Getting regional integration right is more important than getting it quickly, writes Julians Amboko.
The chase for regional monetary unions seems to be part of Africa’s 21st century holy grail:
- In November 2013, Heads of State of the East African Community (EAC) signed the region’s monetary union protocol in accordance with Article 5 of the EAC Treaty of Establishment.
- The Southern African Development Community Protocol on Trade (1996) envisions a Monetary Union as one of its ultimate goals.
- The Economic Community of West African States (ECOWAS) was a lot more ambitious and targeted a single currency by 2004, a goal that later was deferred to 2015.
These are bold and lofty targets for Africa, especially in an era when regional integration seems to be the grand bargain out of a volatile external environment. But if the morass that has plagued the Eurozone is anything to go by, a monetary union could well be the poisoned chalice-par-excellence for economies seeking to further the integration agenda and Africa cannot afford to throw caution to the wind.
The saying goes that it is only when the tide recedes that one gets to know who has been swimming in their birthday suit, and the downturn in commodity prices has done its fair share in exposing fault lines in a number of African economies. Currencies from the Nigerian naira to the Zambian kwacha have chased one another down the depreciation drain, as governments such as that of Angola have reached for the devaluation safety net to prop faltering export earnings whilst Tanzania, an often dormant economy in deploying its monetary tool box, has hiked its cash reserve ratio in a bid to arrest the dizzying swoon of the shilling. This has been aggravated by the greenback’s strong rally in 2015 whose knock-on effect has been the roiling of currencies. Be that as it may, the wild card thrown by this tumble comes with a silver lining and it is critically important that Africa does not waste a good crisis.
In East Africa, the shocks have been asymmetric and raise questions as to the feasibility of realising the macroeconomic convergence that should ideally predicate formation of a monetary union. In Uganda, inflation has surged from as low as 1.3 percent in January 2015 to 8.8 percent in October 2015; the shilling has been on free fall for the better part of the year sliding by 21.2 percent year-on-year as of 30 November 2015. Understandably, the Bank of Uganda has led the vanguard of hawkish monetary policies in the region, hiking its benchmark rate by 600 basis points year-to-date to 17 percent. In Rwanda, the situation is considerably different ─ the franc has shed only 8.5 percent over the 12 months to 30 November 2015, while inflation stands at a modest 2.9 percent as of October 2015. The Bank of Rwanda has not nudged the benchmark rate since its 100 basis points hike in November 2014; an indication of the benign extent of monetary pressures.
This reality echoes misgivings raised by the International Monetary Fund and the Africa Development Bank on the disproportionate exposure to macroeconomic shocks across member states. And just to be sure this is a signal and not noise, in 2011 when the commodity price boom inflicted the region with a double digit inflation epidemic, Rwanda’s annual inflation stood at 5.7 percent against Uganda’s 18.7 percent and it goes without saying that for a convergence criterion as crucial as inflation, East Africa seems to be falling short of an Optimal Currency Area. It is important we look into the fiscal side as much as we do the monetary. Article 5 (3) of the EAC Monetary Union Protocol spells out the convergence criteria, one of which is ‘a ceiling on fiscal deficit, excluding grants, of six percent of GDP’. Kenya’s fiscal deficit to GDP ratio is projected to stand at 8.6 percent of GDP in 2015 whilst that of Rwanda is projected as 10.6 percent, both economies breaching the ceiling (Uganda and Tanzania’s will be within target at five percent for both countries) and derailing convergence by member states.
Lessons from Greece and the Eurozone
On 30 June 2015, Greece defaulted on a $ 1.7 Billion debt with the International Monetary Fund and stoked pervasive over the likely ripple effect on the bloc. It is not the first time the country stood out as Eurozone’s sore thumb ─ in July 2011, the country received $ 155.0 billion in a bailout package from Eurozone countries. It should not be lost to us, however, that Greece’s admission to the Eurozone was marred with controversy over satisfaction of the Maastricht Treaty’s convergence criteria, notably the budget deficit ceiling of three percent. The enduring lesson from the challenges facing the Eurozone should be one ─ getting regional integration right is more important than getting it quickly, and economic blocs in Africa should take cognizance of the same.
This article was first published on the LSE Business Review.
Julians Amboko is a Research Analyst with StratLink Africa Ltd, a Nairobi-based financial advisory firm focusing on emerging and frontier markets. He covers macroeconomic research and analysis for Sub-Saharan Africa, including markets such as Nigeria, Kenya, Ethiopia, Ghana, and Angola.
The views expressed in this post are those of the author and in no way reflect those of the Africa at LSE blog or the London School of Economics and Political Science.