Assessing the Viability of the East African Community as a Monetary Union

Abstract

The objective of this paper is to evaluate the feasibility of the East African Community (EAC) in establishing a successful monetary union. Despite its strong interest and progress, the East African Community (EAC) faces substantial challenges in pursuing a single-currency monetary union. A careful examination of trade data and evaluation of the convergence criteria supports a cautious move toward forming a monetary union rather than its formation for political expediency. The compliance of EAC countries in achieving the target levels of the convergence criteria is, at best, mixed. Mainly, achieving low inflation rates, maintaining lower budget deficit-to-GDP and debt-to-GDP ratios, and building robust foreign reserves were weak. Despite the divergence among member countries in attaining a low and stable inflation rate, overall strong co-movement in inflation rates and the ability to maintain an average inflation rate near the target of eight percent is encouraging. External factors, such as rising financing costs, de-globalization efforts, and geopolitical tensions, complicate the establishment of a monetary union and create uncertainty about its potential benefits. In addition to these new developments, weak trade complementarity, inadequate cross-border infrastructure, expansive non-tariff barriers, and different degrees of compliance with convergence make a speedy move towards monetary union risky. Addressing these observed potential problems before monetary union via harmonization of investment and economic policies, creating robust institutions that foster trust and regional cooperation will mitigate economic and political rivalry and aid in forming an effective monetary union.