The East African Currency Board

Joachim W. Kratz* N JUNE 10, 1965 each of the Finance Ministers of the three East O African Government (Kenya, Tanzania, and Uganda) announced in budget speeches that his Government intended to establish its own central bank and issue its own currency. But the creation of central banks and preparations for issuing national currencies take time. Mean- while the East African Currency Board will continue operations. As the end of its operations becomes foreseeable, however, this short history and description of its functions almost takes on the nature of an epitaph. This paper sketches the history of the East African Currency Board (EACB), emphasizing the period since the beginning of political independence for the East African countries, when EACB made special efforts to adjust its modes of operations to the changing political situation and economic conditions. These new activities of EACB are seen against the economic developments of these years. The last section provides a short appraisal of EACB's enlarged role and a brief look at the respon- sibilities that may have to be shouldered by the new central banks succeeding it.

Area Covered by EACB EACB was established in December 1919 to provide for and to control the currency of the Kenya Colony and Protectorate and the Uganda Protectorate. In 1920, Tanganyika was added to the East African currency area, after a League of Nations mandate had been given to the United Kingdom to administer this territory. In the course of its history, the area covered by EACB underwent several further changes. On January 1, 1936, Zanzibar joined, and in 1942 and 1943, following military operations, the East African shilling was introduced as legal tender in British-occupied Italian Somaliland, Eritrea, and Ethiopia, as well as in the British Protectorate of Somaliland. Ethiopia left EACB in 1945, when the country began issuing its own currency, the Ethiopian dollar. Withdrawal of East African currency in Ethiopia extended over

* Mr. Kratz, economist in the African Department and formerly in the Research and Statistics Department, studied at the universities of Marburg, Paris, and Nancy and graduated from the School of International Affairs, Columbia University. 229

©International Monetary Fund. Not for Redistribution 230 INTERNATIONAL MONETARY FUND STAFF PAPERS several years. In 1950, when the former Italian Somaliland became a UN Trust Territory administered by Italy, the somalo replaced the East African shilling there. A year later, the East African shilling, which had already circulated concurrently with the Indian rupee, became the sole legal tender in the British Protectorate of Somaliland and in Aden. In 1961, British Somaliland left EACB after gaining independence and joining the former UN Trust Territory to form the Somali Republic. At present, EACB membership comprises Aden, Kenya, Tanzania, and Uganda. In Aden, which had acceded to the Federation of South Arabia on January 18, 1963, the East African shilling ceased to be legal tender on July 1, 1965. At that time it was replaced by the South Arabian dinar (equivalent to E A Sh 20). But Aden is expected to remain a member of EACB until EACB affairs are wound up.

History of EACB

ORIGINAL ORGANIZATION AND FUNCTIONS Currency matters in former British colonies were under the authority of the U.K. Government and were the responsibility of the Secretary of State for the Colonies. The Secretary of State issued the regulations governing the operations of currency boards and appointed their individual members and Secretary. Usually they were officials from the Colonial Office, the Office of the Crown Agents, and the Treasury. Unlike most other British currency boards, neither the East African Currency Board nor the West African Currency Board was situated in the area in which its currency circulated, but in London. Both boards acted directly, rather than through the Crown Agents, with whom they were, however, connected. Within its area, EACB was responsible for minting coins, printing currency notes, and fixing the denominations of coins and notes. EACB's principal task was, on demand, to issue at its main offices in the constituent territories notes or coins in exchange for equivalent values in sterlingx lodged with it in London and to pay sterling in London equivalent to the value of currency notes or coins offered to its offices in the constituent territories. For these services, EACB was entitled to charge a commission, variable at its discretion but not to exceed l/2 per cent. It could also fix and vary minimum amounts for its transactions. Profits of EACB, i.e., revenue after deduction of all expenses and of any contributions it made to the constituent territories, were to be

