EAC states waver on a freely convertible currency regime

Monday May 20 2019

EAC member countries are still reluctant to pay as well as receive payments in regional currencies.

EAC member countries are still reluctant to pay as well as receive payments in regional currencies. PHOTO | FILE | NATION MEDIA GROUP 

JAMES ANYANZWA
By JAMES ANYANZWA
More by this Author

Efforts by central banks in East Africa to ensure full convertibility of regional currencies and reduce reliance on the US dollar are facing hurdles even as it emerges that banking regulators had planned to implement the project in September.

Member countries are still reluctant to pay as well as receive payments in regional currencies — a move likely to hinder regulators’ efforts to set up a system of tradeable currencies ahead of a single currency regime in 2024.

Latest data from Kenya’s Central Bank shows that the country has dominated transactions in the East African Payment System (EAPS) which allows citizens of member countries to make and receive payments in the Kenyan shilling, Ugandan shilling, Tanzanian shilling, Rwandan franc and Burundian franc.

CHALLENGES

During the 2017/2018 financial year, Kenyans controlled more than 98 per cent of the transactions in this system, amounting to $2.37 billion out of $2.41 billion, with a paltry $40 million being transacted by Uganda, Rwanda, Tanzania and Burundi.

South Sudan is yet to join the system which links the respective real time gross settlements systems of Kenya, Uganda, Tanzania, Rwanda and Burundi.

Launched in May 2014, the EAPS was meant to enhance the convertibility of regional currencies.

The agreement to make all regional currencies tradeable was also signed in 2014 by the EAC member states with a view to promoting intra-regional trade and as part of the preparation for a monetary union by 2024.

Regional currencies including the South Sudanese pound exhibit characteristics that stand in the way of a freely convertible regional currency regime.

The increased strength of the Kenyan shilling in comparison with its regional peers, the existence of parallel foreign currency markets in Uganda and South Sudan, and the difficulties inherent in repatriating Tanzanian and South Sudanese currencies are among key challenges.

Others are difficulties in promoting the acceptability of regional currencies in member states.

Kenya’s Central Bank said it is working in partnership with other regional central banks to facilitate the acceptance of the EAC domestic currencies as a way of enhancing regional trade and lowering transaction costs.

The bank, in its annual report (2018), said EAC central banks have arrangements for repatriating excess partner state currencies, back to the issuing central bank.

It is argued that allowing regional currencies to be freely convertible will enable traders to transact without having to convert national currencies into dollars and this will cushion them from foreign exchange shocks associated with dollar movements.

USING CLUSTERS

In other regional blocs such as the Common Market for Eastern and Southern Africa implementation of currency convertibility has been enhanced by grouping member states into clusters.

These are Southern African sub-group, the North African sub-group, the Central and East African sub-group and the Indian Ocean sub-group.

According to the Comesa secretariat, there has been significant progress in the implementation of currency convertibility in the Central and East African sub-group while the North African sub-group has already agreed on an action plan for the implementation, and has started quoting exchange rates of neighbouring countries’ currencies in forex bureaus.

In the EAC bloc, the central banks have opened reciprocal accounts with each other, the basket from which payments in different currencies will be made.

The reciprocal accounts are part of efforts by the East African monetary authorities to promote the use of regional currencies ahead of the implementation of a single currency under a Monetary Union by 2024.

Convertibility of the East African currencies has been a major challenge for traders as regional central banks did not operate reciprocal accounts, meaning that traders had to rely on buying and selling of dollars.

Advertisement