The ultimate step in creating a single market is a single currency, it is like a marriage process because there is no point getting engaged unless you get to take the final step.
Despite the troubles with the Euro, many regions have plans to introduce regional currencies; the Gulf States, the Caribbean, ECOWAS and our own region the EAC.
It makes sense if a region is connected geographically and culturally to maximise economic potential. The single currency would create a level playing field for Rwanda’s manufacturing which is hampered by our strong currency, high energy and transport costs.
The weaker shilling favours Uganda’s manufacturing and exports. Their exports are comparatively cheaper and this helps their agro-processing export business. The Ugandan shilling is prone to sharp changes in the exchange rate, particularly against the dollar.
The reliance of remittances has largely reduced the inflow of capital as Ugandans abroad send home less due to changes in the exchange rate.
Fuel importers have been badly hit by these fluctuations in the value of the shilling with swings of up to 5 percent per week. Currency stability will benefit Uganda the most out of all the EAC countries.
In Kenya you also have rapid fluctuations in the exchange rates, the strength of the Kenya shilling underpins the East African economy. However, the cost of this fluctuation is often borne by countries reliant on Kenya like Rwanda, Burundi and Uganda.
Inflation is still a problem in Kenya where the national government budget was almost doubled to accommodate 44 ministries in a government of national unity, a political compromise with a heavy economic price tag. Corruption, rising fuel prices, poor transport infrastructure also cause inflation.
So in reaching convergence criteria we have to stabilise inflation, reduce our budget deficits, harmonise our budget priorities, and openly float our currencies. The East African Shilling will have to be traded freely; it cannot be “monopoly” money for a static internal economy.
This is the only way we can have an appreciating currency, nearly all our regional currencies have devalued over time. To reverse that trend we need increased reserves. Any dreams of a single currency depend on creating a budget surplus that can build reserves, as well as encouraging individual savings.
The savings of Germans are what underwrite most of the EU spending and debt, Germans do not spend most of their adult life paying off mortgages and car loans. Massive re-construction in the post World War II period meant that housing was easily affordable and so the biggest cost of living was removed so Germans could save money instead of borrowing.
Looking at the EAC we must wonder where this bedrock of savings will come from, Kenya’s banks are well capitalised but cannot underwrite the East African banking system. The black holes of debt in some of our commercial banks might replicate the Greek debt problem.
In the process of conversion, the US dollar will be the benchmark against which we measure any future success of the EAC shilling, the US dollar is already the second but unofficial currency of most of our countries.
This might make it easier in some respects, but we need a strong national currency like the Kenya Shilling to be the convergence currency for now because the dollar does not reflect changes in our economies.