The East African Community (EAC) announced the start of negotiations on January 14th that could eventually create a protocol to establish an East African Monetary Union. The announcement follows the publication of a report last year, prepared by both the EAC and the European Central Bank (ECB), which looked at the ability of the three largest EAC countries-Uganda, Kenya and Tanzania-to move towards a monetary union. This argued that while the EAC member governments have shown a strong degree of political resolve to form a monetary union, the reality is that they are not ready in purely economic terms. In particular, the degree of macroeconomic convergence required was insufficient for a sustainable monetary union. As such the report argued that the target of achieving a monetary union by 2012 is completely unrealistic.

In the interim, the three governments have signed a memorandum of understanding that will allow the official use of any of the three shillings in any other member country. The extent to which this takes off will be keenly watched by policymakers, but at the start it is likely to be very limited in use outside the border areas, where the reality is that shops already take currencies from both sides of the border. In major urban areas, the key to any take-up will be the number of shops and businesses prepared to accept multiple currencies and the exchange rates used to convert existing prices. If many shops and businesses do not participate, or offer poor exchange rates in an effort to recoup the higher costs of dealing in multiple currencies, the move will have little impact.

While the ECB report highlighted that the economic convergence between the three countries is currently insufficient to be promising for a currency union, it noted that the political commitment is strong. However, although the governments of landlocked, open economies such as Uganda and Rwanda may see the advantages of a common currency and its role in boosting trade, we are less convinced of the Tanzanian government's commitment to relinquishing sovereignty over its currency, as required for a full monetary union. While steps such as accepting other East African currencies as payment and requesting studies on the way forward are simple, it will be a much more difficult challenge to get all five members to sign up to a monetary union.