Is the East African proposed Monetary Union worth pursuing? The UK-based Oxford University economist Prof Paul Collier doesn't think so.
Considering of what happened in eurozone, he warns the EAC, saying that monetary union is not the way to go, at least for now.
Speaking at a joint EAC-IMF high profile regional conference on the integration of the EAC financial sectors recently, Prof Collier said politically driven monetary union and common currency proved to be a risk to economic integration.
Sharing the hidden truth about the root cause of the eurozone crisis, the academician said that behind the scenes, the majority of member countries had been violating fundamental rules of the eurozone.
“Imagine, 16 out of 17 Eurozone countries started breaking the rules of fiscal deficit and balance of payments within the first ten years, little knowing that their misdeeds would culminate to high sovereign borrowing costs, slowing bank credit and forcing tighter fiscal policies,” he said.
Prof Collier, a veteran consultant for the World Bank and the IMF, says that as a result, the ramifications of their blunders grew into a wide-ranging economic crisis, devastating Greece, Ireland, Italy, Spain and Portugal.
As things stand now, the European common currency is under pressure from high sovereign debts, requiring a rescue package close to a trillion euros.
Prof Collier then posed a question: “Think if the most developed countries in the eurozone can find themselves in a Catch-22 situation simply because they broke monetary and common currency rules, what would happen if a similar fate grips a young EA bloc?”
“So it is one thing to make rules, but to follow them is a different thing altogether,” the Oxford guru intoned, affirming that he does not anticipate the EAC to do the same thing with expectations of a different outcome.
The EAC bloc already faces serious challenges in implementing agreements like the Customs Union and Common market protocols, as a series of non-tariff barriers persist.
The EAC is currently negotiating a protocol for Monetary Union, being fashioned on the European monetary union model.
Prof Collier was of the view that the current EAC generation should make the customs union and common market protocols work properly and leave monetary union and political federation for the next generation.
“Eventually, you will have monetary union and single currency, but leave something for the next generation to do,” he told the participants, underlining that the EAC needs to eliminate trade barriers for the people to trade at their fullest potential.
He cited the common external tariffs (CET) charged on goods imported into the region as being too high and the ‘sensitive list’ of commodities exempted from the tariffs which he says was driven by politicians.
“There is a need to put up railways, ports and roads to facilitate trade,” Prof Collier said, elaborating that the region also needs to share and fully utilize its natural resources.
For instance, he said, Uganda should share oil with her EAC partner states, while Kenya’s geothermal should benefit all the region’s countries, to which he added Tanzania’s abundant gas.
The resources would be placed on the EAC intra-trade channel by preference by cost transfers for instance in building infrastructure, experts noted.
Tanzania’s minister for economic and Finance affairs, Mustafa Mkulo told The Guardian on Sunday that the Prof. Collier’s arguments are most valued and they will definitely have an impact in policy deliberations.
“With the expert advise, we are going to discuss with the EAC Heads of the State to let our technocrats continue working on the monetary union protocol, but the signing and implementation should be delayed,” he said within the conference perimeters.
EAC Secretary General Dr Richard Sezibera said that he plans to convene a retreat of ministers responsible for finance, treasury permanent secretaries and central bank governors in the first week of April for a common view on the now deflated monetary union project.
IMF Deputy-Managing Director Naoyuki Shinohara, said an important challenge ahead of EAC is to advance the customs union and common market, as these ambitious reforms seem to have a long way to go to full implementation.
Non-tariff barriers remain in place between EAC partner states, he said, cautioning that without a truly integrated market, the trading bloc is not likely to see the full benefits of improved productivity, competitiveness and welfare gains.
A final critical question relates to the appropriate pace for moving beyond a common market to monetary union, Mr Shinohara argued, stressing that certainly, good progress in implementing the two protocols will strengthen prospects for successful monetary union.
“But the latter will also depend crucially on achieving convergent fiscal, debt and financial policies,” the IMF Deputy chief noted, reminding participants that global economic problems such as the eurozone crisis, rising oil prices and the risk of softer commodity markets would not spare the region, as these trends could lead to widening trade deficits.
Capital flows are sensitive to global risks, and over the medium term, fiscal austerity in Europe may also lead to declining donor funding for the EAC region, he added.