ANALYSIS OF FEASIBILITY OF MONETARY UNION IN THE SADC AND EAC: EVIDENCE FROM ANALYSIS OF TRADE OPENNESS

Year 2017, Volume: 9 Issue: 2, 32 - 47, 01.06.2017

Ephrem Habtemichael Redda Paul-Francois Muzindutsi Wynand Grobler

Abstract

The SADC and EAC are working toward developing monetary unions in their
respective regions in the near future. Trade openness of an economy is a crucial
characteristic in assessing the feasibility of a monetary union and the adoption of
a common currency. Trade is usually regarded as the main channel through which
the benefits from a common currency are enjoyed by member countries. The
purpose of this paper is to analyse the feasibility of a monetary union in the
SADC and the EAC through the analysis of trade openness within the two
economic regions. Descriptive and comparative analyses are employed to achieve
the outcomes of the study. Results show that, in general, most of the SADC
member countries are open to external trade, meeting the requirement of the
optimum currency area (OCA) theory in this regard. This may mean that they
stand to benefit from adopting a common currency in as far as trade openness is
concerned. However, the low intra-regional trade is expected to limit such
benefits because most of the transactions are made with the rest of the world,
using foreign currencies such as the US dollar and the euro. While the countries in
the EAC region have shown some progress in opening their economies in the last
30 years, results show that none of them has attained the required criterion. Our
findings suggest that the countries in the EAC region may not stand to benefit
from adopting a common currency. Both economic regions need to significantly increase their intra-regional trade before the implementation of the envisaged
monetary union.

Keywords

Trade openness, monetary union, optimum currency areas, SADC, EAC