Burundi stands to gain from EAC financial integration

The main city beach at the Port of Bujumbura. Burundi stands to gain a lot from the East African Monetary Union. FILE 

With negotiations on a proposed East African Monetary Union hitting the home stretch, Burundi is faced with the prospect of dumping its Franc currency in favour of a common unit to be shared with Kenya, Uganda, Tanzania and Rwanda.

However the entry of Burundi into the the East African Community currency area could be just what the doctor added to accelerate its economic reforms and impose discipline in management of fiscal matters.

The country's history bears this political approach out. After independence in the 1960s, many African states forced to suddenly manage their own currencies instead ended up undermining already fragile financial systems. The BRB, the Central Bank of Burundi, although generally considered well managed, has over the decades been unable to fully control inflation leading to the erosion of the the currency's purchasing power.

In 1988 the BIF (Burundian Franc) traded at 150 to the dollar, in 2012 it was at 1,500.

Small countries such as Burundi also tended towards monetary nationalism and exchange controls but with an increasingly globalised regional economy. This doesn't make sense any more. For example, despite the economic disparities in national economies, the CFA Franc era in Central and West Africa has seen high economic growth in the common currency areas as opposed to countries with single national currencies.

The new EAC currency would be managed by a central bank, as in the case of the Euro. One of the targets of such a bank would be in containing inflation, using tools such as the interest rate. This would entice investors looking for stable regimes, while the enlarged currency areas would create substantial incentive for many sectors that would benefit from economies of scale such as infrastructure.

Also, small countries with landlocked economies such as Burundi would be among the first beneficiaries through the acceleration of economic and financial integration across global markets. The establishment of new regional banks such as KCB, DTB and CRDB are apt examples.

More lending

Competition among them would also help control interest rates, and spur lending, especially after a recent study, “The Financial Sector in Burundi", highlighted a number of barriers to access to credit, especially for the production sector such as agriculture and SMEs which create high employment and ultimately economic growth.

In the long run, the creation of a strong monetary, banking and financial system in the East African Community will guarantee macroeconomic stability for its member countries.

In addition, the poor performance over a long period of the BRB and the banking sector has been faulted on the unceasing government interference in the appointment of managers on the criteria of political affiliation rather than their managerial competence.

Although Burundi's independence on budgetary and monetary policy will be reduced, the fact is that for years, the government’s room for manoeuver is already narrow since the country cannot balance its books without massive support from international donors.

Only foreign direct investment for the exploitation of mineral resources on a large scale (nickel, gold, coltan and other resources) and agricultural resources will enable the country to achieve high economic growth, which could raise the standard of living per capita with a fairer income distribution.

The success of the EAC will depend on political will, but the current eurozone crisis reminds us that the future currency should be based on a real relationship with a regional banking supervision in depth which will extend to the whole of the financial sector under the the common central bank.