Establishing a single currency for the East African Community (EAC) presents profound macroeconomic challenges and structural rewards. A core hurdle lies in the disparate levels of trade openness (defined as total trade – exports plus imports – as a share of GDP) among the member states. In a five-nation subset, Kenya exhibits a trade openness of 38.5%, Uganda stands at 46.2%, Tanzania is at 31.8%, Rwanda is highly integrated at 58.4%, while Burundi remains relatively isolated at 22.1%. Historical supply-side disruptions and domestic political transitions in Burundi have consistently suppressed its international trade activity, whereas Rwanda has aggressively pursued export-led growth. These structural differences mean that these nations face highly asymmetric external shocks, making the relinquishing of domestic exchange rate flexibility a high-stakes decision.
Furthermore, trade data indicates that intra-EAC trade accounted for a mere 8.3% of their combined GDP in 2022. By contrast, in the Association of Southeast Asian Nations (ASEAN), which has resisted a common currency, intra-regional trade is over 24% of GDP. This suggests that the trade-creating benefits and transaction cost savings of a unified East African currency—potentially offset by the loss of the exchange rate as a shock absorber—may be marginal in the near term. Nevertheless, proponents argue that eliminating exchange rate volatility would eliminate hedging costs and act as a major catalyst for foreign direct investment (FDI).
Using the information in Extract D and your economic knowledge, discuss the likely costs and benefits of a monetary union to the five selected members of the East African Community (EAC).
