At least it’s a better idea than gold-backed currency

Kenya, Uganda, Tanzania, Rwanda and Burundi are targeting 2012 for adopting a common currency.

What they gain is a more stable currency arising out of a larger trade bloc, with better liquidity in currency transactions (and thus lower cost for transactions).  They might even had a slightly improved allocation of capital across the countries now that currency conversion risks are removed.

What they lose is the ability to have independent monetary policy. They introduce a range of political wrangling frankly better suited to the more mature democracies of Europe (although the aledged birthplace of democracy, Greece, hasn’t covered itself in glory recently). Quantiative Easing? Well which countries’ bonds do we buy?

Research performed many years ago (don’t recall the details and don’t have a link) suggests that common currencies work well where there is also regular labour migration within the area. This helps to maintain employment at similar levels across the area, decreasing the need for disparate monetary policy to control inflation and boost employment as needed. I honestly don’t know where these countries are on this ground.

A good starting point would be similar levels of growth, inflation and employment across the region. I only have figures from the CIA World Factbook, which is usually a year or more out of date, but:

country GDP per capita real GDP growth inflation unemployment
Kenya $1,600 4.0% 4.2% 40%
Tanzania $1,500 6.4% 7.2% N/A
Uganda $1,200 5.8% 9.2% N/A
Rwana $1,100 6.0% 6.4% N/A
Burundi $300 3.9%% 9.8%% N/A

Well the unemployment information isn’t exactly useful, but the other figures do show the problem.

An appropriate central bank interest rate to maintain inflation between 2% and 6% (a good range to keep prices stable but still allow flexibility and reducing risks of deflation) might be 5% or 6% for Kenya. On the other hand, Burundi could really do with a rate closer to 13% or 14% if their inflation rates are to have any hope of converging anytime soon. (On the other hand, Burundu’s growth is lagging behind all others, suggesting deeper problems with the economy.)

This isn’t going to happen by 2012, and even if rates did converge by the time they put the single currency into place, I doubt the economies would stay sufficiently in lock-step to not require differeing monetary policies.

In short, this is definitely not happening in 2012 and most likely won’t happen in the next decade.  It also shouldn’t happen.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

Join the conversation


Leave a comment

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.