Establishing a monetary union among EAC Partner States

Establishing a monetary union among EAC Partner States Visits to EAC Partner States 7 to 25 September 2009

Representatives of EAC and ECB Project Teams • Tharcisse Kadede, Principal Economist, EAC • Anthony Kafumbe, Principal Legal Counsel, EAC • Robert Maate, Senior Statistician, EAC • Erwin Nierop, Head Project Manager for Technical Assistance to the East African Community, ECB • Hanspeter Scheller, Consultant, formerly Director General Administration, ECB 2

Content of Presentation • Opening remarks • Prerequisites for EAMU • Legal and institutional framework for EAMU • Preparatory work for EAMU • Operational regulatory framework for EAMU • Concluding remarks 3

Qualifications • Power. Point Presentation supplements Discussion Paper dated 1 September 2009 (already distributed) • Discussion Paper and Power. Point Presentation – reflect personal views of authors/speakers and not necessarily views of institutions by which they are employed; and – non-exhaustively address main issues for further reflection and discussion • Observations are tentative, pending finalisation of EAMU Study 4

Prerequisites for EAMU • Market integration – Introduction of single currency is usually seen as crown on achievement of internal market • Economic convergence – Price stability and coherence of single currency area can only be maintained, if there is a sufficient level of economic convergence across single currency area • Legal convergence – Establishment of EAMU requires adoption and adaptation of EAC and national legislation • Main focus – removal of prohibitive obstacles and putting in place minimum necessary features 5

Economic convergence to date in EAC • Several data, definitional, conceptual questions concerning convergence to be resolved with help of EAC Team • But to judge from developments shown in charts, EAC not convergent in key respects. Thus: - inflation rates variable and mostly above 5% - growth rates variable and often below 7% - while 91 -day TB rates have converged, bilateral exchange rates quite variable - fiscal deficits excluusive of grants well over 3% of GDP • Sustainability is of key importance 6

Strategy for transition to EAMU • „gradual approach“: political commitment follows the fulfilment of the prerequisites for EAMU • „institutional approach“: political commitment by Partner States to fulfil the prerequisites for EAMU 7

Legal Framework • Treaty for the Establishment of the East African Community (EAC Treaty) • Protocol on the establishment of a monetary union among the Partner States of the East African Community (EAMU Protocol) to be annexed to EAC Treaty in accordance with Article 151 thereof • National legislation such as statutes of NCBs as adapted in light of EAMU Protocol 8

EAMU Protocol Content: – objectives, guiding principles, and scope of EAMU – Institutional framework for EAMU – conditions to be fulfilled for start of EAMU – commitments of EAC Partner States – procedures and timetable for realisation of EAMU Supplement: Statutes of EAMI and EACB 9

Institutional Framework - Components • Extension of attributions to EAC organs - Summit - Council - Legislative Assembly - Court of Justice • Establishment of new Institutions - East African Monetary Institute (EAMI) - East African Central Bank (EACB) 10

Mandate EAMI • Enhance cooperation between NCBs of Partner States • Foster coordination of national monetary and exchange rate policies and operations • Act as institutional hub for organising, coordinating, and monitoring preparations for EAMU 11

Mission EACB • Define monetary and exchange rate policy of single currency area • Ensure consistent implementation of this policy and other central bank functions: – either by own operational capabilities with branches in Partner States (“single central bank model”) – or jointly with member NCBs that would act as operational arms (“central bank system model’’) 12

Mandate EACB Primary objective of price stability would be a clear and unambiguous mandate that would: • not leave room for interpretation • be achievable by central bank with necessary tools at its disposal • be compatible with objectives of Community Secondary objective: Without prejudice to primary objective, support economic policy in Community 13

Organisation EACB Two-layer approach: – Governing Council: strategic and fundamental policy decisions – Executive Board: day-to-day policy decisions Decision-making: – Simple majority – “one person, one vote” principle 14

Functions and tasks EACB Core functions: • conduct monetary and exchange rate policy • hold and manage official foreign reserves • promote efficiency of payment and securities settlement systems Statistical function: develop, collect, compile and disseminate relevant statistics Advisory function to EAC and Partner States on draft legislative provisions 15

Independence EACB • Institutional independence: prohibition to accept instructions from third parties (Community and Partner States) • Functional independence: adequate powers and tools to achieve primary objective • Personal independence: security of tenure of members of decision-making bodies • Financial independence: adequate financial means to fulfil tasks 16

Accountability and transparency EACB • Ex-post justification and explanation of decisions and actions • Statutory reports, testimonies, press conferences, public speeches • Transparency as means to facilitate accountability and enhance effectiveness of monetary policy 17

Prudential supervision and financial stability at EACB Realisation of EAMU may necessitate review of current arrangements for prudential supervision and financial stability. An enabling clause in the Protocol may provide for the possibility of establishing an EAC-wide regime for prudential supervision and financial stability with shared responsibility: NCBs: responsible for prudential supervision of their financial intermediaries EACB: sets rules and standards for a uniform and consistent exercise of prudential supervision 18

Organisation and planning • Coordination among all actors involved with due respect to their different competences • Committee structure involving NCBs • Role of EAMI as central hub for coordinating, synchronising, and monitoring preparatory work • Masterplan • Synchronisation of processes 19

Purpose of Masterplan – identify tasks – allocate responsibilities – identify interrelationships between projects (and consequently need for consultation) – guide organisation and monitoring of activities – determine priorities 20

Committee Structure for EAMU • Monetary Policy Committee (MPC) • Accounting and Monetary Income Committee (ACC) • Banknotes and Coins Committee (BCC) • Information Technology Committee (ITC) • Market Infrastructure Committee (MIC) • International Relations Committee (IRC) • Prudential Supervision and Financial Stability Committee (FSC) • Legal Committee (LEC) • Communication Policy Committee (CPC) • Senior Committee (SEC) • Statistics Committee (STC) 21

Changeover to single currency • Changeover scenario • Name of single currency and sub-divisions • Conversion rates • Legal implications (e. g. continuity of contracts) • Changeover in the financial sector • Cash changeover • Communication strategy 22

Operational regulatory framework for EAMU • In EU, a wide variety of EMU related legal acts • Law-making capacity of ECB • EMU related acts as model for EAMU? • On substance, they may provide for many useful examples and thus save time 23

Timetable for European Monetary Union • 13 years (1989 – 2002) from political agreement to realise EMU to final completion of undertaking • 7 years (1992 – 1999) from signing of legal framework for EMU to start of Stage 3 of EMU • 7 years fully used by EU Member States to reach necessary degree of economic and legal convergence and by Community bodies (in particular EMI) as well as Member States to complete preparations necessary for start of EMU • Importance of setting deadline for start of monetary union (in the case of EMU: 1 July 1998) 24

Concluding remarks: challenges ahead for EAC • Developing (financial) market integration and economic convergence. • Enhancing coordination of monetary and exchange rate policies • Defining a strategy towards EAMU • Developing the legal, institutional, operational, and regulatory framework for EAMU • Capacity building for preparatory work 25

Contact details of EAC and ECB Project Team Members Erwin Nierop erwin. nierop@ecb. europa. eu Hanspeter Scheller hk. scheller@bluewin. chh Tharcisse Kadede tkadede@eachq. org Anthony Kafumbe akafumbe@eachq. org Robert Maate rmaate@eachq. org 26