AUTHOR: WANJIRU WAINAINA1

IMPLEMENTATION OF THE EAST AFRICAN COMMUNITY MONETARY UNION

PROTOCOL ON A COMMON CURRENCY: A FAR-FETCHED VISION OR A
FEASIBLE GOAL?

Introduction

One of the key pillars of economic integration is a unified currency through formation of a
currency union better known as a monetary union. Importantly, such economic integration is
achieved through the mutual agreement between two or more states to align their economic
policies in order to attain a set of economic goals. This collaboration is legally established
through treaty agreement and is evidenced by the reduction or elimination of trade barriers and
creation of a common central bank and subsequent introduction of common bank notes and
coins.

The European Economic and Monetary Union established under the Maastricht Treaty in 1992 is
a globally acclaimed classic example of a monetary union. It integrates the economies of
nineteen European Union member states and is aimed at providing economic stability and
sustainable growth in the region. This positive economic convergence in the monetary union
allows for a steadier economic integration including fiscal policy.2

The greatest advantage of monetary union lies in the withdrawal of transactions costs and the
fixed exchange rates hence promoting international trade between members of the union.
Economist Robert Mundell developed the Optimum Currency Area Theory which suggests that
countries in a united geographical area could benefit more from trade with a common currency. 3
This theory will be discussed further in this paper in relation to the East African Community
region.

The African continent has long desired to unite its economies into a single currency from the
creation of the Organization of African Unity (OAU) in 1963 to its transformation to African

1
The Author is Legal Scholar from the University of Nairobi, An avid researcher and writer in the fields of
intellectual property, international trade and investment, digital rights, democracy and governance in Africa.
2
Mathias Herdegen, Principles of International Economic Law, 2016,page 431
3
Robert Mundell, A Theory of Optimum Currency Areas. The American Economic Review 51, no.4 (1961) p.657-
665 https://www.j.stor.org/stable/1812792. Accessed 17th January 2023
Union (AU) in 2001. To actualize this goal, the Abuja Treaty establishing African Economic
Community provides for the establishment of Regional Economic Communities (RECs) as the
building blocks to the continent’s economic integration. 4 The East African Community is one
such REC and has been previously recognized by the United Nations Economic Commission for
Africa (UNECA) as the continent’s regional bloc which has taken great strides in achieving
regional economic integration.5

However, is the EAC being too ambitious by desiring to implement a common currency by
2024? In this paper, I will analyze this ambition by discussing the history of the development of
EAC’s common currency, the steps that the EAC has already taken towards the implementation
of the East African Monetary Union Protocol and the set-backs that pose a threat to its
implementation. I will also make use of the previous studies conducted on this issue and current
emerging issues to assess the likelihood of its success.

HISTORY OF THE DEVELOPMENT OF THE EAST AFRICAN COMMON

CURRENCY

The history of East Africa’s political and economic collaboration can be traced far back to the
period after World War I. When the British had acquired the territory of Tanganyika, (previously
under Germans and was labeled German East Africa) they now had control over the larger East
Africa Region which included the Colony and Protectorate of Kenya and the Protectorate of
Uganda. With this new possession, the British established the East African Currency Board
which introduced the East African Shilling to replace the Indian Rupees and cents that had been
the mode of currency.6

The East African Shilling was abandoned in 1969 after all the three countries had gained
independence from the British and established their own central banks and subsequently
independent national currencies. The independent states had formed the East African Community

4
Paul Masson and Catherine Pattillo, A Single Currency for Africa? IMF Finance and Development, 2004
https://www.imf.org/external/pubs/ft/fandd/2004/12/pdf/masson.pdf accessed on the 16th January 2023
5
United Nations Economic Commission for Africa Report, Assessment of progress on regional integration in Africa,
item 4 of the provisional agenda, 23rd March 2022.
6
Central Bank of Kenya Currency History, https://www.centralbank.go.ke/currency-history/accessed 17th January
2023.
in 1967 owing to their shared history of regional integration. It was aimed at strengthening and
regulating the industrial, commercial and other relations of the partner states.7

