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Nairobi

How important is a monetary union for East African investments?

African governments have been working to establish a monetary union for the past several years, and the benefits of such a move cannot be overstated. By 2024, the East African Community will have unprecedented cross-border exchange that will revolutionise member economies and foreign investment prospects.

The system will spare investors the headaches and expenses of currency conversion, and that improvement alone will make the region more attractive.

However, the East African Community should heed the eurozone’s economic troubles as it works toward implementing its own monetary union. Greece defaulted on US$1.7-billion in debt it owed the International Monetary Fund in 2015, leading it to the brink of exiting the eurozone. It also provided a sobering example of what can go wrong in such an economic bloc.

If the East African monetary union is to avoid such crises, its leaders must address the following concerns before 2024:

1. Macroeconomic Convergence

Volatile foreign exchange and inflation trends should evoke concern about macroeconomic convergence in East Africa. Stark variances exist among the member states’ currencies, such as the Rwandan franc and the Ugandan and Tanzanian shillings, and there could be troublesome spillover among East African Community economies.

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However, some regional countries appear to be working together ahead of the monetary union. Uganda, Kenya, and Rwanda recently created a single tourist visa that make it easier for international visitors to tour the three countries. This is aimed to bolster tourism and is geared to attract investors who see regional mobility improving. These three countries also mutually waived work-permit fees for citizens of each state, easing movement of labor. That type of collaboration will solidify the East African Community’s vision in the eyes of foreign observers.

2. Adherence to Admission Criteria

Member states must adhere to the convergence criteria spelled out in Article 5 of the monetary union protocol. Several member economies currently surpass the set ceilings for inflation (five percent) and fiscal deficit (six percent of the gross domestic product). Ideally, the East African Community wouldn’t admit these countries to the monetary union in their present conditions.

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Kenya’s fiscal deficit-to-GDP ratio, for instance, is estimated to have stood at 8.1 percent in 2015. The government would need to enact heightened fiscal prudence to bring its economy within the convergence criteria target. Talk abounds of South Sudan’s elevated prospects of admission to the East African Community. But that arguably creates as much risk as it does opportunity. South Sudan has a vastly untapped market, but its economy is struggling amidst ongoing political unrest.

3. Policy Predictability

A big investment draw of the monetary union will be the cross-border predictability inherent to this type of bloc. Industrialists who import and export across East African borders will welcome standardised pricing because it should decrease costs and make forecasting easier.

East African Community members, however, haven’t yet demonstrated substantial policy cooperation. For instance, implementation of a common external tariff has been a teething issue for the region. The participating governments need to streamline these issues and ensure stability if they want to attract international investors and developers.

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East Africa has made enormous strides toward further economic integration. A great deal of work remains, in terms of policy harmonisation, before the monetary union will be realised, but the move toward integration should boost investor confidence. East African Community nations already offer significant investment opportunities, and those will only grow as they move toward the economic union. Investors should prepare to do enormous cost-benefit analyses as they prepare to take advantage of these shifts in the next decade.

Author Bio

Konstantin Makarov
Konstantin Makarov is the managing partner of StratLink Africa. With over 14 experience in financial markets, specifically emerging markets, Konstantin brings a holistic approach that addresses challenges faced by companies, fund managers, and family offices that are operating or considering investing in the emerging and frontier economies. More