Initial efforts by the East African Community to reach a common position on rolling out a single currency for the region have run into hurdles as Kenya and Uganda argue that the legal requirements of a full transfer of monetary sovereignty to the regional level carry the danger of exposing their countries’ financial sectors to external shocks.

Kenyan financial experts argue that the EAC Secretariat’s demand that the confidentiality clause in the banking sector be lifted to pave the way for sharing information on financial transactions among partner states, could make commercial banks vulnerable to their competitors — even though lifting the clause is a prerequisite to the negotiations for the Monetary Union that commence some time this year.

At a regional meeting in Kampala last week to assess how the transition to the Monetary Union would be enforced — at which a team of experts from the European Central Bank released the findings of a study on the establishment of such a union in East Africa — Kenyan officials said they were reluctant to share their country’s financial details with the other members, although their laws allow them to share these with the International Monetary Fund.

“We can’t do that now. We have to wait until our laws have been amended,” said a senior Kenyan banking official, who declined to be named since the session was closed-door.

Dr Louis Kasekende, Deputy Governor of the Bank of Uganda, told The EastAfrican they would employ the Japanese model of “let-them-initiate-we-perfect” to skip certain components of preparation for the single currency.

“Actually it is possible, based on that model, that we could miss the 2012 deadline by two years. It is Rwanda and Burundi telling us to wait for them since they have just joined,” Dr Kasekende said.

The Community’s partner states have also been cautioned to carefully study the implication of transferring all their monetary powers to the regional level, since after implementation of the Monetary Union, any problems would jeopardise the entire region.

For instance, the individual partner states will then have no way of adjusting the exchange rate to restore competitiveness, nor of easing domestic monetary policy to help conditions in the labour market. They may suffer prolonged unemployment if their labour costs became too high and wages and salaries cannot fall.

Supervision

According to the preliminary findings of the International Monetary Fund, Rwandan and Ugandan banks are the weakest in the region, registering low profits last year that the IMF attributes to lack of supervision, insufficient manpower due to engaging in new operations like retail banking, and inadequate skills. The IMF warns that greater integration of banking sectors in East Africa will make the region vulnerable to crises if the regionally active banks are not supervised.

At the consultative meeting, EAC Deputy Secretary General for Planning & Infrastructure Alloys Mutabingwa urged partner states to reconsider their stringent national financial laws, which he said would dilute the blueprint of the Monetary Union.

The East African States are also supposed to maintain similar economic cycles — with similar income levels, interest rates, inflation rates and commonly agreed standards for sound fiscal policies.

Apparently, even the people involved in the design of the Monetary Union are also sceptical that the third pillar of integration will be achieved in accordance with the timetable. For this reason, a section of technocrats in the region is drumming up support for political mobilisation before even the talks for one currency start.

“We will need to keep our nerve in the face of the inevitable setbacks. Establishing a Monetary Union in East Africa will be a difficult and risky task. It will require an enormous amount of work to reform institutions, change legislation and revise macroeconomic policies. It is a long-term undertaking, whose benefits will be realised over many decades,” said Prof Tumusiime Mutebile, Governor of the Bank of Uganda, during the regional consultative meeting.

Previously, it was estimated that the EAC currency would be introduced into circulation in 2012 but the studies that are currently guiding the process propose 2015 — although the officials from the European Union, which is already operating a fully-fledged Monetary Union, predict it will take a little longer.

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.