East African countries have had a tough balancing act in 2020 as the Covid-19 situation oscillated from good to bad over and over again. This is reminiscent of the global situation where central banks have been forced to use high-level tuning and juggling to ensure their currencies don’t fall beyond repair. Even the US dollar, the main international currency has suffered repeatedly with Chinese Yuan and Euro pushing it against the wall.
In East Africa, a tough monetary policy by the central banks has seen currencies remain stable though with significant losses. Kenya for example, has seen its shilling lose ground to the dollar by almost seven points. The Rwandan franc and Tanzanian shilling have survived the wave while the South Sudan pound has been hit hard.
The East African region is primarily a traditional shilling zone that was introduced by the British rulers and used in Kenya, Uganda, Tanzania, Zanzibar, Ethiopia, parts of Somalia, Yemen and Southern parts of Saudi Arabia. The currency was distributed by the East African Currency Board (EACB) whose main function was to maintain the local East African shilling at par with the British shilling.
The region has one of the weakest currencies in Africa and by extension, in the world. A report published in online publication WeeTracker in 2019 listed the Ugandan and Tanzanian shillings as some of the weakest currencies in Africa when compared with the dollar. The South Sudan pound has since joined this list.
In this edition, we focus on how the region is working towards a stable currency. A weak currency refers to a nation’s money that has seen its value decrease in comparison to other currencies. Weak currencies according to Investopedia are often thought to be those of nations with poor economic fundamentals or systems of governance.
While most central banks in the region have had a rough time ensuring the currencies remain stable from an external push by the major international currencies, sometimes internal factors like corruption, inflation, political instability and black markets have been blamed for the weakening of the currencies.
Kenyan Shilling: A stage-managed stability?
As of December 2019, the International Monetary Fund (IMF) held an opinion that the Kenyan shilling was overvalued by 17.5 percent. At that time, the shilling was trading at 104 compared to the dollar and the IMF felt it should be Sh122.20 to the dollar. Since then, the shilling has lost ground to the dollar trading at 108 but the notion of managed currency has refused to go.
In a managed exchange rate system, the rate is kept within a desired range so that there is controlled volatility.
The Central Bank of Kenya (CBK) has refuted claims of monetary manipulation and even commissioned a study to look at how the shilling value was pegged. A comprehensive study by CBK dubbed ‘Assessment of Exchange Rate Misalignment in Kenya’ showed the average undervaluation of the shilling between 2010 and 2017 outweighed average overvaluation across three methodologies.
The situation has been picked up by other players with the US warning Kenya against manipulation of the shilling against the dollar during ongoing talks for a bilateral trade pact. This pre-condition in the free trade deal (FTA) is meant to prevent Kenya from getting an effective balance of payments adjustment or to gain an unfair competitive advantage in the pact.
Dr. Patrick Njoroge, the CBK governor, has previously defended Kenya from the currency manipulation accusation, insisting the foreign exchange rate reflected the shilling’s true value and that the central bank does not seek to control it but rather let it remain a free-float currency.
“Our own calculations support the view that there is no fundamental misalignment reflected in our exchange rate and we have also retaliated that the Kenya shilling reflects the currency’s true value,” he has been quoted saying.
However, beyond the misalignment tag, the Kenya shilling has seen one of its worst times in 2020. With the global economy slowing as a result of Covid-19, a dip in global remittances, collapsing tourism trade and reduced dollar demands has seen the shilling hit a free fall. At Sh108 to the dollar – an all-time high, experts say this is not the worst it is expected to get as Trading Economics expect it to hit Sh109.59 soon.
Tanzania Shilling: Calm after the storm
Historically, the Tanzanian shilling reached an all-time high of 3700 in September of 2020. However, the currency has exhibited a less dramatic fall compared to other currencies in the region. In fact, the drop has been better than one that was experienced between 2012 and 2015 where it depreciated by over 17%.
The Tanzanian shilling has come a long way. There have been issues with the manner in which the Bank of Tanzania has run its policies as well as how the central government has been shielding the currency from external interference. One case in point in mid-2019 Tanzania tightened its currency controls with new regulations on foreign exchange bureaus in what authorities said is an ongoing fight against money laundering and currency speculation.
Since then, when the bureaus were shut, commercial banks have conducted the bulk of foreign currency trading. Though the IMF opines that the Tanzanian shilling remains within the line of monetary fundamentals, there were concerns about the pace and openness of official economic data.
