IMF boss cautions East Africa on monetary union

IMF managing director Christine Lagarde (left) with Kenya's Treasury Cabinet Secretary Henry Rotich at the Treasury Building in Nairobi January 2, 2014. Photo/Billy Mutai   Nation Media Group

By George Omondi,

In Summary

• IMF chief Christine Lagarde said the Monetary Union Protocol signed a month ago by the bloc’s heads of state is “very ambitious” and prone to multiple challenges ahead.

 

The International Monetary Fund (IMF) has asked East African countries to tread carefully on their monetary union plan even as it offers to provide technical assistance for envisaged single currency.

IMF managing director Christine Lagarde said the Monetary Union Protocol signed a month ago by the bloc’s heads of state is “very ambitious” and prone to multiple challenges ahead.

“The recently signed road map to East African monetary union is very ambitious. Don’t rush, take all the steps and learn from the mistakes of Europe and other monetary unions,” Ms Lagarde told a forum organised by Kenya Private Sector Alliance (Kepsa) in Nairobi on Monday.

“The EAC is lucky to have multiple lessons out there, the gaps and pitfalls of other monetary unions across the world that it can learn from,” she added.

In Europe, for instance, failure to provide European Central Bank with cross-border supervisory powers created loopholes that States such as Greece, Spain and Italy exploited to exceed sustainable borrowing levels, plunging the whole union into debt crisis.

Under the East African Community monetary union schedule, Kenya, Tanzania, Uganda, Rwanda and Burundi hope to implement preliminary stages of integration in two years and build the fiscal foundation for a common currency in 10 years.

READ: East Africa set for historic shift as states adopt EU-type monetary union plan

The preliminary stages—fully fledged customs union and a common market—have eluded the East African countries in the last 13 years of integration.

The States have also gone ahead to set fiscal and monetary convergence criteria to be achieved in the next seven years.

Each State has undertaken to keep headline inflation below eight per cent, fiscal deficit at three per cent, gross public debts below 50 per cent and foreign reserve cover equivalent to 4.5 months of domestic import, all by 2021.

“The regional monetary union will only hold when all the member States are able to respect and strictly observe the convergence criteria,” Ms Lagarde said.

In between, the countries have to harmonise payment and settlement system as well as fiscal and foreign exchange policies by 2018.

On Monday, Kepsa members expressed optimism that integration of financial services would be much easier and faster in East Africa compared to experiences of other blocs.

“In East Africa, most of the financial transactions are already being conducted through mobile phones, the level of technology and innovation that EU did not have when it began to implement its monetary union,” Kepsa chairman Vimal Shah said.

Ms Lagarde, however becomes the second top-ranking IMF official to caution on the East Africa’s single currency plan.