1 At the rate of EA Sh 20 = £ stg. 1.

©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 231 credited to the currency reserve fund; losses were to be debited to this fund. EACB was allowed to invest its funds in public sterling securities or in such other manner as approved by the Secretary of State. The extent of investments was left to the discretion of EACB, but it was obliged to hold, subject to any directions from the Secretary of State, a sufficient proportion of its reserves in a liquid form. Periodically, it had to submit to the Secretary of State a statement of the position of the currency reserve fund on the last day of each half year, including a statement of securities. It also had to publish in the government gazettes of the constituent territories statements of the East African currency notes and coins in circulation and the total amount of the currency reserve fund, as well as the nominal value, the actual cost, and the latest known market price of the securities that formed part of the currency reserve fund. Subject to the approval of the Secre- tary of State, EACB was allowed to distribute appropriate parts of its income to the constituent territories. The accounts for all its transactions were subject to audit by the Colonial Audit Department. Thus, EACB operated like all other British currency boards as an automatic money changer. It issued legal tender locally on demand against payment of sterling in London and redeemed the local currency on demand by paying out sterling. In this sense, it provided the equivalent of a pure gold coin standard, the coins, however, being sterling rather than gold. It had no control over the quantity of currency in circulation, which was determined by changes in the balance of payments position of the constituent territories. Therefore it could not follow independent monetary, credit, or balance of payments policies. It had some discretion in the selection of investments provided that the securities chosen were gilt-edged public securities expressed in a sterling area currency and could be easily sold on the London market. Though not expressly prohibited by its Regulations, EACB followed the accepted practice of other currency boards and did not invest in securities issued by the constituent territories it served until 1955, when the Regulations were amended. While EACB had authority to deal with any person (provided the minimum limits per transaction set by it were adhered to), in practice it dealt almost exclusively with the commercial banks operating in the East African currency area.

EARLY HISTORY (1920-55) Ordinarily, it was the policy of the British colonial currency boards to provide 100 per cent sterling backing for the currencies they issued. Special problems, however, compelled EACB to leave a substantial part

©International Monetary Fund. Not for Redistribution 232 INTERNATIONAL MONETARY FUND STAFF PAPERS of its currency without such cover during the earlier years of its existence. At the outset, EACB faced many difficulties in its attempt to replace the Indian silver rupee and, later, coins of Indian standards issued by the German Government and German companies; the former circulated in Kenya and Uganda and the latter in Tanganyika. These coins had to be replaced primarily because their value fluctuated with the price of silver. EACB policy was to exchange these coins for its own currency at face value. Whereas the West African Currency Board, after its establishment in 1912, had been able to repatriate the British silver coins formerly circulating in West Africa at their face value, EACB was not successful in making similar arrangements with the Governments of India and Germany. It had therefore no choice but to sell the retired coins for sterling at their bullion value. When conversion of the former currencies to the East African shilling was completed in 1925, the loss from this operation totaled more than ¿£EA 1.75 million.2 The magnitude of this loss becomes apparent when it is compared with the total East African currency outstanding on June 30, 1925 of only £EA 5.6 million. From the amounts of currency in circulation and in the currency reserve fund and the percentage of currency covered by the reserve fund (Table 1 ), it can be seen that the reserve fund did not reach 100 per cent of the currency in circulation until 1950, more than 30 years after the establishment of EACB. The lowest coverage occurred in 1932 during the Great Depression; although the currency in circulation had fallen to <£EA 3.6 million, it was covered by a reserve fund of less than £EA 0.4 million, i.e., about 10 per cent. To meet this situation, the authorities in Kenya, Uganda, and Tanganyika passed legislation to assume a total guarantee of up to £EA 1.5 million on behalf of EACB and to authorize corresponding sterling loans. The gap between the currency in circulation and the amount of the reserve fund was thus covered by the promise of the territories themselves to use their authority to borrow in London if large amounts of currency were presented for conversion into sterling. As it turned out, this special authority to borrow sterling never had to be used.

