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06 - 13 September 2006 
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Finance and Banking


Monetary Cooperation: A Big Hurdle in the East Africa Integration

I recently had the opportunity to attend a rare event at the Panafric Hotel last weekend.  Dubbed the East African Food Festival, the event attracted a houseful of ‘East Africans’ who still share in the dream of an integrated community. From the rich ‘East African’ menu, we could only see how our disintegration keeps us away from the niceties that each of the three countries has to offer. 

One of the Kenyan ministers in attendance reiterated the need to open up our borders and take advantage of the underlying opportunities in each region.

Retracting from that, I still reckon the East African Customs Union- almost a reality, the Stock Exchanges integration that is still on the drawing board and the debate over monetary cooperation that might become the biggest hurdle in the integration process. 

South Africa and West Africa have already achieved great strides in the monetary cooperation. For East Africa, it is important to note that the efforts to creation of monetary integration are not new.  Africa must have been impressed by the strength that the European Union’s Euro has helped the member states achieve. Of importance is the fact that the integration dream has gained momentum in the recent past steered by the search for new global capital.  East Africa’s three single currencies currently perform poorly in relation to the three major world currencies explicitly the US Dollar, Euro and the Sterling Pound. 

The pace at which East Africa has made progress in this can only be described as slow compared to West African states. In West Africa, financial and monetary cooperation in ECOWAS countries started before post independence economic integration efforts began. The process was driven by administrative convenience and ignorance. A major effort in this process was the establishment of the West African Currency Board (WACB) to provide for and control the supply of currency in the British West African Colonies, Protectorates and Trust Territories. The British colonial currency was pegged to and fully backed by the pound sterling and the currency board was modelled in the currency arrangements embodied in the British Bank Act of 1844.  After independence, Central banks became independent and so did national commercial banks.  Efforts in the later years have seen great strides and this has greatly contributed to market liberalization in the region.

Recent integration efforts in the Anglophone part of the sub-region are driven by the ECOWAS agenda (Second West African Monetary Zone for Gambia, Ghana, Nigeria, Guinea and Sierra Leone).  The timetable was first set in 1998 for countries to meet policy convergence criteria by 2000 and after this failed, the deadline shifted to 2004.  As the efforts bear fruit, attention is already moving to the next step as they work on a West African Monetary institute and a convergence council.

From the West African example, it is clear that countries are now willing to entrust monetary policy to supranational bodies. The only problem is that the integration requires pre political integration which is difficult considering the political climate in the region which is also characterized by cultural affiliations.

However, the benefits of monetary cooperation should not be ignored.  To begin with, integration brings along the benefits of diversification.  Whereas Kenya exports tea, coffee, petroleum and fish products, Tanzania exports coffee, tobacco, minerals and manufactured products while Uganda exports coffee, tea, gold, cotton and fish products.  All the three countries export coffee, two of them produce coffee and another two export fish products. Acting as independent parties, locks out the potential that would have been exhibited by integration.

Through integration, the bargains in the African Stock return potential are even more eminent.  Investors can take advantage of more listings and the underlying benefits from economies of scale.  In addition, integration will make it possible to access a diversified source of external finance.  As a recipient of global capital, East Africa can benefit from reduced cost of capital, discipline and exposure to best practices and reversal of flight capital.   

But with other reform agendas, the efforts, plan of action and implementation all this lies with the policymakers. The private sector has already achieved much, but still gets restricted due to lack of support by systems in place.  When does the cooperation agenda begin to bear fruit and when it does, will the monetary integration process prove a hard nut to crack?

By Michael Musau
CEO Emerging Africa Capital
Licensed by The Capital Markets Authority as Investment Advisers

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