Despite the success of the European Union model, the EAC’s push for a
single currency is not compelling. PHOTO | FILE | NATION MEDIA GROUP
With news about West Africa’s plan to introduce a regional
currency, the Eco, one is reminded that the idea is also an East African
Community aspiration.
The East
African Currency Board issued the East African shilling as legal tender
in Kenya, Tanzania and Uganda in 1919. It was replaced in 1966 after
Independence ushered in national currencies. Fast forward to the 21st
century and the EAC plans to launch a regional currency in 2024.
Meanwhile, here are some issues to ponder.
First,
the Eurozone experience. The EU experience followed the orthodox
approach — economic integration started with trade and moved on to a
monetary union. The euro resulted in greater financial integration and
provided a boost to intra-European trade, the highest in the world.
We
must not forget the political history that brought about the EU. After
the First and Second world wars, Europe had the political imperative to
unite “at all cost”. This overarching political agenda was uppermost on
the minds of the EU’s founding fathers and drove the adoption of the
euro.
Eurozone countries have robust
institutions and strong macroeconomic frameworks. Nevertheless,
challenges abound. The European Central Bank (ECB) has often come under
intense criticism from Germany’s Bundesbank. The differences between the
EU’s industrialised north and the southern periphery remain. The
experience of Greece, brilliantly captured in Yanis Varoufakis’s book Adults in the Room (2017) is a stark reminder of the struggles facing countries on the periphery of a monetary union.
EU MODEL
The EU model is favoured by Africa’s
integration schemes. Is this approach relevant for Africa? To answer
this question, let us look at East Asia’s experience.
These
include 10 countries from the Association of South East Asian Nations
(Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand and Vietnam) and three giants — China, Japan and
South Korea. Until recently, many of these countries were less
developed. Their policy experience is more relevant for Africa than the
experience of “old Europe”.
If indeed
the regional currency idea is a panacea for enhanced intra-area trade,
growth and prosperity, why haven’t East Asian nations embraced it? After
all, these countries have demonstrated remarkable economic,
technological and social success.
Until
the Asian crisis of 1997, trade and investment was heavily conducted in
US dollars or currencies pegged to the dollar. The crisis left a scar
in the minds of policy makers. Dollar-denominated assets fell in value
due to devastating exchange rate devaluations. External debt ballooned.
Settling international financial obligations was severely constrained.
In
those days, there was talk about an Asian monetary union, borne out of
the desire to reduce vulnerability to external shocks. Self-reliance and
control over the region’s destiny was the general feeling. Surely, many
Africans can relate to that.
Post-crisis,
robust recovery followed as Asians embarked on structural reforms —
flexible exchange rates, removal of capital controls, eliminating
business regulations and liberalising trade and investments. Talk of a
monetary union receded. Crisis prevention gave way to forward-looking
growth, measures to boost intra-area trade and Asia’s greater
integration with the world economy. East Asia boomed.
Asians
are pushing the frontiers of development in the 21st century. They are
investing heavily in education, health and infrastructure. They
recognise that the digital revolution is a new growth engine and are
determined to reap the full benefits of digitisation. They are expanding
their highly successful export-led growth model, recognising that the
region can serve as its own “growth engine”.
Aware
of the headwinds in the global trading environment, Asians are
negotiating to strengthen integration through the Regional Comprehensive
Economic Partnership, covering the ASEAN + 6 (Australia, China, India,
Japan, New Zealand and South Korea). These negotiations make no mention
of a monetary union.
Africa’s policy
makers need to reflect on the East Asian experience — a region that does
not have a regional currency and yet is the world’s most dynamic. There
are clear trade-offs between the benefits of an EAC currency and the
cost of members losing autonomy over domestic monetary policy.
Indeed,
a monetary union will mean some surrender of sovereignty. For example,
Uganda will give up its right to take certain policy actions
unilaterally. At the same time, it is entitled to expect that other EAC
members will abstain from potentially damaging unilateral actions. This
“harmony of interest” is a result of establishing a supranational body
whose decisions are binding on all members.
Is
there such “harmony of interest” in the EAC? In Ecowas? In the African
Continental Free Trade Area? Yet it is fundamental for embarking on the
herculean task of creating the equivalent of the ECB.
There
are other challenges too. EAC has wide economic disparities and
structures. Compare Kenya with Burundi. And no suitable anchor currency
exists to play the role of the deutsche mark in the Eurozone.
Building
trust and strong institutions of governance, improving business
regulations and developing regional infrastructure are key. These
priorities trump the pursuit of a regional currency. The case for EAC’s
monetary union is not compelling.
Aloysius Uche
Ordu is the managing partner, Omapu Associates LLC. He is a former vice
president of AfDB and a former director of World Bank.
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