Rwanda: Is East Africa’s proposed single currency a pipe dream?

East African Community (EAC) countries want to adopt a single currency as part of broader plans to integrate into a single market and, ultimately, a region that trades together.

These objectives are based on the idea that integration brings many more benefits to the countries and people of the Member States than they would obtain if they traded or planned individually.

A single currency would mean that Rwanda, Tanzania, Kenya, Uganda, Burundi, the Democratic Republic of the Congo, South Sudan and the newest member, Somalia, would abandon their individual currencies and begin trading with an East African currency.

Those goals would have been achieved by 2024. However, they remain dreams in the minds of East Africans and just plans written in documents filed with the EAC Secretariat.

“Without a common currency, it would not be possible to confirm that Africa has achieved complete independence,” says Africa Kiiza, a researcher at the Columbia Center for Sustainable Investments.

When you control your own currency, Kiiza says, you are in charge of your own fiscal and monetary policies. For the moment, the continent is yet to achieve full control over its monetary and fiscal policies.

In 2013, the CAO wanted to change that status quo. Members adopted the East African Monetary Union (EAMU) Protocol, which aimed to lay the foundations for a monetary union within 10 years and allow partner states to progressively converge their currencies into a single currency in the Community. .

The key to achieving this was the harmonization of monetary and fiscal policies, financial, payment and settlement systems, accounting and financial reporting practices, as well as statistical reporting policies and standards.

A Central Bank of East Africa would later be created.

Other prerequisites were the EAC Common Market and the Customs Union Protocols.

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less progress

The East African Monetary Institute (EAMI), which would become the East African Central Bank and should be operational in 2021, has not yet been created. Member states are still deadlocked over who should host it along with other seats in the monetary union.

Although EAC partner states have made some progress in implementing the Common Market and Customs Union protocol, failure to achieve monetary union amounts to a lack of integration.

In fact, Kiiza says one of the long-standing non-tariff barriers is the multiplicity of currencies in the region. This is because the lack of monetary convergence delays transactions and increases the cost of doing business.

“The multiplicity of currencies means that merchants lose money in the currency conversion process, making it expensive to do business across the border,” he explains.

Africa maintains that the region’s lack of a single currency has led to instability, where traders who carry huge wads of cash when they travel are attacked, threatened, robbed and sometimes killed.

He cites a case of Ugandan traders who previously complained about doing business in South Sudan because they were being attacked for carrying huge sums of cash when traveling to Sudan.

As banks tend to offer a lower exchange rate, traders often prefer to withdraw cash and exchange it where they get a better exchange rate deal, which is usually at border points.

Still, John Bosco Kalisa, CEO of the East Africa Business Council (EABC), cites currency convertibility as a major challenge to cross-border trade in the EAC region. Companies lose 20 percent of the value of their money every time they trade across borders.

“Not only does it impact trade, the lack of a harmonized currency affects the flow of investments and remittances in the region. When I send money from Tanzania to Rwanda, I lose 15% of the value of the money. That should not be the case. “, it states.

READ ALSO: What does the demise of the East African shilling tell us about the prospects of the EAC single currency?

In March last year, central bank governors agreed to improve the way they handle exchange and money transfers within the region. They specifically considered finding ways to prevent illegal activities while facilitating these transactions.

Although this was a step towards a future in which EAC countries could share a single currency, there has been little or no progress in implementing what was agreed upon last year.

What EAC loses

There is no doubt that having a common currency would be a step in the right direction for the region to achieve complete independence and economic stability by allowing a continuous flow of investments, reducing the cost of trade and facilitating remittances.

“A stronger and more harmonized monetary policy is a key tool to attract and boost investment in the region. It allows us to prevent external shocks in the region,” says Kalisa.

However, it will take a deliberate effort for the region to reap the benefits that come with adopting a common currency. When the EAC missed its 2024 target, it set 2031 as a new deadline to adopt a single currency.

Experts are concerned that this change in objectives will not serve the region’s interests well or realistically present an opportunity for the region to achieve full integration.

Kalisa expresses frustration, saying that “the change in deadlines does not help the community, and this is our biggest concern. It contravenes the (East African Monetary Union) roadmap.”

READ ALSO: Is the EAC ready for a single currency?

So the big question in this whole conundrum is whether members have been setting unrealistic targets to achieve the common East African currency. The effectiveness of the Treaty establishing the East African Community must be looked at and examined to understand whether the objectives make sense.

“The way the Treaty was established did not take into account asymmetries. Given the different levels of asymmetry in the region, it will be (practically) impossible to achieve a common currency,” argues Kalisa.

The asymmetry Kalisa refers to is the idea that countries have different levels of development and situations, which determine the pace at which each country moves towards the implementation of certain projects and programs.

“Burundi and South Sudan cannot be expected to advance at the same pace as Kenya, Uganda or Rwanda. Their levels of socio-economic development do not give them the opportunity to implement initiatives at the same pace as those of slightly developed countries,” he said. she explains.

This imbalance and unequal situations between countries were not recognized in the protocol that established the East African Monetary Union. The protocol stipulates that countries must achieve a similar level of macroeconomic convergence criteria as a prerequisite for a common currency.

These criteria include ceilings on general inflation of 8 percent, coverage of import reserves for 4.5 months, general deficit of 3 percent of gross domestic product (GDP) and gross public debt of 50 percent of GDP.

Andrew Mold, Head of Regional Integration at the East Africa Regional Office of the United Nations Economic Commission for Africa, says macroeconomic convergence within the EAC has been a challenge, particularly since the “triple crises” of the global pandemic , the Ukraine shock and climate change.

“The growing debt burden and a strong US dollar have made things even more difficult,” he believes, adding that in any case, it is clearly desirable to have a single currency or, at least, greater stability in bilateral exchange rates. . between member states.

However, Mold suggests that a single currency alone is not enough to ensure higher levels of economic integration, highlighting the case of West and Central African countries, which despite having a common CFA franc, are still struggling to integrate economically. .