East African currencies are under intense pressure, as foreign exchange reserves fall to their lowest levels in five years. In Kenya, the shilling is trading at about 140 to the US dollar.
The growing margin between the market and the Central Bank’s indicative mean rate of Sh128.6 to the dollar signals worsening market conditions.
The Uganda shilling has lost five per cent of its value in the past 10 months, the Kenya shilling 15 per cent and the Rwanda franc seven per cent. Tanzania and DRC have fared much better, losing only two and three per cent respectively, in that period.
This decline means imports into the region are becoming more expensive, worsening the cost of living. Kenya, a net importer, is hard hit. International prices of oil and grain are already high, the result of Russia’s war on Ukraine. A weaker shilling pushes the prices higher still.
For the long-suffering Kenyans, expensive oil imports mean higher transport costs and higher matatu fares. Social media is awash with anguished tales of punitive power bills. To bring this inflation under control, Central Banks in the region have been raising interest rates, a rather bitter pill.
On a positive note, trade between the East African Community (EAC) states is US$10 billion, representing 20 per cent of their total trade. This trade has grown by 13 per cent in four years, thanks to the resolution of some 257 non-tariff barriers in the last decade, according to the EAC secretariat.
But this intra-regional trade is, however, conducted in dollars. As a result, the weakening regional currencies present a growing threat to trade. Goods and services from the region are becoming more expensive for no other reason than the medium of exchange itself. For Kenyans, goods and services from the region are 15 per cent costlier than they were 10 months ago, simply because the payments are in dollars.
Media reports tell of a drop in “import cover” to below the four-month threshold. Basically, with the dollars Kenya has in reserve, how many months could it pay for imports if not a single more came through? When countries are in this bind, one temporary solution is to borrow from the International Monetary Fund (IMF) to pay each other.
A permanent solution would be to have a single currency for the region, which is already anticipated in the EAC integration process. When the East African Monetary Union (EAMU) Protocol was signed in November 2013, the plan was to have a single currency in 10 years – by 2023.
To achieve the single currency, the EAC member states planned to harmonise monetary and fiscal policies; payment and settlement systems; financial accounting and reporting practices; policies and standards on statistical information; and, establish an East African Central Bank.
Monetary policy convergence has seen all EAC countries set the inflation target at five per cent. All conform to international financial reporting standards. What remains is the setting up of the EA Central Bank. Could this be the year of the East African Monetary Union?
