East African Community partner states have reduced the stock of foreign exchange that central banks need to keep in a countdown to the ambitious launch of the East African dollar in less than a decade.

EAC central bank governors agreed during their Sectoral Council meeting in Nairobi two weeks ago that each country should all the time have enough dollars to buy 4.5 months’ worth of imports, yielding to pressure from Kenya, which felt the initial proposal of six months would hurt economies seeking to promote exports.

“We are going to the economic convergence stage of the Protocol on the East African Monetary Union (EAMU) and this is a comfortable rate that can be maintained by all the partner states,” said Eliazar Muga, senior assistant director of economic affairs at Kenya’s Ministry of East African Affairs, Commerce and Tourism.

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Qualifying criteria

The money men have been searching for consensus on the qualifying criteria for the Monetary Union, which will culminate in the launch of a single currency.

Questions on the independence of central banks also hampered the ratification of the EAMU Protocol by some members, but the governors have now agreed that the monetary authorities will retain the national policy-making role.

The import cover, as the forex reserve is known, indicates how well an economy can pay its foreign trade partners for supplies, and influences the stability of the currency. If it is high, the currency tends to strengthen, making exports expensive and imports cheaper.

For East African economies, which are net importers, the challenge is to balance the interests of agricultural producers that rely on exports and other sectors of the economy that depend on imported oil, machinery and intermediate goods in industrial processes.

“A common dollar reserve will help the partners reach an indicative exchange rate among the region’s currencies, which would be applied in a monetary union,” said Jared Osoro, director of the Kenya Bankers Association Centre for Research on Financial Markets and Policy.

The agreement on the import cover is the second major step towards establishing the single currency after the governors agreed last year on establishing an East Africa Payment System that is already operational. However, other convergence criteria, such as inflation, fiscal deficits and debt to GDP ratios are still under discussion.

The payment system and the single currency are expected to reduce the cost of currency conversion across the region and eliminate risks to cross-border investments that arise from volatility in exchange rates.

The EAC partners had for two years differed on the regional Monetary Policy Committee requirement that each country should have enough hard currency to cover at least six months of imports.

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Kenya had initially pushed for a four-month import cover for each country while Uganda and Tanzania wanted an import cover of not less than six months.

Levels of reserves

Currently, Kenya has enough forex reserves to cover 4.6 months and Tanzania 4.4 months worth of imports, the same level as Uganda.

The International Monetary Fund requires that the reserves be either in dollars or gold but the EAC has settled on the dollar because it is already widely accepted as the indicator exchange rates in the region, including Rwanda and Burundi where the franc is the national currency.

Kenya, Uganda and Tanzania have shillings as their national currency.

READ: Central banks move to shore up forex reserves

Mr Osoro said ordinarily, bigger economies like Kenya would have lower import covers but the EAC benchmark had been arrived at with regard to the combined economy of the five East Africa partner states.

IMF requirements

A Monetary Policy Committee statement released 10 days ago showed that the Central Bank of Kenya had foreign exchange reserves of $7.1 billion or an equivalent of 4.64 months of import cover at the end of last month.

The build up from $6.377 billion equivalent to 4.21 months of import cover at the beginning of September 2014 was attributed to utilisation of the proceeds of the $2 billion sovereign bond floated by the government in June.

“This level of foreign exchange reserves is considered adequate to cushion the foreign exchange market against short-term shocks,” CBK Governor Njuguna Ndung’u said on November 4 when announcing that the Central Bank Rate will remain at 8.5 per cent.

The Bank of Uganda (BoU) said recently that it had forex reserves equivalent to 4.4 months of imports, the highest level since the 2008 global financial crisis.

“The stock of Uganda’s foreign exchange reserves at the end of February 2014 amounted to $3.276 billion, which is an increase from $2.046 billion at the end of November 2013,” the executive director of research at BoU, Dr Adam Mugume, told the Daily Monitor in an interview.

Tanzania’s foreign exchange reserves reached $4.53 billion in the year to August, which was about 4.4 months of import cover, slightly lower than $4.56 billion a year ago.

The International Monetary Fund requires developing countries to have foreign exchange reserve that can cover at least three months of imports.