OPINION: Will monetary union solve exchange rate crisis among EAC member states?

OPINION: Will monetary union solve exchange rate crisis among EAC member states?

The monetary union is an arrangement whereby member states decide to adopt a single currency controlled by a single central bank. The classic example is the European central bank which serves around 20 European nations. In a currency union, member countries gave up their control of the exchange rate, which was used as a monetary arsenal, to a supranational authority.

In that regard, the East African nations announced on November 30, 2013, their intention to form a monetary union by 2023 and converge on a common currency thereafter. In the build-up to achieving a common currency, the EAC member states have a desire to harmonise monetary and fiscal policies and other policies such as financial accounting and reporting practices. The others are achieving standards on statistical information, establishing an East African central bank, and surrendering exchange rate policy to that supranational institution.

However, the seven EAC member countries have decided to delay the implementation of the East African Monetary Union (EAMU) by an additional 8 years until 2031 from the initial date of 2024. This is a significant step because rushing into EAMU could pose significant political and economic risks. From our perspective as South Sudanese, the cost of giving up monetary and exchange rate policies as a stabilisation arsenal to EAMU far outweighs the benefit thereof and could make us vulnerable to external shocks.

Since over 90 percent of government revenue comes from oil, a shock to that sector is problematic. Hence, the government often turns to the central bank for temporary financing. However, the government would not have that opportunity when the power to print money was surrendered to a consensus organisation like the EAMU. The request for debt monetization would require the approval of other member states.

The government could also manipulate the exchange rate in order to increase the value of its oil earnings in terms of local currency. But when this tool is surrendered to the supranational body, the government not only gives up its ability to depreciate its local currency and shore up government revenues but also loses a necessary monetary arsenal that can be used to stimulate local demand and lift the economy out of a downturn.

As a matter of fact, adverse shocks within a common currency area could pose severe problems for jobs and production, especially when prices and wages are sticky. As a matter of fact, there is limited movement of capital and labour among EAC member states.

The SSP’s external value is one of its most essential features. Indeed, other prices are flexible in South Sudan, but the difficulty of adjusting the exchange rate if the country joins the EAMU would mean that the adjustment to any shocks will operate primarily via jobs and outflow. Unfortunately, our labour force has fewer skills and would not be able to compete shoulder to shoulder with their peers in the currency area, say, if a crisis hit South Sudan and workers should shift to another member state that is experiencing boom.

It is also fair to say that monetary integration in the EAC will come with long-term benefits: reduced transaction costs, increased trade, and greater macroeconomic and monetary stability. It will reduce the cost of foreign exchange transactions in the sense that when a businessperson wants to import goods or services from Uganda or Kenya to South Sudan, she or he does not need to buy dollars to do so. The business person could just use his East African banknotes to settle that transaction, which will reduce the cost of the transaction and volatility in the currency market. Indeed, currencies in East Africa have been in free fall as the countries continue to grapple with a dollar shortage that has been aggravated by the hike in interest rates by central banks in advanced economies. For example, the Kenyan shilling has lost 13.5 percent of its value since January 2023. However, the cost of foreign exchange rate transactions can only be reduced in theory, not in practise, because we still have a lot to do for economic integration to have a real impact on the lives of ordinary citizens in the member states.

First of all, the intra-day trading in the EAC is not sufficient to protect a single currency against speculators. According to EAC data, intra-EAC trade as a share of imports and exports among seven EAC partner states has increased from 13 percent in 2019 at a value of $7.1 billion to 15 percent in 2021 at a value of $9.5 billion. And By September 2022, the EAC trade value was $10.17 billion, which represents roughly a 20 percent share of intra-trade to global trade. The strong and vibrant currency area should have intra-trade in the region of 60 percent if the common currency can withstand pressure in the foreign exchange market.

According to official data, the EAC’s total trade with the rest of the world stood at $62 billion over the same period. This is a huge amount for currency dealers to pick up on common currency every time the reserves go down. The irony is that most of the goods and services we import as a region could be produced locally since the region is blessed with abundant cheap labour and raw materials. The EAC is the nett importer of petroleum products, yet South Sudan is an oil-producing state, whereas the DRC is also blessed with abundant natural resources, most of which are refined in China and Russia. Hence, the monetary union will work remarkably well if we can transform our natural resources from primary to tertiary form in order to meet domestic consumption and then export the surplus to the world market.

Majok Deng is a South Sudanese economist and reachable via majokthon2014@gmail.com Disclaimer:  the views in this article are his own.