East African Community Secretariat, Arusha, 28 October 2011: The East African Community will continue its march towards a single currency with the fifth round of negotiations commencing on Monday 31 October 2011 in Entebbe, Uganda.
The negotiating team, known as the High Level Task Force (HLTF) on the Monetary Union, will meet at the Imperial Resort Beach Hotel from 31 October to 9 November to negotiate various articles of the Protocol.
The EAC Deputy Secretary General (Planning and Infrastructure), Dr. Enos Bukuku confirmed that among the draft provisions to be negotiated over a ten-day period are articles on the harmonization and coordination of fiscal policies; taxation and customs; national Budget formulation processes; domestic and external debt management frameworks; joint financing of projects; and macroeconomic convergence.
Experts from the Partner States will also negotiate provisions on coordination of monetary policy and fiscal policies; restrictions on Central Bank lending to public entities; restrictions on privileged access to financial institutions; conditions for bail-outs; conduct of foreign exchange transactions by Partner States; management of foreign exchange reserves as well as liberalization of current account and capital accounts of the Partner States.
Crucially too, the HLTF will discuss a framework for building resilience and managing economic shocks as well as safeguard measures; the conditions for the application of these safeguard measures plus surveillance and compliance mechanisms to be embedded in the Protocol.
The Task Force will also negotiate provisions on the name and status of the single currency envisaged for the EAC, as well as provisions on the determination of conversion rates, conversion and redenomination of existing legal instruments and bank notes and coins to be issued by the proposed East African Central Bank (EACB).
After the Customs Union and the Common Market, the Monetary Union is the third stage in the integration process of the EAC bloc, which ultimately aspires to a Political Federation. The EAC Summit of Heads of State has set a 2012 deadline for the achievement of the Monetary Union, and EAC Secretary General Amb. Richard Sezibera has on different occasions reiterated EAC’s commitment to have the Monetary Union Protocol concluded within the set timeline.
Deputy Secretary General Dr. Bukuku on his part notes that the Monetary Union will help mitigate price instability and exchange rate volatility in the region, which would be a boon for businesses and ultimately promote investment and spur development.
To enrich the negotiations, the EAC has commissioned various studies, which include among others a study on the review of the EAC macroeconomic convergence criteria; and one on a harmonized monetary policy framework for the region both of which are being done jointly by the EAC and the International Monetary Fund (IMF). Another study on a common exchange rate mechanism is being undertaken jointly with the International Growth Centre (IGC).
Previous rounds of negotiations deliberated on provisions touching on, among others, the scope of the Monetary Union; macroeconomic policy framework; monetary policy framework, exchange rate policy and exchange rate mechanism; and instruments of monetary control.
The negotiations commenced in January this year and are targeted to be concluded by early 2012.
• The process for the establishment of the East African Monetary Union is underpinned by Articles 5 and 82 of the Treaty for the Establishment of the EAC where, among others, the Partner States undertake to establish a monetary union and to co-operate in monetary and fiscal matters.
• The primary rationale for a monetary union is to reduce the costs and risks of transacting business across the national boundaries of those countries which comprise the union.
• By embracing a single currency, EAC Partner States would remove the costs of having to transact in different currencies and the risk of adverse exchange rate movements for traders and travelers alike within the region.
• It is envisaged that the EAMU will deepen the integration of East African economies and, in doing so, enhance the benefits which can be derived from the EAC Common Market.
• The Monetary Union High Level Task Force comprises senior officials from the Partner States Ministries of Finance, Planning and Economic Development, EAC Affairs, as well as Central Banks, Capital Markets Authorities, Insurance and Pensions Regulatory Agencies, and National Statistics offices.
• The HLTF has already negotiated Articles 1-15 and in Entebbe, will negotiate Articles 16-39.
Overview of selected draft provisions to be negotiated. Please note that these are NOT the Article texts.
• Restriction on Central Bank Lending to Public Entities (Article 25)
The prohibition on central bank lending to public entities is based on three considerations:
First, granting public entities recourse to central bank lending might impede the ability of the EACB to conduct a stability-oriented monetary policy and could thus undermine its ability to achieve its primary objective.
Secondly, there is a risk that if central banks are given the task to finance the public sector, their independence could be weakened, even if such lending is not automatic and/or is limited by ceilings.
Thirdly, barring such access contributes to fiscal discipline by subjecting government borrowing to market conditions.
• Restriction on Privileged Access to Financial Institutions (Article 26)
This prohibition is based on the consideration that barring privileged access to financial institutions contributes to fiscal discipline. Privileged access to financial institutions would in particular comprise legal and regulatory measures which would force financial institutions to lend to the general government and other public entities at a privileged rate, below the prevailing market rate, e.g. the compulsory subscription by financial institutions to low interest-bearing state loans.
This Article does not preclude measures based on prudential considerations. Its aim is to ensure that public debt management is subject to market conditions. Compliance with this prohibition would exert healthy pressure on the Partner States to avoid major errors in the conduct of fiscal policies.
• Conditions for Bail-out (Article 28)
The “no bail-out” clause would be another means to foster fiscal discipline in the single currency area and in particular to address the “free rider” issue. In accordance with this clause, no Partner State may conduct its finances in a manner that will eventually impose on the Community or the other Partner States a bail-out and maintain a fiscal policy stance which would not comply with the requirement of sound fiscal management.
• Foreign Exchange Transactions by Partner States (Article 29)
To the extent that the governments of Partner States continued to hold and manage foreign reserve assets after the start of the Monetary Union, the provisions of this Article would be intended to ensure the consistency of foreign exchange transactions involving the single currency with the EACB’s monetary and exchange rate policy.
• Determination of Conversion Rates (Article 37)
Conversion rates would need to be fixed by a binding act in order to benefit from general application. The process should involve the proposed institution to undertake such preparatory work or the EACB itself, as appropriate. The fixing of the conversion rates should be on the basis of prevailing exchange rate relationships since it would be difficult to use this occasion for a final realignment.
If conversion rates were determined only shortly before or at the start of the Monetary Union, bilateral exchange rate relationships between the currencies of the Partner States could theoretically change until that date. If the Partner States wished to avoid changes based on such market developments, the conversion rates would have to be fixed at an earlier date.
• Conversion and Redenomination of Existing Legal Instruments (Article 38)
Pursuant to the principle of the continuity of contracts, the introduction of the single currency should not in itself change the terms of existing legal instruments. The term “legal instruments” covers the widest possible range of instruments with legal effect.
It would include legislative and statutory provisions, administrative acts, judicial decisions, contracts, unilateral legal acts, payment instruments other than banknotes and coins, and other instruments with legal effect. The other measures necessary for the transition to the single currency, in particular the method for the redenomination of existing legal instruments and the rules for rounding, would be determined by an Act of the Community.
• Bank Notes and Coins (Article 39)
This provision would confer sole legal tender status on the banknotes and coins issued by the EACB and would entitle the Community to set a date by which banknotes and coins in the legacy currencies would cease to be legal tender in the single currency area. The Partner States would be committed to ensuring adequate sanctions against counterfeiting and falsification of the banknotes and coins of the EACB.
The Community would be competent to enact legislation which would ensure appropriate protection by effective measures under criminal law and would organize the cooperation between the EACB and the Partner States, and between the latter, in the fight against counterfeiting and falsification of the banknotes and coins issued by the EACB.