Analysis of feasibility of monetary union in the SADC and EAC: evidence from analysis of trade openness

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.