CHANGES DURING 1955-59 The year 1955 marked EACB's first departure from its role as a purely automatic money changer. Following a policy statement in the House of Commons in December 1954, in which the Secretary of State

2 While the currency unit of the East African Currency Board is the East African shilling, the widespread custom in East Africa of using East African pounds (£EA 1 — EA Sh 20) has been followed throughout this paper.

©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 233 TABLE 1. EAST AFRICAN CURRENCY OUTSTANDING AND RESERVE FUND ON JUNE 30, 1925, 1930, 1935, AND 1940-55

Currency Currency Per Cent of Outstanding Reserve Fund i Cover 2

Million East African pounds 1925 5.6 2.4 43.6 1930 4.7 1.3 27.9 1935 4.3 1.3 30.2 1940 6.9 3.7 54.0 1941 8.2 5.1 62.1 1942 14.1 11.0 78.3 1943 21.1 18.2 86.0 1944 24.8 22.5 90.7 1945 28.4 26.6 93.9 1946 24.5 23.4 95.4 1947 24.4 23.6 96.8 1948 23.7 23.2 98.1 1949 27.2 26.8 98.3 1950 29.6 29.9 101.2 1951 39.4 39.9 101.3 1952 48.3 46.5 96.2 1953 48.6 50.3 103.6 1954 53.3 57.6 108.0 1955 60.4 61.8 102.3

Sources: East African Currency Board, Report for the Year Ended 30th June, various years. 1 Securities at market value. 2 Calculated from unrounded data.

"informed Colonial Governments that he would be agreeable in principle, subject to a review of the individual circumstances of each territory, to a small part of the present investments held on behalf of Colonial currency funds being transferred into locally issued securities," 3 the Secretary of State issued revised Regulations for EACB in December 1955. These amended Regulations contained a new paragraph, as follows: 14. Without prejudice to the generality of the foregoing, the Board may sub- scribe for, or buy or sell, and may hold publicly issued securities of or guaranteed by the Government of one of the Constituent Territories or of any authority established to administer services common to two or more of the Constituent Territories provided that the cost price of such securities so held shall not, except with the approval of the Secretary of State, exceed an amount in East African shillings equivalent, at the par rate of exchange on London, to £10 million . . . sterling.

3 East African Currency Board, Report for the Year Ended 30th June 1955, pp. 5 and 11.

©International Monetary Fund. Not for Redistribution 234 INTERNATIONAL MONETARY FUND STAFF PAPERS Within the limits set by the Secretary of State, EACB was thus put in a position to extend credit to the Governments of the constituent territories by holding government or government-guaranteed securities, corresponding to a fiduciary issue, not exceeding £10 million. The first such local investment by EACB was in securities issued by Kenya; at the end of June 1956, EACB holdings of these securities amounted to £EA 191,000 at nominal value. In the following year all three mainland territories placed long-term loans with EACB, and by the end of June 1957 the amount outstanding had risen to £EA 5.8 million (Table 2). In December 1957 the Regulations were again amended, and the maximum limit for the fiduciary issue by EACB was raised to £EA 20 million. Total loans on June 30, 1958, however, had not reached more than £EA 6.3 million. A year later, EACB claims on the Governments of the constituent territories had climbed to £EA 8.9 million, including an issue of securities by Aden amounting to £EA 0.9 million. In 1959, EACB was authorized to acquire local Treasury bills (within the specified limit for the fiduciary issue to Governments) and thus provide short-term financing to the Governments concerned. The authorities of Uganda and Tanganyika were the first to avail themselves of this new facility. At the end of December 1959, EACB held Treasury bills valued at £EA 3.8 million, £EA 2.3 million for Uganda and the rest for Tanganyika. Six months later these holdings were £EA 3.1 million, £EA 1.6 million for Uganda and the rest for Tanganyika. Total fiduciary securities (i.e., Treasury bills and longer-term securities) on June 30, 1960 amounted to £EA 13.1 million, or £EA 6.9 million below the authorized maximum limit.

