Threshold Effect of Macroeconomic Convergence Criteria on Real GDP Growth Rate within the East African Community

Abstract

This study investigates how the thresholds set by the East African Monetary Committee (EAMC) have impacted the growth of the East African Countries (Kenya, Tanzania, Uganda, Rwanda, and Burundi). The analysis establishes the actual thresholds supported by a panel data model, running from 2005 to 2020, which are drawn from World Development Indicators data from the World Bank website. The actual thresholds obtained are compared to the thresholds adopted by EAMC. This data was analysed using a Dynamic Threshold Panel model; the results show a slight deviation of the actual (optimal) data thresholds from the thresholds adopted as the EAC criteria for the formation of a Monetary Union. Therefore, there is need to reconsider the thresholds criteria to enable them to become feasible for the member states to achieve so as to form the Monetary Union.

Understanding the Optimum Thresholds for the Macroeconomic Convergence Criteria in Africa’s Regional Economic Communities: Evidence from SADC, COMESA and ECCAS

“…Beyond this threshold, any increase in inflation would be detrimental to growth prospects within the regional community. While this result confirms previous studies that have found an inflation threshold of less than 10% in the WAEMU (Combey & Nubukpo, 2010) and the East African Community (Oloo et al, 2022), it contrasts with the result highlighted by Seleteng (2006), who identified an inflation threshold of 18.9% for SADC member countries. However, a threshold of 9.15% turns out to be an intersection between the inflation thresholds found above.…”

“…These have identified deficit thresholds above the current 3% criterion of their convergence pacts. Kebalo and Zouri (2022) and Oloo et al (2022) found budget deficit thresholds of 11.42% and 6% for the West African Economic and Monetary Union (WAEMU) and the East African Community (EAC) respectively. However, as part of the new convergence pact to be proposed, the 3% of GDP deficit standard could be gradually adjusted, as moving from a standard of 3% to 6.5% of GDP seems too high and could have serious implications (economic and political).…”

“…The findings revealed that the threshold for the optimal inflation rate is 14.47% and implies that beyond this threshold found, an inflation target would have serious consequences for the conduct of monetary policy in this group of countries. Recently, Oloo et al (2022) analyzed the threshold effects of macroeconomic convergence criteria on real GDP growth in the East African Community (EAC) over the period 2005 to 2020. The authors identify an inflation threshold of 7.5%.…”

“…Conversely, Oloo et al (2022) working on the Community of East African States (EAC), find, using a dynamic threshold panel model, a budget deficit/GDP ratio threshold of 6% that the members of the EAC must respect in order to achieve the objective of monetary union. Overall, the research generally concludes that the budget deficit thresholds used as convergence criteria in the various stability pacts are pro-growth but sub-optimal in terms of the synchronization of economic cycles.…”

“…The IMF recommends a level of foreign exchange reserve accumulation that should meet short-term debt obligations. Oloo et al (2022) analysed the threshold effects of macroeconomic convergence criteria on the real GDP growth rate in the East African Community between 2005 and 2020. For the foreign exchange reserve criterion, the authors identify a threshold of 4 months of imports favourable to economic growth.…”