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EAC Monetary Union: Why returning the old East African shilling is laudable, but impractical

28th April 2013

Senior officials of the East African Community central banks and treasuries are locked in another round of discussions, or perhaps one could say negotiations, on the on-off plans for the creation of an East African monetary area, via a monetary union.

What this means is that the old East African shilling would come back, after it collapsed under acrimonious disputes relating to ‘equal and balanced’ industrial development strategy for East Africa, within the East African Common Services Organisation (EACSO) following its Kampala Agreement of 1964.

There was positive inclination to that agreement from then Tanganyika and Uganda governments; the Kenyans had signed along, just emerging into independence.

This dispute led to the collapse of the EACSO arrangement three years later, leading to the formation of an East African Community, which despite its slightly grandiose name was a dilution of the short-lived EACSO, itself a diminution of the East African High Commission, formed in 1947, as a veritable union of the three states.

Nationalists in Tanganyika and Uganda battled the EAHC because it gave the stronger Kenyan settler group inordinate control of EAHC affairs – the irony is that Tanzania is right now locked in bitter contest on an aspect of its legacy, as the East African Muslim Welfare Society that was disbanded in 1968 was a copy of the EAHC in religious matters. Is it time we went back to the old, tested formulas?

The monetary union that is envisaged has used up a lot of time, perhaps unnecessarily if policy makers were realistic enough, to examine how to use the European Union model, that is, the European Monetary Union (with a central bank at Frankfurt in Germany) to see how it can be applied in our case.

That was to go too far, first because Europe is an industrialized zone while East Africa is not, hence the whole issue of copying decision making mechanisms – the sort Prime Minister Mizengo Pinda was alluding to when he unveiled the Malaysian model lately – is unworkable.

There is enough to go with in East Africa itself: how to restore the old East African shilling, and shed the subsequent pride, contempt.

The old EAHC is a model because the EACSO was just moribund in the currency aspect, in which case the moment the close political union was abandoned as East Africa approached independence, its monetary aspect too was likely to fail.

It would have required similar policies in Tanganyika and Uganda, which for a start would accept Kenya’s economic centrality in the zone, and leave their economies open as was the case before, not counting how many companies belong to ‘us,’ and how many to ‘them.’
This feeling is what animates the current efforts to restore the East African shilling, but the climate is not shed of the nationalist underpinnings of existing nation-states, and their political infighting, or ideological baggage from previous eras. Much oft his has failed, and the original market model is in the vogue, but without a painful crisis, it is hard to tell policy makers in Tanzania and to an extent Uganda why the market is best.

There are developments in Rwanda and its closer cooperation with Kenya which should favor a proper integrationist model, and if Tanzania would be just to itself, it would realize that its innumerable impediments on the market do not help its economy; revolt is widespread in the country as its old cooperatives model is in disrepair, but authorities stick to it.

All these layers of bureaucrats from the local government level, ‘mass organisation’ level and ministerial or parliamentary bureaucrats sitting endlessly in boards of organizations tied to the peasant model of production won’t hear of a shift to the market. Even after the Lindi riots, they will still claim they protect poor farmers of cashews, cotton, etc.

When the East African shilling and private banks ruled the scene, and agriculture was organized by individual or independent farmers choosing their leaders the way companies have shareholders, the rate of growth in agriculture in Tanganyika (and then Tanzania) was 13.5 per cent annually, from early 1962 to late 1966.

With the Arusha Declaration which was preceded by a few months by the Bank of Tanzania, thus the collapse of the East African shilling and separation of Tanzania from the East African monetary area – and issuing policies of BoT that bureaucrats still love, like rejecting the Water Ministry budget and asking the minister to get funds – the rate sank to 3.0 per cent annually. It was a disaster.

The huge problem with forming a new East African monetary union is that the reigning authorities have no actual appreciation of the structural inadequacies of the development model they are pursuing, and seek an EAMU nearly as a guarantor in their effort to source more loans from outside.

That is the wrong reason for a monetary union, and so long as that is the proper policy intention, it is better not to go into the union, as it would spark disaster in a short while. The only reason to form a monetary union – and this is a lesson which even the European Union is at present acknowledging – must be political intention to guide economic administration on the part of market rationality, thus monetary union facilitates this.

It must be admitted that Tanzania is not yet near that finishing line of policy dialogue, semantics or acrobatics, and instead it is seeking a way of anchoring its potentially disastrous sovereign bonds (relying more or less entirely on gas discoveries in a volatile environment and uncertain foreign investment given the bureaucratic pressures for a mammoth state share, TPDC dictates, etc).

So far it must be said that the sort of agreements signed during the visit of newly inaugurated Chinese presidency of Xi Jinping is probably the best we can take, where the state is handed big sums of money with scant accountability.

A monetary union is the opposite of a barter deal: It is accountability of every aspect of government financing, and it is hard to see how this can be done now, despite all the real, valiant efforts of the CAG.

As a matter of fact, if East African countries would agree to a monetary union that reflects the standards approvable at the moment by a more realistic European Union, it would lead to far greater transparency than all the shouting and insulting in Dodoma could possibly achieve.

Yet this is unlikely to come from the top officials locked in another round of discussions, but only if those who supply budget funds seek that this control mechanism be instituted, that is, a monetary union with an independent central bank, whose standards would include an independent office of the Controller and Auditor General.

Only in this context would a monetary union be feasible, but it would also mean that Tanzania would be under clear notice to sign up to the East African Common Market protocol without ifs or buts, for instance access to land for all EAC citizens, not ‘on the basis of each country’s laws’ for they should be harmonized. Why would the EAC’s donors not insist on that aspect for a change, as it would be a revolution - from above?