RECONSTITUTION IN 1960 In anticipation of the independence of the constituent territories, EACB was reconstituted and its administration and mode of operation were greatly changed in 1960. The number of its individual members was increased from four to seven; its seat was transferred from London to East Africa and its head office to Nairobi. Persons designated to serve from then on as members were the Secretary General of the East African Services Organization as chairman (de facto, but not ex officio), the Permanent Secretary to the Treasury of Kenya, the Permanent Secretary to the Treasury of Tanganyika, the Secretary to the Treasury of Uganda, the Financial Secretary of Aden, the Financial Secretary of Zanzibar, and a technical expert. Although these members were still appointed by the U.K. Secretary of State for the Colonies, they were representatives of the member Governments, and day-to-day direction of EACB was to be exercised from a seat within the currency area.

©International Monetary Fund. Not for Redistribution TABLE 2. EAST AFRICAN CURRENCY BOARD: FIDUCIARY ISSUE TO GOVERNMENTS,1 ANNUALLY, 1956-59 AND SEMIANNUALLY, 1960-65 (In millions of East African pounds)

June June June June June Dec. June Dec. June Dec. June Dec. June Dec. June 1956 1957 1958 1959 1960 1960 1961 1961 1962 1962 1963 1963 1964 1964 1965

Kenya , EAS T AFRICA N CURRENC Y BOAR D Total taken up 0.2 1.9 2.5 4.0 3.8 5.8 3.8 4.8 3.8 3.8 3.8 3.6 3.5 3.5 3.5 — — — — — Amount in Treasury bills (2.0) (1.0) — Total available 2.5 5.8 5.8 5.8 5.8 5.8 5.6 5.6 5.6 7.0 7.0 9.9 9.9 5^6 Uganda Total taken up — 2.9 2.9 2.9 4.5 3.1 3.4 5.5 5.1 4.9 3.6 5.9 3.7 8.9 9.5 Amount in Treasury bills (1.6) (0.2) (0.5) (2.6) (2.2) (1.9) (0.6) (2.9) (0.8) (6.0) (6.5) Total available 3.4 5.9 5.9 5.9 5.9 5.9 5.6 5.6 5.6 5.6 7.0 7.0 9.9 9.9 Tanzania (Mainland) Total taken up — 1.0 0.8 1.1 3.6 4.1 4.4 4.5 4.7 5.6 5.1 6.4 4.7 8.1 6.2 Amount in Treasury bills (1.5) (2.0) (2.3) (2.4) (2.7) (3.6) (3.1) (4.4) (2.8) (6.3) (4.5) Total available 2.8 5.7 5.7 5.7 5.7 5.7 5.6 5.6 5.6 5.6 7.0 7.0 9.9 9.9 Tanzania (Zanzibar) Total taken up — — — — 0.3 0.3 0.3 0.3 0.4 0.3 0.6 0.6 0.8 0.7 0.9 Amount in Treasury bills (0.1) — (0.1) (0.2) (0.1) (0.3) Total available 0.4 0.7 0.7 0.7 0.7 0/7 0.7 0.7 0.7 0.7 0.9 0.9 1.2 1.2 Aden Total taken up 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 Amount in Treasury bills Total available 0.7 1.5 1.5 1.5 1.5 1.5 2.4 2.4 2.4 2.4 3.0 3.0 4.2 — East African Currency Board Total fiduciary issue: Government 0.2 5.8 6.3 8.9 13.1 14.2 12.8 16.0 14.9 15.5 14.0 17.4 13.6 22.0 20.1 Amount in Treasury bills (3.1) (4.2) (2.8) (6.0) (5.0) (5.5) (3.7) (7.4) (3.8) (12.3) (11.3) Total fiduciary issue to Governments authorized 10.0 10.02 20.0 2 20.0 2 20.0 2 20.02 20.02 20.0 20.0 20.0 20.0 25.0 25.0 35.0 30.8

Sources: East African Currency Board, Report for the Year Ended 30th June, various years,

2ι Investments at cost; bills at nominal value.

