Beware of the Eurozone trap

A trader uses the automated trading system. Law in the offing to enhance monitoring of stockbrokers’ activities. Photo/FILE  Nation Media Group

In Summary

• Analysts say the partner states are at different levels of economic development and the protocol needs to curb harmful competition.
• Some experts and the business leaders have lauded the move, saying it will enhance trade and reduce volatility faced by regional economies.

Experts and business executives have said that the Eurozone experience — which has seen several countries seek bailouts to pay debts and keep their economies afloat — has shown that it is difficult to enforce spending limits among members of a monetary union such as the one proposed by the EAC.

Some EU countries reneged on agreements to maintain low budget deficits since there were no rules for enforcing fiscal discipline. Heavily indebted countries such as Greece, Italy, Portugal, Spain and Ireland deepened the Eurozone crisis.

READ: Dar most exposed to Eurozone crisis

“Although countries have agreed on the basic parameters for achieving a monetary union, experience from the EU shows that this process is difficult and requires a lot of hard work,” said Ezra Suruma, former Ugandan finance minister.

A key challenge to the protocol has been deciding how to converge the different economies of the EAC nations.

The monetary union is expected to reduce the costs and risks of transacting business across the EAC, occasioned by the different currencies and exchange rates.

Analysts say the partner states are at different levels of economic development and the protocol needs to curb harmful competition.

Tanzania, Uganda, Kenya and Rwanda together forgo nearly $2.8 billion in tax relief as they compete to offer incentives to foreign investors. Kenya and Tanzania have been offering huge tax incentives to attract foreign direct investments (FDI), resulting in significant revenue losses.

An independent compliance, surveillance and enforcement institution has been created to ensure partner states comply with the provisions of the protocol, and are ready to join the monetary union.

Among other bodies to be created are a statistics, financial services and monetary institute, and an EAC central bank. The bank will be created last, in 2018, and is expected to start operations in 2024.

According to the protocol, countries will retain their central banks, but the proposed East African Central Bank will decide on monetary policy, with national central banks only enforcing these directives.

Ambitious

Betty Maina, chief executive at the Kenya Association of Manufacturers, expressed reservations on the practicality of the monetary union being formed within the set timelines, considering the slow implementation of the Common Market Protocol.

“We think it’s ambitious and not practical, considering that preceding phases of integration are not finalised, and also the differences in the level of the economic development of the partner states,” said Ms Maina.

Despite these concerns, some experts and the business leaders have lauded the move, saying it will enhance trade and reduce volatility faced by regional economies.