However, cracks began to develop on the bloc due to the ideological differences with Kenya
demanding for more seats at major decision making organs alluding to its notable economic
strength over its counterparts. Additionally, a political rift ensued between the then presidents of
Tanzania and Uganda, Julius Nyerere and Idi Amin respectively, as the former supported the
latter’s predecessor and refused to meet him. Tanzania and Kenya also differed on economic
ideologies as Kenya took on a more capitalistic approach and Tanzania a socialist one. The
cracks paved to a collapse of the EAC in 1977.8

In 1984, the three countries began negotiations on a mediation agreement 9 to mainly settle the
division of assets and liabilities held by the former EAC. This agreement paved way for more
negotiations among the three states and the commencement of a treaty making process in 1997
which led to the signing of the Treaty for the East African Community on the 30 th November
1999 by the presidents of Kenya, Uganda and Tanzania.

The Treaty entered into force in July 2000, and in 2007 Burundi and Rwanda acceded the Treaty
expanding EAC to five countries. South Sudan and the Democratic Republic of Congo signed
the treaty in 2016 and 2022 respectively. The Treaty purposed first for the creation of a customs
union, then a common market and a monetary union, and hopefully a political union.

The customs union was introduced in 2005, and was fully established in 2010. The Common
Market Protocol, which includes free movement of goods, labour, persons, services and capital,
and the right of residence and establishment 10 was signed in 2009 and came into force in July
2010. Its full implementation has encountered several obstacles including the failure of member
states to align their national legislation to the protocol and other security-related operational
challenges.11

7
The Treaty for East African Cooperation of 1967.
8
Sena Eken, Breakup of the East African Community, Article published on the IMF elibrary
https://www.elibrary.imf.org/downloadpdf/journals/022/0016/004/article-A010-en.pdf accessed on 17th January
2023.
9
East African Community Mediation Agreement Chapter 4, 1987 (Revised Edition 2012).
10
Article 10 of the East African Community Common Market Protocal.
11
https://www.eac.int/press-releases/351-380-494-eala-calls-for-full-implementation-of-the-common-market-
protocol-cites-sensitisation-as-key-in-the-process accessed on the 17th January 2023.
EAC organs have already been established and are operational; they include the East African
Legislative Assembly, the East African Court of Justice, a Secretariat, the Council of Ministers
and the Summit of Heads of States. These achievements are positive indicators of the depth of
the strong will and combined effort of the EAC states to have a strong regional integrated area.

The EAC Partner states met at a summit in 2007 and agreed to make tangible efforts towards a
monetary union which led to the signing of the East African Monetary Union Protocol pursuant
to the provisions of articles 5 (2), 82 and 151 of the treaty for the establishment of the East
African community.

EAST AFRICAN COMMUNITY MONETARY UNION

The East African Community Monetary Union (EAMU) Protocol was signed by the five heads
of state from Burundi, Kenya, Rwanda, Tanzania and Uganda in Kampala on 30th November
2013 in accordance with the EAC Treaty. It laid down groundwork for a monetary union within
10 years and facilitated the progressive convergence of the EAC partner states’ currencies into a
single currency in the Community.12

Tanzania, Kenya and Uganda were determined to merge their respective shillings with the
Rwanda and Burundian Francs and now will include the new joiners: the South Sudanese Pound
and the Congolese Franc to form the single legal tender for the bloc. The goal was set at
achieving the common currency by 2024 but now one year to the initial timeline there has been a
proposal to extend this timeline to 2031.13

FOCUS OF THE EAST AFRICAN MONETARY UNION

Outlined in the protocol, is the objective of the EAMU to “promote and maintain monetary and
financial stability aimed at facilitating economic integration to attain sustainable growth and
development of the community.”14

As pre-requisites for the EAMU, EAC countries are required to: (i) harmonize and coordinate
fiscal, monetary and exchange rate policies; (ii) adopt common principles and rules for payments
12
East African Community Website https://www.eac.int/monetary-union accessed 16th January 2023.
13
Luke Anami, EAC member states not ready yet for single currency roll out, published by The East African
Newspaper, December 2022. https://www.theeastafrican.co.ke/tea/business/eac-to-wait-longer-for-monetary-
union-4042080 accessed 17th January 2023.
14
Protocol on the Establishment of the East African Community Monetary Union, Preamble and reiterated at Art.3
and settlements; (iii); harmonize policies and standards on statistical information; (iv) introduce
bands and gradually fix their bilateral exchange rates; and (v) integrate their financial systems
and adopt common principles and rules for the regulation and supervision of the financial
system.

