Steve Mbogo - 5 July 2010

The financial crisis in Greece that threatened the stability of the Eurozone has caused a rethink on the timeline of establishing an East Africa Monetary Union.

David Nalo, the permanent secretary in the Ministry for East Africa Cooperation, said the crisis in the Greece had showed the need to understand how the financial sectors of member states are managed because mistakes in one country may affect the financial stability of the whole region.

The East Africa Monetary Union was supposed to be implemented from 2012, the second phase in the planned integration of the East Africa that commenced in the past week with the launch of the common market.

The Greece financial crisis was caused by poor management of the economy and the financial sector, leading to a ballooning public debt that technically made the country insolvent.

Greece is a member of the Eurozone meaning that it uses the euro as a common currency with 16 other countries.

In East Africa, the plan is similar; to use a single currency across borders.

It would mean the economic and political developments in any country will have a direct impact on the currency, and neighbouring states.

"It is better to be cautions in joining the common monetary union because of the need to first understand the deep management issues of the other economies," said Mr Nalo.

Greece has been facing a crisis with its debts equalling 120 per cent of its gross domestic product.

Although Greece controls only 2 per cent of the Euro zone economy, its debt crisis threatened to collapse the whole bloc and led to a weak euro.

By early June the Euro had declined by 11 per cent against the dollar from its position in March.

The rethink of East Africa Monetary Union is also informed by the fact that the region has been toying with the idea of adopting the Euro Zone model and it is consultants from European Central Bank who have been advising the EAC on the common currency.

Mr Nalo said most of the integration energies will now be focused on ensuring that the common market is successful.

"If the market is not successful, there cannot be a monetary union so we need to first work on it," he said.

The second phase of negotiations on integration start this month with principal focus on harmonising national laws of member states to make it easier for free movement of goods, services and labour.

Member states have until August 21 to come up with draft legislation that will enable gradual harmonization with the East Africa Common Market Protocol.

This exercise is expected to take at least five years, meaning that proper discussions on the monetary union may not start until 2015.

Mr Nalo, however, said the East Africa region already enjoys the advantage of trade in a currency bearing the same name 'Shillings' and the member countries have a liberalized foreign exchange regime.

All member countries require a major audit of their laws governing the financial sector.

A recent one conducted in Kenya showed that there is a serious disparity between the national laws and those of the East Africa Common Market Protocol.

For example, there are no provisions on how workers will pay their social security dues or benefit from them if they are not working in their home countries.

Integration

Earlier Kenya and Uganda negotiators for regional integration had urged that the legal requirements of a full transfer of monetary sovereignty to the regional level carry the danger of exposing their countries' financial sectors to external shocks.

An earlier report on the creation of a monetary union by the European Central Bank had suggested two strategies for the achievement of the union; in the first option, the monetary union would be kept as an aim with no firm public time-frame until all prerequisites appear to be within reach.

In the second, partner states would commit themselves to a firm date for the start of the union, relying on an institutional drive to act as a catalyst for implementing the necessary preparatory work.

Source: http://allafrica.com