The funding of a proposed East African Central Bank (EACB) will be determined by the East African Community (EAC) Council of Ministers in accordance with each country’s share capital in the bank.
A draft protocol on a monetary union shows that central banks of member states will also be required to deposit foreign exchange reserves with the proposed bank to keep stable a common currency.
“The council shall determine the amount and type of foreign reserve assets to be transferred from national central banks to the EACB in accordance with the financial key framework,” the draft monetary union protocol seen by the Business Daily reads.
The EACB could also make calls for foreign reserve assets beyond the limits disbursed by national central banks as set by the council. Gold and foreign currencies that each state holds as at the time of launching the monetary union — excluding East African currencies, International Monetary Fund reserve positions and special drawing rights — will qualify as foreign exchange reserves.
The amount of foreign reserves each country needs to maintain in a monetary union has been one of the hotly-contested areas.
The heads of state will make a decision later this month on whether the union will be launched this year as scheduled.
Experts have said the region is not ready for a monetary union citing slow movement of goods and failure to open up borders for free movement of factors of production and professional services.
EAC presidents could, however, approve the protocol to set goal posts for the union, which may take years to achieve, as they did with the custom and common market protocols.
The draft protocol suggests that the EACB may entrust national central banks to manage part or all of its foreign reserve holdings.
Kenya, through Central Bank governor Njuguna Ndung’u, 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.
Being the heaviest user of foreign reserves with a 2010 import level of $11.977 billion (Sh1 trillion), Kenya has opted to tread cautiously given the financial implication.
By comparison, Tanzania’s import over the period was $7.87 billion, Uganda had $4.66 billion, Rwanda $1.256 billion while Burundi trailed with only $205 million.
Once the protocol is effected, all foreign exchange transactions by the EAC governments will be carried out through the EACB or relevant national central banks within the target set out in the region’s common monetary and exchange rate policy.