Totals available for the five constituent territories do not add to the total authorized, presumably because a small amount was allocated to thai 23 5 part of Somalia where the East African shilling was still legal tender at that time.

©International Monetary Fund. Not for Redistribution 236 INTERNATIONAL MONETARY FUND STAFF PAPERS Members of the reconstituted EACB were now able to follow economic events at much closer range and through more frequent and more intimate contacts with government officials, local representatives of the commercial banks, and business circles. EACB was consequently in a better position to take a more active role in economic and financial affairs. Although the new EACB retained much of the strength and simplicity of the old system which had helped to maintain general confidence in the East African currency at a high level, it was more willing to venture into new directions and to undertake functions in the monetary field generally associated with operations of central banks. The amended Regulations provided sufficient legal basis for this wider scope of activities. EACB began to explore ways in which its lending to Governments could make the greatest contribution. It started to provide seasonal financing facilities for export crops, with the dual aim of promoting exports and acting as a banker of last resort to the commercial banks. It became more flexible in its policies as to interest rates and exchange commissions. To facilitate banking operations in general, it opened and maintained accounts for the commercial banks and introduced a multilateral clearing system between banks. In order to improve currency distribution over the whole currency area, EACB also opened new currency subcenters and "safe custody" facilities in remote areas.

PROBLEMS OF THE EARLY SIXTIES (1960-62) General economic conditions in East Africa in 1960/61,4 and partly also in 1961/62, were affected by political and other uncertainties. These uncertainties induced an outflow of funds, a decrease in private capital investment, and a drawing down of bank deposits. From the end of June 1960 to the end of June 1961, currency in circulation declined by £EA 1.2 million (Table 3). Part of the decline was due to the withdrawal of East African shillings from the former British Protectorate of Somaliland in 1961.5 The decline would have been even greater had not the capital outflow been financed partly by the commercial banks which reduced their overseas cash holdings and expanded their credits to the private sector. These operations led to a considerable decrease in the liquidity of the commercial banks. To improve this situation, the banks raised their minimum lending rate to 7 per cent in July 1960 and to 8 per cent in October of the same year. Between June 1961 and June 1962, notes and coins in circulation had contracted further by £EA 1.4 million, reflecting the economic slowdown.

4 The periods referred to are EACB financial years, July 1 to June 30. 5 <£EA 0.6 million was withdrawn before June 30, 1961 and £EA 0.2 million in July and August of 1961.

©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 237 TABLE 3. EAST AFRICAN CURRENCY BOARD: SIGHT LIABILITIES AND CURRENCY RESERVE FUND AT END OF PERIOD, ANNUALLY ON JUNE 30, 1956-61 AND QUARTERLY 1962-65 (In millions of East African pounds}

Currency Deposits Currency Outside Held by Total in by Reserve banks banks circulation Banks Fund

1956 Jim 51.1 9.6 60.7 61.3 1957 Jim 52.5 8.2 60.7 63.8 6.9 58.7 — 63.4 1958 Jim 51.8 — 1959 Jun 51.4 5.9 57.3 — 63.8 1960 Jun 54.3 6.1 60.4 — 66.8 53.3 5.9 59.2 68.4 1961 Jun — 1962 Mar 56.1 5.7 61.8 1962 Jun 53.2 4.6 57.8 0.7 68.4 1962 Sep 59.8 3.2 63.0 2.0 1962 Dec 62.8 5.2 68.0 1.9 1963 Mar 65.9 3.6 69.5 1.5 1963 Jun 60.7 4.8 65.5 1.3 75.2 1963 Sep 67.6 4.3 71.9 1.4 1963 Dec 70.6 5.1 75.7 1.3 1964 Mar 67.9 4.4 72.3 0.9 1964 Jun 64.2 4.1 68.3 1.0 75.9 1964 Sep 71.3 4.3 75.6 0.6 1964 Dec 73.6 6.2 79.8 1.4 1965 Mar 71.4 5.4 76.8 0.9 1965 June 55.51 5.3 60.8 1 0.9 69.9 1965 Sep 58.1 4.9 63.0 0.6 1965 Dec 59.3 6.0 65.3 0.9

Sources: East African Currency Board, Report for the Year Ended 30th June, various years, and The Kenya Gazette, various issues. 1 The decrease reflects the withdrawal of the East African shilling from Aden. Because of rounding, figures do not add to the total.

