The East African monetary union: ready or not?

Abstract

EAC Partner States are in the implementation process of the protocol on the Establishment of the East African Community Monetary Union (EAMU) signed in November 2013, which will lead to the use of a common currency by 2024. However, the use of a common currency has benefits and costs. The main benefits of monetary union derive from the elimination of the transaction costs of exchanging currencies and the elimination of exchange-rate volatility while the main costs of monetary union are those attributable to the inability of monetary authorities of the individual countries to use country-specific monetary policies and the exchange rate as an instrument of macroeconomic adjustment in response to shocks. The benefits and costs arising from the establishment of monetary union depend on the structural characterizes of the economies concerned. While endogenous theory suggests that a common currency can promote trade and growth and that countries could become more similar in a currency union than before joining currency union, many recent studies show a much smaller trade impact of monetary union, particularly in developing countries. The main objective of this paper was to investigate the readiness of East African Community countries for a monetary union by extending the period of study used by other researchers, to cover recent periods when progress was made in policy coordination and implementation of common market protocols.