By the Governor of the Bank of Uganda, at the opening of the East African Legislative Assembly Consultative Workshop on the East African Monetary Union, Kampala, 9 September 2013.
Honourable Ministers and Honourable Members of the East African Legislative Assembly Ladies and Gentlemen The issue that we have gathered here to discuss today – the planned introduction of the East African Monetary Union (EAMU) – is one which will have profound effects on this region for decades to come. Later this year I expect that the heads of state of each of the partner states of the East African Community (EAC) will sign the Protocol for the introduction of the EAMU. The Protocol will pave the way for the transition to EAMU over the course of the next 10 years and the complementary legal, institutional and economic reforms. The East African Monetary Union is a project with potentially large long term benefits for all of the economies in the EAC but which also entails considerable risks. The long term success of EAMU will be dependent upon major changes to public policy and in the way in which public policy is made in all partner states of the EAC. A successful monetary union is only possible if each partner state is prepared to accept the pooling of its economic sovereignty. Many economic decisions which are now made at the national level will have to be made at the regional level. This pooling of economic sovereignty extends beyond the loss of independent national monetary policy and exchange rates, which is of course inherent in a monetary union; it also requires that each partner state accepts constraints on its fiscal policy and implements fully the provisions of the common market, including not just free trade in goods and services within the EAC but also the free movement of capital and labour within the EAC. If we do not build the requisite foundations for monetary union, the introduction of EAMU may actually harm our economies. The problems which are currently being experienced by some of the peripheral members of the Euro zone – Greece, Portugal and Spain for example – which have lost competitiveness on international markets and can no longer use exchange rate depreciation to restore their competitiveness, should provide a salutary lesson to everyone involved in planning for the introduction of the EAMU. Without wishing to pre-empt any of the contributions from my colleagues in the EAC Secretariat, the Ministry of Finance, Planning and Economic Development and the Economic Policy Research Council which we will hear later on in this workshop, I would like to take a few minutes of your time to explain why I believe that monetary union in East Africa will make an important contribution to the long term development of our region, potentially helping to accelerate the transition of our economies to middle income status, and also to identify the critical prerequisites for the successful introduction of EAMU. Why is monetary union important in East Africa? The partner states of the EAC are implementing a customs union and a common market in order to promote regional economic integration. Deeper regional economic integration will provide a major spur to development in all partner states by strengthening competition within our respective domestic markets, by allowing producers to reap greater economies of scale and thus become more efficient, and by widening opportunities for trade. The regional market will also provide a stepping stone for domestic producers to access global markets. 2 BIS central bankers’ speeches The primary rationale for the monetary union is to cement the benefits of regional economic integration. Replacing individual currencies with one single common currency will reduce the costs and risks of transacting business across the national boundaries of the partner states of the EAC. Monetary union removes the costs of having to transact in different currencies and the risk of adverse exchange rate movements for trade within East Africa. Furthermore, because the combined economy of all of the partner states together will be more diversified than that of any individual partner state, it will be less vulnerable to external shocks such as commodity price shocks and as a consequence, the volatility of the common exchange rate against that of other major currencies such as the dollar or Euro should be less than the volatility of the currently existing national currencies of the partner states. Exchange rate volatility is a major risk for business and a deterrent to private investment, especially in the traded goods sectors of the economy. Hence by eliminating entirely exchange rate movements within the EAC, and by reducing exchange rate volatility with respect to third party currencies outside of the EAC, the EAMU should reduce some of the commercial risks of doing business in East Africa and, as such, help to promote more private investment. EAMU will also be important for the future of East Africa because of the signal it sends to the rest of the world. Having a common currency is one of the clearest statements of intent that the EAC can make to demonstrate its long term commitment to deep regional integration. It sends a message to foreign investors that the EAC really is a genuine single market in which to do business. Because it involves a major loss of economic sovereignty, the introduction of the EAMU is also a political statement about the commitment of partner states in the EAC to a common future as East Africans, rather than just as citizens of individual nation states. What are the prerequisites for the success of monetary union? The first prerequisite for the EAMU is that all partner states implement the customs union and common market in full. This means removing all non tariff barriers (NTBs) to intraregional trade in the EAC. It means allowing firms in the services industries, such as transport firms, domiciled in any partner state to sell their services without restriction in all other partner states. It also means accepting without preconditions the free movement of labour throughout the EAC: for example Kenyans should be able to live and work in Uganda without restrictions and without having to pay for work or residency permits.
Finally, it means allowing the free movement of capital across borders within the EAC. Free capital mobility within the EAC will only be meaningful if each partner state imposes no restrictions on the purchase of assets by investors from any other partner state. A genuine single market in the EAC, without any restrictions on the movement of goods, services or factors of production, is an essential foundation for EAMU for two reasons. First, the benefits of monetary union to the partner states are positively correlated with the amount of trade between the partner states and the degree of integration of their economies. Unless there is very substantial trade within the EAC, there will be only minor benefits to be derived from a common currency. East Africa will not be able to attain the fullest degree of economic integration which is possible until all of the artificial barriers to intra-regional trade and to the movement of factors of production within the EAC have been abolished. Secondly, the member states of the EAC will inevitably suffer what are called “idiosyncratic economic shocks”; these are shocks which affect the economy of one member state but not those of others.