In order to act as a lender to the banking system in a period of scarce liquidity and to ensure the processing and marketing of crops, EACB asked the Secretary of State in November 1960 for permission to discount and rediscount bills and other appropriate instruments issued in connection with the marketing of specified crops.6 These new powers were granted, subject to the limitation that advances under this type of financing would not exceed £EA 5 million or raise the total fiduciary

6 Coffee, tea, cotton, sisal, cloves, and pyrethrum. It was made clear that this list could be expanded to include other crops, if needed.

©International Monetary Fund. Not for Redistribution 238 INTERNATIONAL MONETARY FUND STAFF PAPERS issue above £EA 25.0 million. In 1960/61, however, rather high ad valorem stamp documentary duties on crop bills in the constituent territories, together with the rate of 7 per cent imposed by EACB, discouraged this type of financing. Therefore, no use was made of this facility until 1961/62, when the commercial banks, for the first time, turned to EACB to obtain financing. Even so, bank borrowing (including rediscounted Treasury bills) did not exceed £EA 0.9 million during this period. Amounts made available during each month and EACB's holdings of crop-financing paper at the end of each month are shown in Table 4. EACB's lending to commercial banks remained rather limited for two reasons: First, heavy rains severely affected the harvest of cotton in Uganda and eliminated the need for the wider refinancing that had been anticipated. Second, EACB accepted only the highest standard of paper. It is worth mentioning that EACB decided not to apply the concept of territorial allocation to the funds available under its crop financing facility that it used in its lendings to the Governments. Since most of the commercial banks operated in all the constituent territories and funds could move unhampered between the territories, EACB considered it more important to influence their over-all liquidity position than the liquidity position of their branches in the country where produce was, at any particular moment, being harvested and processed. However, limits were placed on borrowings by the individual commercial banks. To make borrowing by the commercial banks from the central institution more attractive, EACB in May 1962 lowered its discount rate for crop-financing bills from 7 per cent to 5l/2 per cent (Table 5). It justified this action by indicating that it did not wish to impose a "penalty rate" 7 for crop financing. At the same time EACB said that it would ensure that the funds advanced would be used by the commercial banks to finance crops, and not for working capital, and that the banks had recourse to EACB as a lender of last resort. Simultaneously with the rate reduction by EACB, the commercial banks lowered their minimum overdraft rate from 8 per cent (to which it had been raised in October 1960) to 7 per cent. EACB's rediscount rate for Treasury bills or similar bills of the Governments remained at l/2 per cent above the current tender rate. The latter was Vs per cent below the London Treasury bill rate and moved during the period according to fluctuations in that rate. In 1961/62, rediscounted Treasury bills reached <£EA 350,000.

7 To the extent that the minimum overdraft rate charged by the commercial banks had remained at 8 per cent since the fall of 1960, EACB's rate of 7 per cent had little penalty effect.

©International Monetary Fund. Not for Redistribution TABLE 4. EAST AFRICAN CURRENCY BOARD: CROP-FINANCING ADVANCES, MONTHLY, DECEMBER 1961-DECEMBER 1965

(In thousands of East African pounds) EAS T AFRICA N CURRENC Y BOAR D

1961 1962 1963 1964 1965 Made Outstanding Made Outstanding Made Outstanding Made Outstanding Made Outstanding available at end available at end available at end available at end available at end during month of month during month of month during month of month during month of month during month of month

