The Nation, Kenya
Bank in push for a single monetary unit
By Muthoki Mumo
15 January 2013
African Development Bank is stepping in to help East and South African region accelerate the push towards a common currency status. To achieve this, it has drafted a stringent set of financial guidelines to steer the process.
In a new report, the bank notes that efforts to create greater fiscal integration in the Common Market for East and South Africa (Comesa) and other regional bodies have been hindered by lack of clear regulations and the lax manner in which the rules are enforced. Comesa countries have set 2018 as the deadline for the creation of a monetary union.
“The existing surveillance mechanisms of African Regional Economic Communities (RECs) and monetary unions are weak, and possibly ineffective, in varying degrees in different organisations,” reads part of the report.
The report urges members to domesticate the monetary union road-map by tabling and passing legislations which outline national programmes in the larger regional agenda.
“A major responsibility also lies with the national authorities to encourage national ownership of the multilateral fiscal surveillance framework, reinforce their national public finance management systems, and formulate their individual convergence programmes,” says Jian Zhang, principal economist at the bank.
Further, AfDB calls for better public finance management through enforcement of various regulations among member states. This, it says, will ensure that countries do not out-pace each other on the path towards the monetary union.
The measures are also geared at protecting the eventual union from exposure to contagion in the case of macro-economic instability in one or more of the countries.
Fiscal reporting harmonised
The bank proposes that all Comesa countries maintain average annual inflation levels below five per cent. Additionally, the region should adopt a harmonised index of consumer prices to ease surveillance and benchmarking.
Budget deficit as a percentage of Gross Domestic Product (GDP) ought to be reined in at four per cent while fiscal reporting across Comesa should be harmonised.
Achieving these measures may be a tall order for Kenya. Although the country’s December 2012 inflation was 3.20 per cent, the average inflation rate last year stood at 9.64 per cent putting the country well outside the limits proposed by the AfDB.
Additionally, over the last five years, Kenya’s budget deficit (including grants) exceeded four per cent of the GDP.
AfDB recommends creation of new institutions to manage the transition to a monetary union. The Convergence Council is envisioned to bringing together central bank governors and Finance ministers to create guidelines for economic policy.
Comesa monetary institute will ensure compatibility of convergence programmes proposed by member states while developing the architecture for the region’s central bank once the monetary union is in place.