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What would a monetary union mean for East Africa?

Discussion in 'Biashara, Uchumi na Ujasiriamali' started by ByaseL, Mar 5, 2010.

  1. B

    ByaseL JF-Expert Member

    Mar 5, 2010
    Joined: Nov 22, 2007
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    An east african perspective

    As the talks on the East African Common Currency get momentum in Dar es Salaam, let me take you down memory lane on this subject.

    One evening in August in the late 1960s as a school kid, my parents put me on a boat to sail across Lake Victoria from my home town in Kisumu, to the other side in Tanzania. My destination was the port of Musoma from where I would use multiple means of transport to get to Sanaki, where many of my relatives lived.

    In those days, travelling across our borders was no big deal. There was no need for travel documents as we still enjoyed the luxuries of the East African Common Services, the precursor to the 1967 East African Community. In those days, there were no matatus or recklessly driven and overloaded buses. The only means of transport were the East African Railways and Harbours and the East African Road Services.

    I can remember clearly that it was the month of August when schools were closed. I had accomplished the same feat alone four months earlier, when the same parents put me on a bus, an OTC, to travel to Kampala alone to visit one of my first cousins who was a bicycle repairer near Nsambya Police Station.

    As a young boy growing up in Kenya, travelling was my undying passion. I loved to travel alone and discover distant places in order to come and tell my schoolmates tales of my adventures.

    In those days, the East African Shilling was the only money we all knew in the region. It was the same shilling found in Kenya, Uganda and Tanzania. And it was a pretty strong currency.

    At times the East African Pound was stronger than the British Pound by at least 25% in value. That was why the fare to Kampala from Kisumu was KSh 3.00 by bus, while the fare from Kisumu to Musoma was KSh 4.00 for an overnight boat ride that took 14 hours.

    In those good old days, there was no need to worry about the US Dollar or the British Pound as the currency of choice for our regional travel. There was no Euro either because the European Union had not come into being. Life was fun those days. Kenyans, Ugandans and Tanzanians felt more East African than they do today. Many things made us feel that way. We had the East African Posts and Telecommunications, The East African Power and Lighting Company, the East African School of Aviation at Soroti in Uganda, the University of East Africa in Makerere, the East African Marine Services, the East African Examination Council and even the East African Tea Research Institute, among many other East African organs. We even had East African Driving licenses recognised throughout the region.

    Because we had a common currency, travelling across the three states was much cheaper because we did not have to lose our cash at exchange bureaus like we do today.

    However, with the advent of the 1967 East African Community, so many things began to change. The three states decided to go their separate ways by printing their own currencies. These were political decisions taken by political leaders without consulting their citizens.

    Overnight, we were confronted with the puzzle of converting the East African Shilling to our national currencies. Nostalgia notwithstanding, the transition took place and the region came to terms with it.

    For the next couple of years or so, the three currencies could be used interchangeably in any of the three territories. However, even this scenario came to an abrupt end when Idi Amin overthrew Milton Obote in 1971, subsequently plunging Uganda into turmoil and economic meltdown.

    In just a few months of his rule, the once vibrant Ugandan economy was on its knees. Sooner rather than later, Kenyan businessmen could no longer accept the weakened Ugandan currency even as Ugandans fleecing their troubled land clamoured for the Kenyan shilling.

    As the Tanzanian economy also faltered under Nyerere’s Ujamaism, it was increasingly being evident that the Kenyan currency was in demand in the whole region, while the reverse was the case with the other two. And even after the stabilisation of the two economies years later, the exchange rate was never the same again.

    This distortion is the reason we East African neighbours still carry European and American currencies as we travel to do business next door. This is an arrangement that is not only shameful but degrading and expensive.

    Today, if I travel from Nairobi to Dar es Salaam and Kampala, I will change my currency three times before I return to Nairobi. Every time I change my money either into a local currency or a dollar, I lose some of it due to fluctuations that happen every day.

    The day the five states will agree to have a common currency, travel will be substantially cheaper and affordable in our region. It will be a step closer to full regional integration.

  2. M

    MgonjwaUkimwi JF-Expert Member

    Mar 8, 2010
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    Monetary union in EA would bring about economic benefits along with political chaos in the region.

    Economically the EA shilling would smoothen, promote, and harmonize investment in the region in a sense that investors would treat EA as single investment block.

    Single currency would eliminate the most pressing problem investors face: fractuation of currencies among individual member states. For example foreign investor wishing to invest in cooking-oil manufacturing industry in Kenya worries about fractuation of Kenyan shilling against Tz shilling as the raw material (mawese) would have to come from Tz. The worry is 100% eliminated under single currency. Similarly, Ugandan investor is worried about the cost of borrowing capital from Uganda for investment in Tanzania; the worry doesn't come to being under single EA currency.

    Single currency would, to some extent, harmonize investment policies in the region through competitive investiemtn policies: member states with condunsive investment policies would attract more investors than those without. Competitive investment policies in the region would lead to a less skewed investment.

    Potically single EA currency is costly. First, member states would lose control over monetary and fiscal policy. For example, Ugandan government wont be able to freely print money, when Uganda , decides to go to war against non-member state, for example. Tz government, for example, would be hesitant to freeely increase government spending to boost her investment since doing so would impact the region as a whole.

    Second the equation of relationship between governments of member states, bankers and investors change under single currency since investors and bankers would have a wider and different playing field. This erodes government control over investment and provision of social services and in turn this may bring about political instability. For example, under single currency investors in the region can form a cartel to influence government policies in their favor and government in question would have less negotiating power. At the end of the day, under single currency, the investors make policies and government buys to it.

    I think the question of single currency in EA is more of how much control should member state governments have over their respective economies. I would argue that government without control over monetary and fiscal government is a government in a non-existing mode, and therefore, I think single currency in EA should be avoided at any cost.

    Economic situation in member states is not good enough to allow implementation of single currency. Development of EA region heavily depends on the role of the government in the provision of necessary infrastructure and social services. Such role reflects government's control over monetary and fiscal policy. Unfortunately different levels of development in the region along with different levels of political stability necessitates strong role of the government of member states. Single currency works the contrary.

    For the same reason Britain chose to stay away from the unificaation of currency in the Europian union. One would wonder the usefulness of government without a control over monetary and fiscal policy.
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