EAC Central Bank Governors push for single currency plan
East African Central Bank Governors, who wound up a meeting last week in Nairobi, to discuss inflation and regional economic unity, have set a new pace for the push towards a single currency and a single Central Bank.
The Bank Governors attended a high-level meeting to discuss the effects of the Eurozone debt crisis and the effects it was having on the economies of the region, after a series of public protests against high inflation and high bank interest rates.
During the meeting, the Central Bank Governors singled out Rwanda, a member of the East African Community (EAC), which has solely emerged unscathed from the soaring regional inflation, for largely failing to blend into the regional economy.
(Kenya’s) acting Finance Minister Robinson Githae said while the entire region suffered from the effects of high inflation, due to credit expansion to the private sector and currency depreciation, Rwanda remained untouched “We are beginning to see a rise in political intolerance for high inflation.
This phenomenon is encouraging as it puts pressure on us as policy makers, to strive to maintain a proper balance between supply and demand for money,” Githae said.
While the minister urged the Rwandan Central Bank Governor Claver Gatete to share the tips in dealing with inflation, other Governors from the region cited Rwanda’s limited “economic convergence” with its neigbours.
Gatete said high food prices in the Horn of Africa was to blame for the high inflation in the East African region. “There is a limit as to how the Central Banks can handle the crisis. The governments have to take steps. The Central Bank has to study commercial banks behavior, public behaviour and government spending behaviour,” Gatete said.
He said the Central Bank of Rwanda, managed to keep inflation low by keeping a stable balance between imports and exports and predicting when to intervene to keep a proper balance, without curbing either side.
“We audit all commercial banks, inspecting them to enhance our understanding of their systems and reassuring the commercial banks that we have the capacity to provide liquidity,” Gatete said in response to his plan of dealing with speculation.
Rwanda’s inflation currently stands at 8.7 percent. It has stayed within the same range since 2005-2011 and the foreign currency reserves are at 7.7 months of import cover, boosted by foreign trade, aid high remittances, the Governor said.
During the meeting, economists consulting for the African Development Bank (AfDB), which convened the meeting, said it was critical in assessing whether the monetary policies in place across the region, were effective in the face of global economic crises and how the region could commit to enforcing wise fiscal plans.
“Can economic diversification and regional economic integration address structural factors. How can we commit to tight monetary policy and fiscal prudence,” posed Bo Sjo, of the University of Linkoping, Sweden.
According to his studies, most consumers in East Africa, notably, Ethiopia, Kenya and Uganda, were paying for roughly 11 percent to 38 percent for most consumer goods as a result of costs linked to the weakening currency.
Ethiopians were paying the highest price, at 38 percent and Kenyans at 17 percent due to the weakening of the Shilling against the U.S. dollar.
Inflation in Kenya eased to 18.9 percent in December 2011 and 18.3 percent in January and it is expected to ease off with oil prices remaining stable and food supply enhanced locally.
Githae said tightening the monetary policy by raising the Central Bank rate from 6 percent to 18 percent, to tighten demand for credit and reduce pressure, would also ease inflation further and stabilize the exchange rate, which also registered a huge dip.
Compared to Rwanda, whose officials have plainly announced plans to stay out of the EAC’s planned monetary union, Uganda has reported a major weakening of the local currency, an increase in consumer demand, and an upward push for credit demand.
Uganda’s Central Bank (BoU) has been tightening the monetary policy to curb inflation in the wake of a decline in foreign aid and remittances over the last three years, a bank executive revealed.
Bank’s Research Director, Adam Mugume, said foreign aid and remittances have dropped from 800 million U.S. dollars to 100 million dollars in three years, forcing the depreciation of the Ugandan shilling and a move towards economic dollarisation.
“We have had aid inflows and foreign remittances drop within three years. The exchange rate had to depreciate. The post election violence in March 2011 and the walk-to-work protests resulted into the move towards dollarisation,” Mugume said.
While Uganda’s business community and bank customers showed a preference for the dollar, with at least 22 to 27 percent of all bank deposits made in dollars, the shilling depreciated massively, pushed down by the doubling of sugar prices.
“Inflation peaked to 30 percent, driven by sugar prices, which doubled within the same month,” Mugume told East African Central Bank Governors.
Alain Kirundi, an economist from the University of Johannesburg at the African Development Bank (AfDB) convened meeting, said domestic factors such as excess currency supply and food prices were major sources of high inflation.