Kenya, Uganda now want Monetary Union delayed

According to the analysts from the European Central Bank, the consequences of the EA Monetary Union are expected to go far beyond the need to adapt to the new single currency.

“The inescapable consequence of Monetary Union is that a substantial part of national discretion in economic policy will have to be given up,” the researchers say in their study conducted last year.

The EAC, together with the European Central Bank, last year conducted studies to address the prerequisites for the East African Monetary Union (EAMU), the establishment of the legal and institutional framework necessary for the implementation of EAMU, preparatory work for the move to EMAU and the operational regulatory framework for EAMU.

Irreversible consequences

In the final draft report, which will be submitted to the Council of Ministers in April, the financial experts from the European Bank say the economic bloc will face irreversible consequences once partner states surrender national discretion in monetary and exchange rate policy if their economies are not sufficiently convergent.

“The Monetary Union project requires radical changes in economic policies backed by reforms to institutions and legal changes. From the standpoint of macroeconomic policy, the most critical requirement is the gradual convergence of all the East African economies during the transition to Monetary Union, especially in terms of synchronisation of economic cycles of member states,” Prof Tumusiime Mutebile said.

Economists also argue that economic policy would become very rigid within an EAMU as individual governments lose the option of devaluation and monetary policy is set by a supranational East African Central Bank. In the event of an asymmetric shock that puts the economy in recession, an individual government would be very limited in its policy response options in an EAMU.