Moreover, Partner States ought to phase out any outstanding national central bank lending to the
government and public entities, while attaining and maintaining the pre-defined macroeconomic
convergence criteria for at least three consecutive years before 2024. 15 The macroeconomic
convergence criteria as set out in Article 6(2) includes: (a) ceiling on headline inflation of 8%;
(b) a ceiling on fiscal deficit, including grants of 3% of Gross Domestic Product; (c) a ceiling on
gross public debt of 50% of Gross Domestic Product in Net Present Value terms; and (d) a
reserve cover of 4.5 months of imports.16

The EAMU protocol is divided into other parts that outline specific guidelines on
macroeconomic policy framework, financial payment and settlement systems, statistics,
provisions on single currency, institutional mechanisms and general provisions. 17 Importantly,
the protocol is not solely for the purpose of achieving a common currency, rather the goal of
achieving a common currency is essentially one of the components towards shared economic
growth and stability of the EAC.

POSITIVE STEPS TAKEN TOWARDS REALIZATION OF A COMMON EAST

AFRICAN CURRENCY

Notable progress has been realized under the EAC central banks Governors Monetary Affairs
Committee (MAC), including the harmonization of banking regulation, payment system
integration, and the harmonization of monetary and exchange rate policy. To attain these
objectives, the following MAC subcommittees were put in place: Economic affairs; Financial
market; Banking supervision and Financial stability; Information Technology (IT); Payment
Systems; Human Resources; Legal; Accounting and finance; and Banking and currency.18

15
Ibid art. 5(2)
16
Ibid art. 6(2)
17
Ibid Part D-J
18
Thomas Kigabo and Almas Heshmati, ‘Are the East African Community’s Countries Ready for a Common
Currency, Discussion Paper IZA Institute of Labor Economics, April 2022. P.3
The monetary affairs committee (MAC) of EAC Central Bank Governors was created to
harmonize monetary and exchange rate policy formulation and implementation as well as the
regulatory frameworks of financial sectors in the region to ensure their stability and
development.

In their effort of coordinating and harmonizing monetary and exchange rate policies during the
transition to the monetary union, EAC central bank governors decided to adopt a price-based
monetary policy framework by 2018 as money demand functions have become unstable and thus
limiting the effectiveness of monetary policies in the region. To achieve that objective, clear
measures were adopted to develop the interbank markets in all 6 countries and harmonize
monetary policy instruments.

A study conducted by Thomas Kigabo and Almas Shemati using data collected from the EAC
central banks from January 2000 and July 2019 indicates that inflation was lower and less
eruptive in the post-EAMU protocol period when contrasted with the pre-EAMU protocol period
in all EAC countries. This difference reflects the positive contribution of seven years of
harmonization of monetary policy frameworks in the region and efforts by EAC’s central banks
to use more market based monetary policy instruments for controlling the inflation rate. 19

Additionally, a regional monetary policy communication strategy has been set up and is now in
the process of implementation by all EAC central banks to increase their credibility and
contribute to anchoring the expectations of economic actors.

SET-BACKS ON IMPLEMENTATION OF A COMMON EAST AFRICAN CURRENCY

According to a communique released by the EAC Monetary Affairs Committee on March 7 th

2022, timely implementation of the EAMU protocol has been hindered by the continuous failure
to realize the targets set out in the EAMU roadmap. 20 The EAMU protocol provides for the
creation of four key institutions: the East African Monetary Institute (EAMI), the East African
Financial Services Commission, East African Statistics Bureau and the East African
19
Thomas Kigabo and Almas Heshmati, (n 16) page 11.
20
James Anyanzwa, Uncertainty stalks progress to single currency deadline, published by The East African
Newspaper March 16th 2022 https://www.theeastafrican.co.ke/tea/business/uncertainty-stalks-progress-to-
single-currency-deadline-3750078 accessed 17th January 2023.
Surveillance, Compliance and Enforcement Commission. These institutions are intended to
provide support to the monetary union yet none of them has been established till date due to lack
of resources.

