Tanzania trumps critics over resolve

Any doubts about Tanzania’s resolve for East African integration have been put firmly aside, after the government ratified the East African Community Monetary Union Protocol. It is the first country to do so.

This is the blueprint for having a single currency and setting up a regional central bank to monitor monetary policy in all the member countries. Basically in about 10 years time, we will all be using the same currency which is one of most important pillars of a strong Common Market.

The Tanzania’s speed of approval will no doubt surprise some quarters. On several occasions, there have been unflattery mutterings that Tanzania has not been fully supportive of EAC integration. With this move, the challenge has been thrown back at these critics. And as Dr. Abdulla Saadalla, the deputy Minister for East African Cooperation  said in Dodoma, by being first to ratify, the Tanzanians have shown they are not a stumbling block.

Indeed during the debate on the issue in Dodoma, MPs were clearly satisfied that Tanzania’s macro-economic policies were firmly in line with the basic conditions necessary to be a part of the Single Currency regime. These conditions are set out in the convergence criteria which demand that for a country to join the Monetary Union it must be living within its means. In particular, relatively low public debt, controlled inflation and a stable currency exchange rate.

On a confident note, Dr. Saadalla said Tanzania’s growth rate presently at 7%, ranks among the top 10 in sub-Saharan Africa.

The EAC’s leading friends, led by the European Union and Germany in particular, are cautiously excited by East Africa’s progress towards full integration. Even the IMF has been eager to provide technical assistance. The EAC single currency is expected to be introduced by 2024 by member states that comply with the convergence criteria. Joint monetary policy will be governed by an independent EAC central bank with a system of national central banks as its operational arms. The central bank’s primary objective will be price stability; secondary objectives will be financial stability and economic growth and development. The single exchange rate will be free floating.

To qualify, countries are expected to meet the convergence criteria and comply with them for at least three years. The primary convergence criteria are ceilings on headline inflation (8 percent), fiscal deficit including grants (3 percent of GDP), and gross public debt (50 percent of GDP in net present value terms); and a floor on reserve coverage (4.5 months of imports).

In addition, there are three indicative criteria: ceilings on core inflation (5 percent) and the fiscal deficit excluding grants (6 percent of GDP); and a floor on the tax-to-GDP ratio (25 percent).

The advantages of Monetary Union are many. Far more than the  sensitive issue of relinquishing national currencies. A common currency eliminates the transaction costs associated with exchanging currencies in order to buy and sell goods across countries. Smaller transaction costs make it easier and more profitable to buy and sell across countries; increasing trade between countries.

Tanzania has clearly shown it has confidence in regional integration. The reasons are not hard to understand. Investors crave for stability. Tanzania is East Africa’s top exporter of gold, diamonds and gemstones. In a couple of years. natural gas will join this list. 

Joining a monetary union brings the advantages of sharing a currency across a group of countries, effectively increasing the economic size of Tanzania. Reducing exchange rate fluctuations has the advantage of increasing transparency, lowering transaction costs, and improving trade and investment.

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