AfDB now faults Comesa monetary union criteria

Saturday January 12 2013

By CHRISTABEL LIGAMI Special Correspondent

The African Development Bank (AfDB) has faulted criteria the Common Market for Eastern and Southern Africa region (Comesa) adopted to establish a monetary union.

According to a new AfDB report, the current fiscal convergence criterion being used to create a monetary union does not factor in the interests of all member countries and may not be financially sustainable.

“The Comesa criteria concerning inflation, government budget deficit, and central bank credit to government, replicate the numerical value of the Economic and Monetary Union (EMU) criteria, but it is not clear how and why criteria prescribed for industrialised countries be relevant for Comesa,” says the report.

Comesa has been mulling over establishing a monetary union. The Comesa secretariat has since 2008 engaged experts from central banks of Zambia, Kenya and Uganda to undertake a study to facilitate the establishment of the union.

The monetary union involving the use of one common currency in the region was expected to be launched in 2018 but has since been pushed to 2021 following different views among the bank governors that needs more time for consultations.

“Many member countries of Comesa are heavily dependent on foreign grants to balance their budgets. For example, in the case of Burundi, Congo DR, Malawi, and Rwanda the difference between the deficit excluding grants and including grants is as much as 10 percentage points of GDP, and for Zambia 4 percentage points of GDP,” reads the report.

The East Africa Community (EAC) has been facing similar challenges in its bid to rollout a monetary union.

Last month, the EAC Heads of State pushed back the implementation of the monetary union by another year to November this year after members failed to agree on 14 of the 77 articles needed for its creation.

They include the creation of key institutions for the proper functioning of the union; consensus on what articles should be shifted, deleted or retained and allocation of roles to the organs and institutions of the EAC.

A monetary union is expected to reduce the costs and risks of transacting business across the national boundaries of countries within the bloc due to different currencies and exchange rates.

The EAC partner states have significant differences in these factors, which must be harmonised for the monetary union to work.