Importantly, The United Nations Economic Commission for Africa conducted a study on the
East African Community’s readiness for a monetary union in 2017. Its report noted that the
implementation of the EAMU protocol is often sidelined as member states focus more on their
21
national growth and sovereignty. Indeed, this can be observed in the lackluster progress of
implementation of recommendations given by regional committees. Moreover, this delay can be
observed in the lagging of key bills during the process of enactment and assentation including
the EAC Financial Services Commission Bill (2022), EAC Surveillance Compliance and
Enforcement Bill (2022) and the EAC Standardization Accreditation and Conformity
Assessment Bill (2022).22

Additionally, the member states are yet to attain the four macroeconomic convergence criteria
for the implementation of the monetary union as set out in Article 6 of the EAMU Protocol. Dr
Pantaleo Kessy, Principal Economist, EAC Secretariat averred that, “Attainment of these criteria
has been challenging to most Partner States, partly due to increased demand for infrastructure
development and spending to mitigate the economic impact of the Covid-19 pandemic,” 23

Results of the research conducted by Thomas Kigabo and Almas Heshmati show that despite
some similarities in the structures of EAC economies, the member states remain susceptible to
asymmetric shocks. The member states have made progress in the process of inflation rate
convergence in EAC, but the speed of convergence has been slower than desired. Their research
suggests that there is a need for an extension of the period for preparation and policy
harmonization before the adoption of the common currency.24

21
United Nations. Economic Commission for Africa. Subregional Office East Africa (SRO-EA) (2017-10). The East
African monetary union: ready or not?. UN. ECA Intergovernmental Committee of Experts (ICE) Meeting(21 st: 2017,
Nov. 07-09 : Moroni, Comoros). Addis Ababa. © UN. ECA. https://hdl.handle.net/10855/24078 Accessed 21st
January 2023.
22
Ibid (n 18)
23
Luke Anami, EAC member states not ready yet for single currency roll out, published by The East African
Newspaper, December 2022. https://www.theeastafrican.co.ke/tea/business/eac-to-wait-longer-for-monetary-
union-4042080 accessed 17th January 2023.
24
Thomas Kigabo and Almas Heshmati, (n 16)
IS THE EAST AFRICAN COMMUNITY AN OPTIMUM CURRENCY AREA?

The Optimum Currency Area (OCA) theory as propounded by Robert Mundell and has been
developed overtime to suit the needs of the current modern world. The theory suggests that
countries in a common geographical and geopolitical region are more likely to enjoy the
maximum benefit of trade and maximize economic efficiency with a common currency. The
advantages are connected to the elimination of transaction costs due to exchanging currencies
and exchange rate volatilities.25

However, this advantage can only accrue if the following criterion is met26;

1. A common market area that allows workers to move freely throughout the area and
reduce unemployment in any single zone

2. Flexibility of pricing and wages, along with the mobility of capital, to eliminate regional
trade imbalances.

3. A centralized budget or control to redistribute wealth to parts of the area which suffer due
to labor and capital mobility. This is a politically difficult one, as wealthy parts of the
region may not wish to distribute their surpluses to those that are lacking.

4. The participating regions have similar business cycles and timing for economic data to
avoid a shock in any one area.27

Frankel and Rose slightly contrast with Mundell and suggest that a common currency can still be
implemented without the optimum currency area conditions. According to them, the common
currency would propel the countries to more economic growth and would align them after
joining the union.28 Nevertheless, more recent data indicates that developing countries with

25
Robert Mundell, A Theory of Optimum Currency Areas. The American Economic Review 51, no.4 (1961) p.657-
665 https://www.j.stor.org/stable/1812792. Accessed 17th January 2023 .
26
https://www.investopedia.com/terms/o/optimum-currency-area-theory.asp#:~:text=Optimum%20currency
%20area%20theory%20(OCA,region%20using%20its%20own%20currency. Accessed 17th January 2023
27
ibid
28
Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic
Journal, Royal Economic Society, vol. 108(449), pages 1009-1025, accessed 20th January 2023
common currency outside of an optimum currency area would experience smaller trade impact
as compared to ones in an OCA.29

