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Conversion formula set to delay deal on East Africa’s common currency
Trucks at Malaba, the border town between Kenya and Uganda: National currencies will be phased out once a regional unit comes into force. Photo/File
The search for a uniform exchange rate policy for East Africa is in limbo as volatile market forces prevent negotiators from fixing standard conversion rates for the five national currencies against the proposed regional currency.
A team of East African Community (EAC) technocrats is expected to draft a binding law specifying the rate at which the national currencies will be converted into East African Currency Unit (EACU).
Market forces, including the share of each country’s real GDP to region’s overall wealth, nominal exchange rates against the dollar and a partner state’s real exchange rate in the conversion formula, are bound to keep changing.
“We need a binding Act to standardise application of exchange policy across the region but also recognise that prevailing exchange rate relationships at the time of negotiation could be different from those at the time of application,” a negotiator in the intergovernmental team told the Business Daily.
The official added: “The challenge now is for us to ensure that the conversion formula captured in the Act is flexible enough to include bilateral exchange rates prevailing shortly before or at the start of monetary union.”
Just like the shilling, one unit of the East African Currency will be divided into 100 units. Its name will, however, have to be agreed during the ongoing negotiations and endorsed by region’s council of ministers.
The EAC Secretariat is set to come up with a procedure allowing East Africans to choose the design and name of the EAC single currency before council of ministers names the date of adoption.
The shilling used by Kenya, Tanzania and Uganda and the franc used by Rwanda and Burundi will be phased out at a date the ministers choose.
“The status of the EACU as a single currency would mean that monetary amounts in valid legal instruments could solely be expressed in units of the new currency subject to the provision that the parties agree on denomination in a lawful third currency,” reads one of the proposals in the draft monetary union protocol seen by the Business Daily.
The negotiating team, however, acknowledges that region will not have a single currency until goods and factors of production are able to freely move under customs union and common market.
The implementation of customs union is still undermined by administrative barriers that have slowed down movement of goods while common market has an implementation timetable of up to December 2015.
Implementation of the monetary union means that a semi-autonomous East African Central Bank (EACB) will take over issuance of currency.
The protocols propose to hand over EACB policy formulation role as national central banks retain enforcement authority over financial institutions within their areas. In European Union, the inability of region’s central bank (ECB) to police own rules has exposed weakness in this arrangement.
“We are lucky because our negotiators are being guided by experiences from all other blocs including EU to come up with watertight agreements,” said Mr Henry Rotich, deputy director of economic affairs at the Treasury.
Among the highlights of EAC negotiations, the draft protocol strips public entities —including state-owned banks — of special lending arrangement with national central banks.
Apart from enforcing fiscal discipline, the negotiators opted to close central bank vaults on public entities, saying it could impede EACB’s ability to conduct a stability-oriented monetary policy, its primary objective.
“In accordance with the prohibition on central bank lending to public entities, the credit facilities which are currently granted by central banks to public entities would be abolished and outstanding amounts would have to be securitised and placed in the market before the coming into force of the protocol,” say the draft.
The controls extend to the discretionary overdraft facility that the five governments enjoy from central banks, fixed at five per cent of the last audited public revenues in Kenya.
Under the monetary union protocol, the facility will now be fixed at a specific percentage of each country’s average three years’ revenues, stripping governments of current discretion.
Rwanda fixes its overdraft at 11 per cent of the previous audited government revenues while Tanzania has 12.5 per cent of the average of the previous three-year audited government revenues.
Burundi’s current policy is 7.5 per cent of the previous year audited revenues while Uganda has 18 per cent of the recurrent revenue of government.