Tanzania has been keen on what information goes out, a move that has been termed as secretive. However, the Bank Of Tanzania (BOT) has come out clearly to state that all economic data is presented openly and reflects the current situation.
Some of the information that has remained scanty includes the foreign exchange reserves with speculation being that the Covid-19 situation affected this ratio. However, BOT has since issued a statement saying, “the country has adequate foreign exchange reserves for the importation of goods and services”. Also, the Ministry of Finance in its annual budget announced that the country has $5.3bn in foreign exchange reserves putting to rest such speculations.
Tanzania is in the middle of elections and BOT has been working hard to ensure that the elections do not affect the stability of the shilling. There has never been an election in Tanzania that has resulted in widespread violence and instability and that has had a detrimental effect on the economy. Going with this history, the Tanzanian shilling is expected to remain stable no matter the outcome of the elections.
Uganda: Managing a currency for a depressed economy
In early 2020, just like many other currencies, the Ugandan shilling tumbled as global financial markets began to react to the spread of the coronavirus. The shilling fell 6.2 percent to a new record low of 3919.7 to the US dollar on March 25 from Feb. 1. But since then the shilling has recovered as measures to contain the pandemic are lifted.
The Ugandan shilling is expected to trade at 3736.81 by the end of this quarter, according to Trading Economics. Historically, the Ugandan shilling reached an all-time high of 3940 in March of 2020.
Bank of Uganda (BOU) forecast inflation will remain below its 5.0 percent target in the next 12 months despite a temporary rise in transport costs in the months ahead due to the global economic slowdown and low food crop inflation. The IMF recently issued a loan to BOU amounting to US$340 million (1.2 trillion shillings) to maintain stability in the foreign exchange market by bridging the gap in the balance of payments position.
In 2019, the BOU Governor Emmanuel Tumusiime Mutebile said the biggest challenge faced by his organization was how to accumulate foreign exchange reserves to service the external debt without hurting the domestic market.
He said forex reserves have to be purchased from the domestic market, without causing sharp exchange rate depreciation pressures that would ultimately pass through to domestic inflation, thereby warranting tightening of monetary policy, and subsequently impacting on economic growth.
Uganda is planning on reviving key elements of the economy including tourism and agricultural exports to boost foreign reserves and help the Ugandan shilling strengthen against major currencies.
Rwanda: Taming inflation for growth
Rwanda received accolades when it managed a successful social care programme during the Covid-19 period, where door-to-door delivery of food rations was effectively conducted. This safety net shielded the Rwandese people against hunger and abject poverty. However, this had a hit on the economy and inflation.
Rwanda’s inflation rate averaged 8.7 percent in the second quarter, up from 8.2 percent in the first quarter, due to higher public transport prices. But Rwanda National Bank (NBR) said headline inflation is projected to start slowing to below its target of 5.0 percent in the last quarter of 2020 but still raised its forecast for average inflation this year to 6.9 percent from 6.0 percent projected in April due to the rise in transport prices.
The NBR has its eye all focused on the Rwandese franc. The Rwandese franc reached an all-time high of 979 in October of 2020. It is expected to trade at 989.59 by the end of this quarter, according to Trading Economics.
The exchange rate of Rwanda’s franc has depreciated by 2.3 percent against the US dollar by the end of July, slightly down from a 2.6 percent decline in the same period last year.
Burundi: Recovery plans after power change
Burundi concluded its elections in 2020 with a new leader in power. As sadly as it turned out, the outgoing president Pierre Nkurunziza was not there to pass over power as he passed away days before. Though power was passed peacefully, there were undertones on what the new President Évariste Ndayishimiye would do for the economy. The president has however come out strongly to indicate he has a plan for Burundi’s economy that has been battered by political turmoil for years.
One of the ideas being mooted by the government is to rein in on the currency black market which over the years has jeopardized the exchange rate control. Some of the measures used to contain this menace is the revocation of licenses for forex bureaus.
Burundi’s central bank sets the official rate for the US dollar at 1,919 Burundian francs but black-market traders and forex bureaus can get roughly 3,500 on the streets of Bujumbura. Black market prices make it difficult for businesses to buy dollars at the official rate, further increasing their deficit on imported goods.