I find Florian Preis and Dominik Rappe’s thesis analysis of the East African Monetary Union as
an Optimum Currency Area quite comprehensive. Their results indicate that the East Africa
Community comprising of all member states has barely satisfied the conditions of an OCA for
the formation of a monetary union. This is caused by the prevalence of asymmetric shocks,
structural differences, and limited convergence.

Preis and Rappe’s research illustrate that although the three founding members display
comparatively high diversification of production and consumption as well as similar economic
structures, the EAC overall has moderately open economies and limited financial market
integration, especially when compared to more advanced countries in Europe. The scholars
suggest a gradual development of the single currency; first to be introduced to the founding
countries (Kenya, Uganda and Tanzania) as they possess a higher degree of economic
convergence then expanded to include the other members( DR Congo, Burundi, Rwanda and
South Sudan).30

CONCLUSION

I opine that the implementation of the EAMU Protocol specifically on the adoption of a common
currency is a positive ambition. However, before adopting it, a deeper level of economic
convergence is required among the member states. Therefore, it is advisable to first put in place
measures that will ensure the full implementation of the common market and customs union
protocols, further harmonize policies, and increase intra-regional trade.

I aver that the implementation of the EAMU Protocol requires conscious effort among member
states in policy coordination, free movement of labor, and flexibility in EAC labor markets to
provide mechanisms for adjustment in a monetary union with asymmetric shocks. It is practically

29
United Nations Economic Commission for Africa Report, The East African Monetary Union, Ready or not? July
2018.
30
Florian Preis and Dominik Michael Thomas Rappe, An Optimal East African Monetary Union? Optimum Currency
Area Theory and Policy Recommendations for a Sustainable Monetary Union, Copenhagen Business School
Copenhagen, 15 May 2019. Page 110
impossible to adopt a common currency in the next one year as it is well observed that we still
lack the regional institutions to facilitate the establishment of the EAC central bank.

Nevertheless, even with the new proposed timeline of 2031, a common currency might not be the
ultimate hallmark of the EAC’s economic integration. I opine that member states should be more
intentional and expeditious to implement policies geared towards the realization of the core
objective of the EAMU Protocol; to promote financial stability and facilitate the achievement of
sustainable growth and development of the Community.
REFERENCES.

Statutes

The Treaty for East African Cooperation of 1967.

East African Community Mediation Agreement Chapter 4, 1987 (Revised Edition 2012).

East African Community Common Market Protocol.

Protocol on the Establishment of the East African Community Monetary Union

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Newspaper, December 2022. https://www.theeastafrican.co.ke/tea/business/eac-to-wait-longer-for-
monetary-union-4042080 accessed 17th January 2023.

Anyanzwa J, Uncertainty stalks progress to single currency deadline, published by The East African
Newspaper March 16th 2022 https://www.theeastafrican.co.ke/tea/business/uncertainty-stalks-
progress-to-single-currency-deadline-3750078 accessed 17th January 2023.

Central Bank of Kenya Currency History, https://www.centralbank.go.ke/currency-history/accessed

17th January 2023.

East African Community Website https://www.eac.int/monetary-union accessed 16th January 2023.

Frankel, Jeffrey A & Rose, Andrew K, 1998. “The Endogeneity of the Optimum Currency Area Criteria,”
Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-1025, accessed 20 th January 2023

Herdegen M, Principles of International Economic Law, 2016

Kigabo T and Heshmati A, ‘Are the East African Community’s Countries Ready for a Common Currency,
Discussion Paper IZA Institute of Labor Economics, April 2022.
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monetary-union-4042080 accessed 17th January 2023.

Masson P and Pattillo C, A Single Currency for Africa? IMF Finance and Development, 2004
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2023

Mundell R, A Theory of Optimum Currency Areas. The American Economic Review 51, no.4 (1961)
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