agreed upon by the Sectoral Council on EAMU.

“It is not yet known if the complaints raised by the two countries will be resolved in time for the meeting. If not, then the protocol will be pushed to April for signing at the next extraordinary summit,” said the Kenyan official, adding that until all the partner states are in agreement, the EAMU cannot be signed.

The dispute over the protocol has reignited fears of growing cracks within the bloc since the emergence of the Coalition of the Willing — Kenya, Uganda and Rwanda — which excludes Tanzania and Burundi.

READ: Disunity fears as key EAC summit looms

While EAC officials are in public insisting there are no divisions, in private, they are expressing concern.

A fortnight ago, Tanzania President Jakaya Kikwete, in a rare address to parliament, said he was deeply disturbed by the fact that his country was being isolated by Kenya, Uganda and Rwanda on matters that ordinarily should be handled by the EAC — especially employment, a single tourist visa, immigration and the political federation.

All the five EAC heads of state will be meeting for the first time since last month’s meeting in Kigali between President Uhuru Kenyatta of Kenya and his Rwanda and Uganda counterparts Paul Kagame and Yoweri Museveni.

Among the issues to be considered at the summit, to be held in Uganda, are the EAC Monetary Union Protocol, progress on the Political Federation Protocol, the admission of South Sudan into the community and the approval of the extension of the jurisdiction of the East Africa Court of Justice.

Numerous unresolved trade disputes in the region are an indication that the partner states are lagging behind in implementing the Common Market Protocol, just two years before from the 2015 deadline.

The protocol, which calls for the free movement of goods, labour, capital and services in the region, came into effect on July 1, 2010, and was to be implemented over a five-year period.

Additional reporting by Christine Mungai.

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