African states’ single currency goal is still on

Monday July 26 2010

Central Bank of Kenya governor Prof Njuguna Ndung'u. Photo/FILE

Central Bank of Kenya governor Prof Njuguna Ndung'u. Photo/FILE 

By MARK KAPCHANGA

The push to have African currencies merged is gaining momentum following revelations that majority of the countries are on track in meeting requirements for a monetary union set for 2021.

A meeting convened in Nairobi two weeks ago that brought together more than seven central bank governors under the Association of African Central Banks (AACB), said that the objective to have a single currency and a common central bank in the next 11 years, was on track as “most of the active members have been meeting a number of the macroeconomic convergence targets.”

Some of the targets set by the governors are the maintenance of a low inflation of less than five per cent, GDP growth of above seven per cent, reduction of budget deficit excluding grants and GDP ratio to less than five per cent and raising of national savings to GDP ratio to more than 20 per cent in the medium term.

According to Central Bank of Kenya governor Prof Njuguna Ndung’u, AACB had started working on Stage III of the integration programme that will form a basis for the establishment of a continent-wide common central bank.

The proposed currency merger will see improved business within the continent as it will reduce transaction costs incurred by traders and tourists exchanging local for other currencies.

Economists say the move will also see losses due to fluctuation in exchange rates mitigated.

Merits

Aly-Khan Satchu, the Nairobi Stock Exchange Data Vendor Rich Management says there are clear merits to a single currency in the continent.

“With 53 countries, the cross-border foreign exchange related costs are just punitive. However, the events surrounding the Euro are surely a warning shot across the bows. My concern with a common currency is that the weakest point can become the soft underbelly,” he said.

Removing the risk associated with the exchange rate would also help to lower interest rates on debt, especially long-term bonds, mostly because of the reduction in the risk premium.

Under the new currency regime, prices within the continent would be easy to compare which would facilitate the application of anti-dumping laws.

“Notwithstanding these benefits, regional groupings in Africa have tended to give less emphasis to monetary integration. Under the African Monetary Co-operation Programme, the Eastern Africa central banks evaluate each other annually to ensure convergence in policies as we pursue further monetary integration,” Prof Ndung’u said.

The move to merge the currencies at continental level comes just a month after the East African Community Common Market protocol came into effect paving the way for the discussions on establishment of a single regional currency and an East African Central Bank.

The EastAfrican has established that central bank governors in the EAC partner states met in Nairobi last week to define the path for the establishment of the union.

Critical in the deliberation was the approach the region should use in tackling the macro-economic disharmonies in a bid to have a robust currency.

The merger is expected to bring considerable benefits but also heavy costs.

They include the replacement of national currencies, changing all prices and other monetary values, adopting new accounting systems as well as setting up of new regional institutions.

Heavy costs will also arise from the surrender of national discretion in monetary and exchange rate policy if the economies are not sufficiently convergent.

This, critics say, may face countries at the periphery such as Burundi whose economy is still at infancy level.