Wednesday, 30 November 2011

Will a Single currency benefit East Africa?


The Kenya shilling: used by
nearly 60 million people in the bloc

Will a monetary union benefit the East Africa Common Market?  Can it succeed? These are questions many “an expert and observer” have asked in the recent past. The economic conditions in East Africa, says critics, are not favourable for a Monetary Union come mid–next year.

The experts do not foresee the bloc being ready for a monetary Union until after 2015. What are the problems cited: Weak domestic currencies, rising inflation, economic disparity within the member-states and among the states and general unpreparedness-whatever that means.

The Tanzanian Currency:
the third weakest currency in EA
 Just the same problems the pro- monetary union lobby says a single currency would solve.  The single–currency school accuses the critics of  “crying wolf.” Of creating mountains out of Mole hills.To be sure, the single -currency school avers, inflation in East Africa is high, ranging between 19.8 per cent per year in Kenya to 31 per cent in Uganda.

However, a closer look at the drivers of inflation shows that they are temporary in nature. A prolonged drought in the region resulted in food shortages which in turn send, food prices skyrocketing.  The other driver is high crude prices in the international market. To some extend the debt crisis in Europe weakened our currencies as demand for the green buck in the international market rose.

But these conditions are reversing: the rains are pouring heavily; Crude prices in the world market have turned south and the panic caused by the debt crisis in Europe has passed. 

With all conditions looking north the currencies are now recovering their foot hold against the green buck. Even the Kenya shilling, recently, billed the worst performing currency in the world against the US dollar has turned round. It is now billed as the best-performing currency in the world against the US dollar.

The trend in East Africa is; good rains lead to the collapse of food prices and consequently, food-driven inflation. Unless the debt crisis in Europe spins out of control, demand for the green back has declined and local currencies are revaluing. These coupled with the decline in crude oil prices are a recipe for a decline in inflation. Experts are now looking at single digit inflation by the end of Q1 next year.  Such developments, says the pro-School, nullify pessimists’ argument of volatile economic conditions.

They cite the example of the Kenya shilling which almost the official currency in large parts of Tanzania, Uganda and Somalia. If for argument’s sake, the shilling were to become the official currency in the region, what would happen to domestic prices across the board?

In Tanzania for instance, prices would decline by nearly 322 per cent so that items that cost 100s of shillings would cost in the 10s of shilling. Those that cost tens of thousands would come down to hundreds. In Uganda, prices would decline by 783 per cent while in Rwanda and Burundi the price declines would range between 35.4 and 30 percent.

In effect, the domestic prices of goods and services will be re-valued and so would the wealth of the region.
The stronger Kenya shilling is used as a store of value and also for trade in the region. One can book a Middle level Hotel in Arusha and Moshi and other parts of Tanzania that border Kenya using the Kenya shilling. One can also buy a pack of cigarettes at the Kiosk across the street in Kenya shillings.

The same is the case in Uganda and Somalia. The stronger Kenya shilling is valued as a means of exchange and a store of value. We are talking about ordinary vendors on the street not a savvy businessman in a stripped suit.

The upshot here is: East Africans know a stronger currency when they see it and they   use it for business. So we might say that the small business man in East Africa has contributed to the weakening of their domestic currencies by preferring the Kenya shilling to their domestic currency.

The implication is: a stronger foreign currency is preferable to a weak domestic currency. Even in Kenya, some ambitious people prefer holding the US dollar to the local currency which they consider volatile.

A stronger East African currency would probably be stronger than the Kenya shilling. This would mean that the GDP of the region would be revalued in terms of the domestic currency and inflation would dip.

Just imagine. How would a currency used by 130 million people affect: consumption, production and employment creation in the region? How would it affect the competitiveness of our exports to the world market? How would it affect regional foreign debt? How would it affect debt service especially in the weaker economies? Think about it.

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