Rwanda: Is the Proposed East African Single Currency a Pipe Dream?

Countries in the East African Community (EAC) want to adopt a single currency as part of the broader plans to integrate under a single market, and ultimately one region that trades together.

Those targets are based on the idea that integration brings far more benefits to the countries and the people of the member states than they would have if they traded or planned individually.

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

Those targets would have been achieved by 2024. However, they remain dreams in the minds of East Africans and only plans written on papers shelved at the EAC Secretariat.

“Without a common currency, one wouldn’t confirm Africa has attained complete independence,” argues Africa Kiiza, Research Fellow at Columbia Center on Sustainable Investment.

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

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

Key to achieve that was the harmonization of monetary and fiscal policies, financial, payment and settlement systems, financial accounting and reporting practices, as well as policies and standards on statistical information.

An East African Central Bank was to later be established.

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 was to become the East African central Bank and was supposed to be up and running by 2021 has not been established. Member states are still in stalemate over who should host it along other monetary union headquarters.

Despite EAC partner states having made some progress on implementing the Common Market protocol and the Customs Union, failure to achieve monetary union amounts to failure to integrate.

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

“The multiplicity of currencies implies that traders lose money in the process of currency conversion, which makes it costly to conduct business across the border,” he explains.

Africa contends that lack of a single currency in the region has led to instability where traders who carry huge bundles of cash when traveling are targeted, 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.

Because banks tend to give a lower rate of exchange, traders usually prefer to withdraw cash and exchange them where they get a better exchange rate offer, and that is usually at border points.

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

“It does not only have an impact on trade, lack of a harmonized currency affects the flow of investment and remittances in the region. When I send money from Tanzania, to Rwanda, I lose 15% of the value of the money. That shouldn’t be the case,” he says.

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Last year in March, central bank governors agreed to improve how they handle money exchange and transfers within the region. They specifically considered finding ways to prevent illegal activities while making these transactions easier.

Although this was a step towards a future where EAC countries could share a single currency, there has been little to no known progress about the implementation of what was agreed 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 seamless flow of investment, bringing down the cost of trading, and easing remittances.

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

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

Experts worry this change of goalposts does not serve the interests of the region well nor does it realistically present an opportunity for the region to attain full integration.

Kalisa expresses frustration, saying that the “shift in deadlines doesn’t help the community, and this is our biggest concern. It contravenes the [East African Monetary Union] roadmap.”

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The big question in this whole puzzle then is whether members have been setting unrealistic targets toward achieving the East African common currency. One has to look at and examine the effectiveness of the Treaty that establishes the East African Community to understand whether targets 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,” Kalisa argues.

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

“You cannot expect Burundi and South Sudan to move at the same pace with Kenya and Uganda or Rwanda. Their levels of social-economic developments do not grant them the opportunity to implement initiatives at the same interval with those of slightly developed countries,” he explains.

That imbalance and unequal situations among countries was not recognized in the protocol establishing 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.

Those criteria include ceilings on headline inflation of 8 per cent, reserve cover of 4.5-month import, on overall deficit of 3 per cent of gross domestic product (GDP), and on gross public debt of 50 per cent of GDP.

Andrew Mold, Chief of Regional Integration at the United Nations Economic Commission for Africa’s Regional Office for Eastern Africa, says macroeconomic convergence within the EAC has been challenging, particularly since the ‘triple crises’ of the global pandemic, the Ukraine shock and climate change.

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

However, Mold suggests that a single currency alone is not sufficient to guarantee higher levels of economic integration, highlighting the case of West and Central African countries, who despite having a common CFA Franc, still struggle to economically integrate.

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