East African Community (EAC) has proposed the idea of a unified currency for East Africa, an idea that has since gone beyond the planning stage.
According to the Secretary-General of the EAC, Peter Mathuki, the community is in the process of harmonizing critical policies and putting in place the requisite institutions to attain a single currency for the region by 2024, as outlined in the EAC Monetary Union Protocol.
While this idea has its promises, economists have questioned if the proposed move can meet all the protocols needed to unify the monetary systems in the bloc, at least within the period the EAC recommends for its release.
Dr Pantaleo Kessy, a monetary expert with the East African Community has recommended that the community moves the release date to 2031 instead of the proposed 2024. This would allow time for the full implementation of the Customs Union and Common Market protocols, and to eradicate the problem of non-tariff barriers (NTBs) among member states.
He also argued that current EAC member countries have not all met the four mandatory macroeconomic convergence criteria to attain the status.
Among these is the requirement that any country that will be admitted to the bloc should not have an inflation rate exceeding eight percent.
Member states should also have forex reserves to cover at least four months’ imports and fiscal deficits averaging 3.5 percent. States should also avoid borrowing more than 50 percent of their respective GDPs.
These criteria prove a problem for not just East Africa but for the idea of a unified African currency and the possibility of it becoming a reality should incase the African Union were to consider the move. To further understand the idea, let us consider the benefits and disbenefits.
Advantages of a Unified Currency For Africa
There is little question that the establishment of a unified currency for an African single market would provide a significant advancement in the protracted process of African integration, both politically and economically, especially when one considers the commodity growth rates it has due to the deposit of a variety of mineral resources.
According to Africa the Statistics Times, Africa’s growth has been shaped by commodity prices. The continent has a third of the planet’s mineral resources, 10% of the world’s oil reserves and produces nearly 70% of the global diamond trade.
In my opinion, a single currency can help all African nations achieve the necessary structural growth by addressing the difficulty in converting some of their currencies. With a single currency, trade is easier and simpler for investors and consumers, making it possible to achieve a single market for goods and services in Africa.
A single currency would also considerably boost intra-African trade, as well as trade between nations and regions, even if it is just used for cross-border transactions. These developments could have a positive impact on the African market’s competitiveness and growth potential.
Also, reduced obstacles with trade and investment would entice more small and medium-sized businesses, which have historically only operated in their home markets, to expand into their neighbours’ markets. These microeconomic elements would increase resource allocation and competition inside the African market.
Over-dependency on a few key commodities can also prove a problem for economic growth because of the uncertainties of the market but with a united currency, key infrastructures can be developed to improve the trade potentials of these commodities. Currently, Africa accounts for 10% of global oil and 9% of natural gas production, a rate that would change with the implementation of a policy that unifies the market.
Disadvantages of a Unified Currency for Africa
While the process of reshaping the African market from segmented national markets to an Africa-wide market would lead to more growth for the economy, a single currency would consolidate authority in the hands of a small number of people and centralize decision-making at the level of the Africa Union, endangering one of the core values of the African Union, individual liberty.
Also, corrupt politicians might be against this move to allow them to maintain control of a developing country because currency rates and income can then be calculated with a singular system, leading to very transparent trade outcomes.
So yes, a unified currency would positively impact the African economy but are we ready for it yet?