East African Community member states are working towards linking the regional electronic payment system to other payment solutions in Africa, to ease trade around the continent following the launch of the African Continent Free Trade Area (AfCFTA).
The performance of the East African Payment System (EAPS), which was launched in May 2014, has been hampered by the reluctance of member countries to trade in each other’s currency, leaving Kenya to control over 98 per cent of the transactions through the system.
EAC central banks are now exploring ways of transforming the system by linking it with other payment solutions in Africa to enable seamless transfer of cash across the continent at both retail and wholesale levels.
Bank of Uganda’s deputy governor Dr Louis Kasekende said the move will help boost intra-Africa trade and support the growth of regional firms.
Currently, Kenya dominates transactions in the EAPS, which allows citizens of member countries to make and receive payments in regional currencies — the Kenyan shilling, Ugandan shilling, Tanzanian shilling, Rwandan franc and Burundian franc.
During the 2017/2018 financial year, Kenyans accounted for over 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.
Cash in real time
South Sudan is yet to join the system, which links the respective real time gross settlements (RTGS) systems of Kenya, Uganda, Tanzania, Rwanda and Burundi.
The operationalisation of the EAPS was largely meant to enhance regional currency convertibility.
The agreement to make all regional currencies tradable 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 the year 2024.
Although EAC central banks have so far opened reciprocal accounts with each other, the basket from which payments in different currencies will be made, member countries are still reluctant to pay as well as receive payments in regional currencies.
It is argued that the reluctance by EAC member countries to transact in regional currencies is likely to dampen the regional central banks’ hopes of operationalising a system of tradable currencies ahead of a single currency regime in 2024.
It is also argued that regional currencies including the South Sudanese pound exhibit varying characteristics which are making it difficult to promote a freely convertible regional currency regime.
Other obstacles include the increased strength of the Kenyan shilling in comparison with its regional peers, the existence of parallel exchange rate markets in Uganda and South Sudan, difficulties inherent in repatriating Tanzanian and South Sudanese currencies and the difficulties in promoting the acceptability of regional currencies to member states.
Kenya’s Central Bank 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, through its annual report (2018), said EAC central banks have arrangements for repatriating excess partner state central bank 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 the foreign exchange shocks associated with dollar movements.
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 the Southern African subgroup, Northern African subgroup, Central and Eastern African subgroup and the Indian Ocean subgroup.
According to the Comesa Secretariat, there has been significant progress in the implementation of currency convertibility in the Central and Eastern African subgroup while the Northern African subgroup has already agreed on an action plan for the implementation and has started quoting exchange rates of their neighbouring countries’ currencies in their forex Bureaus.
In Comesa only nine central banks are live on the Regional Electronic Payments and Settlement System (REPSS). These are Democratic Republic of Congo, Egypt, Kenya, Malawi, Mauritius, Rwanda, Swaziland, Uganda and Zambia.
Over the two-year period until February 2018, the value of transactions processed through REPSS had reached nearly $35 million and one million euros, with the Central Bank of Kenya accounting for 91 per cent of the total value of dollar transactions while the Bank of Uganda accounted for 81 per cent of the value of euro transactions.