Kenya cautious about EAC single currency plan

The region’s monetary union seeks to unite fiscal and trade policies of members, allowing citizens to trade and interact freely. Photo/PHOEBE OKALL

Anxiety has hit Kenya’s economic sector as the five East African countries start fresh talks to introduce a single currency — even as disputes delay other integration plans.

Top government officials from member states who concluded a four-day preparatory meeting in Arusha last week are expected to begin a final round of talks on the monetary union protocol, setting the stage for the launch and eventual adoption of a single currency next year.

The region’s monetary union seeks to unite the monetary, fiscal and trade policies of Kenya, Tanzania, Uganda, Rwanda and Burundi, allowing citizens to trade and interact freely.

A proposal has also been put forward that the East African Shilling (EAS) will be adopted in a monetary union —a currency abandoned more than three decades ago with the collapse of the first EAC integration.

A single medium of exchange means countries face the extra cost of discarding current multiple currencies like Kenyan shilling (KES), Ugandan shilling (USh), Tanzanian shilling (TSh), Burundian franc (BIF) and the Rwandan franc (RWF) which currently enjoy concurrent circulation in the region with attendant conversion risks to citizens.

“The introduction of a common currency will provide a stronger and more solid basis for investment and economic growth,” EAC Secretary General Mr Juma Mwapachu said in a press release.

To make cross border transaction at the moment, local traders and individual travellers either have to change their money into US dollars or convert it from one national currency to the other depending on the number of countries involved, a process that on average claims 20 per cent of the money value

By a rough estimate, this rate of exchange loss means about Sh19 billion of the total Sh96 billion that Kenyan businesses exported to the EAC region in 2010 was lost in currency conversion.

In Kenya, however, economists and local traders interviewed by the Business Daily remained cautious, saying a single currency has the potential of exposing Kenya’s economic system to wider regional shocks.

“We are not ready for it. We just started integrating a few years ago and have not reached a level where we can trust all the political and economic decisions taken by our neighbours,” Mr George Arodi, an economist and export manager at Mabati Rolling Mills said, citing frequent shocks such as political violence and natural disasters that have plagued member states in recent months.

The task force on monetary union comprises top officials from Treasury, Planning and EAC Affairs ministries and central banks.

Others are officials of capital markets authorities, insurance and pensions regulatory agencies, and the national statistics bodies.

“Adopting a single currency means our exchange rates against currencies of other major export destinations such as dollar and euro will always be dependent on economic and political circumstances of our neighbours,” said Mr Arodi.

These comments are however more benign compared to radical sentiments that have always cropped up at regional integration meetings as the Kenyan side feel its currency is the strongest and safest in the region and should therefore be adopted as the common medium of exchange

In most of the intra regional transactions, Kenyan shilling is generally accepted in Rwanda, Uganda, Tanzania and Burundi but Kenyan businessmen are said to prefer payment in the US dollar to regional currencies.

“Multiple currencies work in both ways for firms — some make huge gains when others make losses but a transaction that involves many currencies is generally a barrier to cross border trader,” said Mr Chris Muiga, head of currency trading at Kenya Commercial Bank

The cautious mood in Kenya is linked to the recent experience of the EU countries whose model the EAC has taken, private sector players said. British whose Sterling Pound was the strongest at the time of forming EU’s monetary union opted to retain its currency which has since retained its strength against the euro.

Last year, the Greek external debt crisis reduced confidence in the euro, forcing it to lose value against major world currencies as speculators switched to the dollar, almost plunging the entire EU into economic instability.

Kenya was eventually sucked into the crisis as significant drop in value of euro translated to lower shilling earnings by fish and fresh produce exporters who rely heavily on European market.

“One lesson from EU history is that we need a common exchange rate regime, perhaps in the form of narrow fluctuation margins for bilateral EAC exchange rates and a wider margin against third currencies, or a basket of currencies representing the pattern of the EAC’s (joint) external transactions,” said Ms Carole Kariuki, CEO of the Kenya Private Sector Alliance

But experts warn that the preparation for a monetary union could extend beyond next year.

Barrack Ndegwa, integration secretary at Kenya’s EAC ministry said a lot of work still needs to be done in order to attain the degree of economic convergences required to sustain a single currency.

Going by previous negotiations, each country is expected to bring its inflation rate down to five per cent, raise overall gross domestic growth to seven per cent annually and peg national budgetary deficit to five per cent of the GDP before a monetary union is launched.

“As an exporter to the region, I know we will save a lot of money and time in cross border transactions when a single currency is adopted but to avoid disrupting national economies, the fundamentals have to be right before this happens,” said Mr Vimal Shah of Bidco Oil Refineries which sells products in all the five countries.

Kenya, which funds close to 95 per cent of her budget from domestic resources looks poised to maintain the required budget deficit level after recording safe limits in the last two fiscal years.

Inflation rates have also dropped to safer levels of between three and 4.5 per cent since the government revised the formula for calculating consumer price index last year.

However, the country faces a challenge of maintaining the desired growth level due to frequent weather shocks.

The country projects lower GDP growth of 5.2 per cent for 2010 with an outlook of between 5.5 and 6.0 per cent in 2011.

By comparison, International Monetary Fund projects a GDP growth of 6.7 for Tanzania, 6.4 per cent for Uganda, 6.5 for Rwanda and only 4.5 per cent for Burundi for 2011.

“The failure by these indicators to agree means we have not reached the desired level of macroeconomic convergence and a lot of work still needs to be done on the fundamentals,” said Mr Ndegwa.

Foreign reserve

Kenya has also taken a lone stand in the amount of foreign reserve that each country needs to maintain in a monetary union with Central Bank Governor Prof Njuguna Ndung’u preferring the current statutory level of four-month import cover while Uganda and Tanzania have been pushing for a cover of not less than six months.

At the EAC secretariat, director General in charge of Trade and Customs Peter Kiguta said a single currency will significantly lower transaction cost in the region but warned a rushed monetary union may end up being another political statement without substance on the ground.

Mr Kiguta said all the five countries must first fully implement the custom union and common market protocols - promoting free movement of goods, services and factors of production - before introducing a higher stage of integration.

“Even if we were to have all these macroeconomic indicators in place by the end of this year, it is the perfect operation of earlier stages of integration that will ensure they remain stable throughout the region,” Mr Kiguta told the Business Daily on phone.

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