The Monetary Geography of Africa

Chapter 8. EAC and COMESA

Overlapping membership of countries in a number of regional organizations complicates plans for monetary integration in East Africa and southern Africa. There is a project under way to revive economic cooperation in a small, three-country group, the EAC, but two of these countries are also members of a much larger, twenty-country group, COMESA, which stretches from Egypt in the north to Namibia in the south. COMESA has its own agenda for regional integration and is a rival to SADC in these initiatives. Further complicating the situation, there are nine countries with membership in both SADC and COMESA. EAC The treaty establishing the EAC, comprised of Kenya, Tanzania, and Uganda, was signed by the three member governments in November 1999. Formally launched in January 2001, the EAC succeeded a 1996 cooperation agreement to revive regional integration that had ended following the 1977 collapse of the original EAC. The 1999 treaty provides for the formation of a customs union by 2004, to be followed by a common market, subsequently a monetary union, and ultimately a political federation. A second EAC Development Strategy (2001–05), agreed to by the member governments, sets out an action plan for widening and deepening cooperation in a range of spheres, including 129 EAC and COMESA 8 2284-08_CH08.qxd 10/27/04 11:16 Page 129 130 eac and comesa political, economic, social, cultural, research and technology, defense, as well as legal and judicial affairs.1 The declared vision for regional integration is to create wealth and enhance competitiveness through increased production, trade, and investment in the region. Regarding the monetary union objective of the community, the treaty’s Article 82 states that the partner states will “cooperate in monetary and financial matters and maintain the convertibility of their currencies as a basis for the establishment of a monetary union.” The treaty elaborates that cooperation will be “in accordance with the approved macroeconomic policies harmonization programs and convergence framework of the community in order to establish monetary stability.”2 Monetary union is seen as a rather distant goal, however, and specificities and timetables are not currently under discussion. To date, the priority for the community has been movement toward a customs union through a program of tariff harmonization, namely, establishment of a common external tariff and elimination of internal tariffs. Progress has been relatively slow. After years of discussion and four postponements, the agreement establishing a customs union was signed in March 2004. On monetary union, the strategy is to lay the groundwork by maintaining currency convertibility, harmonizing macroeconomic policies (particularly exchange rate, interest rate, monetary, and fiscal policies), and working toward closer macroeconomic convergence. In practice, progress has been made on currency convertibility and sharing of information through the synchronization of budget days in the three countries. But macropolicy coordination or convergence is currently not high on the priority list for policymakers in the region. Revival of the Old EAC The current EAC is a revival of the old EAC, which included, at some point, a customs and monetary union as well as the joint administration of taxes and many services. The member countries, which shared a common currency under Britain’s colonial rule, issued separate currencies after independence. But the 1967 treaty, formally establishing the EAC community, specified free exchange at par. The link to sterling was broken following the 1967 sterling devaluation. 1. East African Community, “EAC Development Strategy: 2001–05” (www.eachq.org/ Dev_Strategy/EACDEVESTRATEGY20012005.htm). 2. East African Community, “East African Community—the Treaty” (www.eachq.org/eacTheTreaty .htm). The treaty was established in 1999. 2284-08_CH08.qxd 10/27/04 11:16 Page 130 eac and comesa 131 Why did the old EAC collapse? The two major contributing factors, namely, differences relating to the distribution of benefits and ideological clashes, were not specific to the monetary integration aspect. Kenya, the more industrialized partner, ran a persistent trade surplus with Uganda and Tanzania . The latter two countries felt that Kenya benefited more from the arrangement through trade and fostering industrial development and were disappointed that compensating mechanisms (subsidies, concessions from Kenya, or redistribution through the East African Development Bank) did not work.3 Politically, Tanzania (under President Julius Nyerere) and Uganda (under President Milton Obote) pursued socialist-oriented strategies, while Kenya was more capitalistic. Tanzania did not recognize the Idi Amin government that took power in a 1971 coup in Uganda, which precluded summit meetings and contributed to...