The East African Monetary Union: Is the Level of Business Cycle Synchronization Sufficient?

Abstract

The East African Community (Burundi, Kenya, Rwanda, Tanzania and Uganda) has a goal of a currency union, as part of a movement toward eventual political union. A key factor in making a currency union desirable is a high level of business cycle synchronization (BCS) among member countries. In this paper we undertake a new approach to this topic with a recently developed set of tools. These tools have the advantage of yielding time-varying estimates, and, unlike previous metrics, allow us to gauge both differences of the phase of the business cycle between countries and differences in business cycle amplitude. We find BCS among the five countries does compare reasonable well with that found for euro zone nations before euro adoption. However, given the euros’ difficulties, this is not strong evidence in favor of the desirability of a currency union. Moreover, Rwanda appears less well-suited, in terms of BCS, than the other four countries. In addition, all five nations have experienced sharp drops in BCS in recent years. Lastly, there has been no significant increase in BCS since the 2000 EAC Treaty, or the 2005 customs union. Overall, our results cast doubt on the desirability of an East African currency union.