Site meeting in Kampala in the morning, lunch in Nairobi and sundowner drinks in Dar es Salaam caps a busy East African day at work. That is the synopsis of a television advert currently on Kenyan television stations promoting the use of a helicopter service that can get you hopping around the region easily. Businesses are taking the East African Community opportunities very seriously. But the East African governments want us to take this to a whole new level by introducing a common currency in the next ten years. Let me begin by saying, I am not an economist by any stretch of the imagination. Neither am I a soothsayer nor wizard for that matter. I only ask the following questions as a concerned East African citizen that can ill afford to take a helicopter ride around the 5 capitals of the community.
Our governments will have us believe that a common currency is an imperative outcome of the push to creating regional economic and (God help us) political integration that will help us citizens achieve our wildest success at the altar of capitalism and free market economics. The common currency – let’s call it the East African Shilling (EASh) for now- will reduce the cost of business as it will eliminate trade barriers in the form of currency exchange losses incurred by cross border transactions within the region. The common currency will ease the burden of travelling across borders, as we will not have to go to our favorite forex bureaus and seek the elusive Kenyan, Tanzanian or Ugandan Shillings or Rwandese or Burundian Francs. The EASh will further stimulate the movement of capital, goods and people and enable price transparency, as there will be one unified unit of measure for goods. That’s the official story and they’re sticking to it. What we are not being told is why not? Why haven’t other regions come up with a single currency?
A single currency has to be issued and monitored by a regional central bank. That regional central bank will be charged with setting the monetary policy, issuing bank notes, setting interest rates and keeping inflation low. Monetary policy is the process by which the central bank controls the supply of money often using interest rates to promote economic growth and stability. For instance, if there is widespread unemployment, the central bank can drop interest rates, (and in Kenya for example, reduce the Cash Reserve Ratio which banks are supposed to maintain at the CBK) with a view to encouraging banks to lend to the private sector. More loans to businesses means more working capital which increases production and creates a need for more employees. More loans to individuals means more money to burn buying goods, which means retail outlets increase business, employ more people…..you’re catching the drift by now. The only problem is that this leads to an economic boom, which in turn leads to inflation as goods become more expensive due to higher demand than supply. Higher inflation leads to an economic bust, a recession is sure to follow with its attendant job cuts and market depression and the whole cycle starts again of trying to jump start the economy.
So the question here is, will our East African Central Bank be able to manage the monetary policy for 5 economies that have varied rates of economic growth and varied sources that generate gross domestic product? I hazard a guess that all the EAC economies are net importers and therefore constantly suffer from current account deficits. These deficits can only be reduced if we export more, meaning we have to produce more in country. If one, or two or three of us increase our domestic consumption of things imported, we immediately begin to put a strain on our EASh as we drive demand for limited foreign currency to purchase the imports. The other two countries that are living within their means begin to see their currency devaluing with no immediate short-term option to increase value through increased exports. The East African Central Bank (which by this time is scrambling about trying to buy dollars to maintain an IMF driven floor limit of 3 months’ import cover) will raise interest rates to tame the inflationary spending of the one, two or three rogue spenders while hurting the other two countries who were minding their own business living within their means. As a result, businesses in these two innocent countries start to suffer as higher interest rates means lower access to credit which means lower production, lower employment…..you catch my drift by now.
One country sneezes and the rest of us will catch the plague. That’s what a unified currency does. There is no way of knowing whether Tanzania’s fiscal policy of raising domestic taxes will be successful to enable it to meet its expenditure budget. If it is unable to raise enough domestic taxes it will have to borrow from financial markets by issuing treasury (or God help us Eurobonds) or bills. If Kenya, Tanzania and Uganda for example are consistently unable to balance their budgets and have to seek external borrowing, there will consistently be pressure on the EASh as the three governments have to find the foreign currency to make the borrowing repayments. And may God help the unsuspecting East African citizens who haven’t been exposed to the Kenyan government’s attempts at funding a wickedly expensive devolved government and the vapid attempts to raise funds through weakly drafted taxation and social security laws. A weak EASh can only strengthen on the back of increased domestic production of goods and services as well as extreme fiscal discipline on the part of not one, not two, not three, not four but FIVE countries.
But as I said, I am no economist. I am but a simple citizen of an East African Community member whose government has promised her nirvana when she enters the haloed grounds of a common monetary union. I’d better get my flu shots updated and get a face mask prepared for the massive cold I am going to suffer when I start to share wallets with my four neighboring countries.