May 5, 2023
Single currency for East Africa: 7 things you need to know
Kenyan Shilling (KES), KSh
A single African currency for East Africa is targeted to be instituted by the African Central Bank by 2028 to create an ‘economic and monetary union’.
This comes as part of the Abuja Treaty in 1991 that was signed by all member states (except Eritrea) and which established the African economic community, intending to create a ‘harmonisation of policies’ for a more ‘connective’ community.
Harbingers’ Magazine has created this explainer to outline the details of the plans.
1. What is the African Union?
The African Union, previously known as the Organisation of African Unity (OAU), was created in 1963 in response to the ending of colonialism. The purpose of this e organisation was to promote cooperation between the newly independent states on social and security issues.
In 2002, the African Union (AU) was officially founded which replaced the previous OAU, which is closely modelled on the EU. It seeks to encourage pan-African peace, security, and economic cooperation among its 55 members. The heads of all governments meet every year at an assembly and a commission implements AU policies such as foreign and economic development.
2. What are the main currencies in Africa?
As of right now, all 55 member states use their own currencies (respectively) such as Nigerian Naira, Kenya Shilling, Zambia Kwacha, South Africa Rand, Libya Dinar, Zimbabwe Dollar, etc. However, there are exceptions, as there are some countries using more than one currency. For example, the CFA Franc is used in eight Western African countries (such as Senegal, Mali, and Ivory Coast) and six Central African countries (such as Cameroon, Gabon, and Chad).
In 2023, the most valuable currency in Africa is the Tunisian Dinar (TND) with a dollar conversion rate of 3.07 Dinars.
Graffiti art of Muammar Gaddafi, taken 2012.
3. When and why was the idea of a single currency for Africa suggested?
The idea has been debated since the establishment of the OAU as it could potentially promote economic integration and increase cooperation between member states.
The Abuja Treaty had called for a single African currency to be instituted by the African Central Bank by 2028. In 2009, the leader of Libya, Muammar Gaddafi, a known advocate for the African Union suggested for the continent to switch to a new currency, independent of the American Dollar – ‘the gold dinar’.
Alongside this, he called for “one Africa” proposing a single military force and for Africans to only need one passport to move across the entire continent.
This would have allowed for even greater integration and promoted cooperation between member states. The idea of a single currency for Africa has always been planned to occur especially since the success of the Euro in the European Union.
4. How will it impact African firms and consumers?
For firms, the incentive is to maximise profits. A single currency will be a significant improvement because of the increase in price transparency and the elimination of exchange rate uncertainty. Price transparency enables firms to cut their costs of production as they can find the cheapest options much more easily.
The main issue when it comes to exchange rates is that firms are never too sure which way it will move – it could be in their favour or vice-versa. As a result, this hinders trade (especially for smaller firms) and by having one single currency, it abolishes this uncertainty and thus promotes goods traded within the region – which will increase goods sold and therefore profits.
Due to higher profits from an increase in more goods sold, firms will invest their earnings to boost the productive capacity. This could be achieved by expanding their spare capacity and educating/training workers.
For consumers, their incentive is to maximise their utility (satisfaction). Similarly with firms, they are also highly benefited because it eliminates the costs of converting currencies and is easier for price comparisons.
By getting rid of currency conversion, it allows consumers to save money as the cost of converting is removed. In addition, it is easier for tourists as the comparison between exchange rates is removed and it better encourages travel across countries.
5. How will it impact African governments?
For the government, their aim is to achieve and maintain the macroeconomic objectives – economic growth, greater equality of Income, low unemployment, low and stable inflation, protection of the environment, balanced government budget and equilibrium balance of payments.
A single currency would make the African zone a more attractive region for non-African Union countries to do business with. As a result of higher attraction, this will drive investment and trade.
In general, both components positively impact the economy as Aggregate Demand (the total goods and services produced in an economy) increases. This is because investment and trade exports are components of AD – meaning that if one increases, AD increases. This will cause economic growth and will, in turn, affect other objectives:
- Unemployment will fall as firms will require more workers – an increase in the production of goods/services occurs when consumption increases. For firms to meet the increased demand of consumers, they must expand their spare capacity in the form of increasing their land, labour, and capital.
- Living standards will improve as more unemployed people will receive an income (increasing equality of income).
- Government budget will be in surplus, this occurs when the government receives more taxation and spends less – the government will receive an increase in taxes due to more people receiving an income and less government spending on welfare payments (benefits).
- The current account to be in a surplus – the country will be exporting more goods than importing trading between countries increases. It is important to note that the demand for imported goods will increase as the level of consumption increases due to economic growth and therefore may lead the country to be in a current account deficit.
However, the issue with economic growth is that it would create demand-pull inflation. This is bad for the economy because it would lead to issues such as:
- Unemployment – results in a fall in (material) standard of living as cost of living increases, as households decrease their consumption of goods/services.
- Appreciation of the exchange rate – the increase in value of a currency will result in the current account deficit as the value of imports will be cheaper than exports and thus more goods will be imported than exported.
There could be a solution if Central Banks introduce an inflationary monetary policy to reduce inflation by increasing interest rates to steady economic growth. This is because an increase in the cost of borrowing decreases both investment and consumption leading to a fall in price levels.
6. Are there any other organisations/continents that already use a single currency?
Yes, the most notable example of a single currency being used is the Euro in the European Union (EU). It first took place in January 1999 and two years later the currency was fully converted to notes and coins for member states to use in their economies. It is seen as a huge success since the Euro is seen as the second most important currency in the world, after the US Dollar. As of 2023, there are 20 EU countries that use the Euro such as Germany, Spain, and Italy.
7. What is Eco and the ECOWAS?
Both East and West Africa are trying to launch their own currency. The Economic Community of West African States Commission (ECOWAS), which is a regional group of 15 countries, wants to launch the Eco, its regional currency, by 2027.
The establishment of the Eco will contribute its primary aim – to promote economic integration, this includes all fields of economic activity such as transport, natural resources, and energy. The formation of one currency will allow member states to increase the value of their exports due to greater integration, therefore the current account will run on a surplus as more goods will be exported than imported.
But both regions have been pushing back its launch dates, citing various reasons but most notably the COVID-19 pandemic. The EAC also had an initial launch scheduled for 2024. But now, it says the date is too soon, considering that member states have not attained all requirements.