The past few months have seen an upsurge in the volatility of exchange rates globally and within the EAC, largely due to a strengthening US dollar.

While exporters must be smiling all the way to the bank, given that East Africa is a net importer, a majority of people are likely to see a rise in their expenditure due to imported inflation.

What if we just had one currency? The world is clearly becoming smaller every day, so we may as well adopt one currency globally and do away with the inefficiencies involved in exchanging currencies. I can think of a few entities and people who would not be amused by such a proposition.

Forex traders and dealers, banks, hedge funds, have all found a way of profiting and losing too, from forex trading. The forex market is after all the largest and most liquid market in the world.

Would a common currency in the EAC be a step towards protecting its economies from volatility against the hard currencies? This is where we are heading with the plans to have an EAC monetary union by 2023. This will entail harmonising monetary and fiscal policies and establishing a common central bank.

In October 2014, the Committee on Regional Integration endorsed the protocol laying the foundation for a monetary union that would see Kenya, Uganda, Tanzania, Rwanda and Burundi converge their currencies. According to the Kenya Cabinet notice to parliament, “The existence of multiple currencies in the EAC region discourages trade and investment among partner states due to foreign exchange transactions costs.”

Exchange rate volatility can be caused by a variety of factors, but arguably the main factor is the demand and supply dynamics, which are in turn influenced by macroeconomic factors and policies.

Research however suggests that the impact on exchange rates depends on the balance of payments position of the economy. Given that all the EAC economies are net importers, weakening of the local currencies against the hard currencies will have a negative impact on the economy by making goods and services more expensive.

Part of the reason the current currency situation exists, other than the global strengthening of the US dollar, is the widening current account deficits across the EAC nations.

Monetary policy designed to control this would ideally result in increasing interest rates, which will in turn lead to more expensive loans and dampen economic growth, a double edged sword.

In my view, a common currency should result in more efficient trade within the EAC by stripping out bottlenecks within the trade chain.

The resulting increase in trade and trade opportunities should result in improved productivity, leading to  decreased imports, since goods and services would be more accessible and within easy reach due to the common currency. This would therefore reduce foreign currency volatility and improve the balance of payments position.

More exports

Furthermore, increase in production should also result in more exports within and without the EAC, again resulting in a narrowing current account deficit and a better balance of payments position.

Improved productivity would also result in higher economic growth and attract foreign direct investment which would lead to a strengthening of the currency.

All in all, the net effect of a common currency would appear to be better than if each of the EAC countries were trading on its own. But as all things are, a common currency is a risky venture.

There are many lessons to learn from the experience of the EU, to prevent future cases of “Kenxit” (Kenya exit) or “Rwexit” (Rwanda exit).

It is questionable whether harmonising fiscal and monetary policies will be achievable in the EAC, given the challenges already being experienced with formulating and implementing such policies within the countries themselves.

Political influence and attachment to “sovereignty of our currency” would also be obstacles to overcome, not to mention the political volatility in the region given the recent events in Burundi.

Otherwise, theoretically, all for one (common currency) and one for all should prove a worthy opponent against the “big boys.”

Antony Koskey is a consultant at Deloitte East Africa.