Single currency goal for E. Africa needs robust talks

The EAC countries’ flags: The official story is that integration will place the region on a stronger pedestal. FILE 

By Carol Musyoka

In Summary

• EAC countries should know why other regions do not have a unified unit.

Site meeting in Kampala in the morning, lunch in Nairobi and sundowner drinks in Dar es Salaam to cap an East African day at work. That is the synopsis of an advert currently on Kenyan television stations promoting the use of a helicopter service.

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 10 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 five 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 citizens to 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 within the region.

The common currency will ease the burden of travelling across borders, as we will not have to go to our favourite 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.

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 of trying to jump start the economy starts again.

So the question is, will our East African Central Bank be able to manage the monetary policy for five 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.