Jan — — 588 588 1,650 1,200 566 566 3,378 2,853 Feb — — 290 150 1,000 300 1,610 2,028 Mar — — 100 — 1,65—0 1,000 1,920 1,568 Apr — — 200 200 1,150 900 May — — — — — — 850 850 Jun — 750 750 1,010 1,010 Jul — — — — — 1,650 1,000 1,835 890 Au g — —— 1,15—0 50—0 45—0 45—0 1,250 750 2,030 30 Sep 63 226 425 425 2,140 2,040 Oct — — — 226 385 235 2,350 2,350 Nov — — —50 —50 22—6 200 690 600 1,775 2,095 Dec 160 160 750 — 450 200 3,300 3,200 3,684 2,979

Sources: East African Currency Board. Report for the Year Ended 30th June, various years, and data furnished by EACB. 23 9

©International Monetary Fund. Not for Redistribution 240 INTERNATIONAL MONETARY FUND STAFF PAPERS TABLE 5. EAST AFRICAN CURRENCY BOARD: RATES OF INTEREST AND EXCHANGE COMMISSION, AT THE END OF JUNE, 1955 AND 1960-64, AND AT THE END OF NOVEMBER 1964 (In per cent)

Rediscount Exchange Commissions on Rediscount and Advance Rate for Rate for Purchases Sales Treasury Bills Crop Financing

1955 Jim 1/4 % 1960 Jun V4 l/4 1961 Jun y* 1/4 — 7 1962 Jun Vsi HM f5V4 1 1 Y2 per cent 1963 Jun Ve 3/8 1 above the local J 5V* 1964 Jun 3/8* f ]5'/2 VI ι tender rates 1964 Nov Î4 ι %1J Is

Sources: East African Currency Board, Report for the Year Ended 30th June, various years. 1 The exchange commissions in connection with both the buying and the selling fates in Aden remained at 1A per cent, but a charge of V& per cent was applied for transfers from East Africa to Aden.

The downward trend in economic activities also had the effect of reducing government revenue. The Governments, therefore, had more recourse to short-term borrowing from EACB than previously. At the end of December 1960, EAÇB's holdings of Treasury bills amounted to £EA 4.2 million; Kenya and Tanganyika had issued almost £EA 2.0 million each. In February 1961 the total holdings, though roughly the same amount, represented different borrowers. EACB's short-term claims on the Government of Tanganyika amounted to <£EA 2.6 million, EACB held no Kenya Treasury bills, and its short-term claims on the Government of Uganda reached almost <£EA 1.7 million. Four months later, Treasury bills made up only £EA 2.8 million of the total fiduciary issue of <£EA 12.8 million, but by the end of 1961 they had risen again to <£EA 6.0 million. In this period EACB developed certain guidelines for lending to the Governments, One was to allocate as equitable a share as possible of the fiduciary issue to each Government; another was normally to leave an unused margin within the limit of the authorized fiduciary issue to the Governments so that this amount might be available for exceptional demands and other unforeseen contingencies, as well as for rediscounts of government securities or Treasury bills held by the commercial banks. EACB therefore required that all Governments would have to consult with it before issuing any bonds or bills to it.

©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 241 EACB also sought an equitable formula for sharing the portion of net income to be distributed to member Governments. It was thought that, in theory, each Government's share should be equal to the amount of currency circulating in its territory. After the withdrawal of East African shillings from Somalia was completed, EACB reviewed the estimates of currency circulating in the remaining five member territories. It concluded that statistics of issue and redemption for each of the countries were not a sufficient guide for this purpose since trade and capital movements betweeû the territories were allowed freely and physical transfers of currency had taken place on a large scale. It therefore adopted, as more practical and politically more acceptable, a formula giving equal shares to the three mainland territories of nearly 28.2 per cent each, 3.5 per cent to Zanzibar, and 12.0 per cent to Aden. In 1962, EACB distributed £EA 2 million according to this formula (Table 6). Once this new formula was established and accepted, EACB used it also to determine each Government's share of the fiduciary issue. Thus, from the <£EA 20.0 million authorized fiduciary issue to the Govern- ments in 1962, slightly over ¿£EA 5.6 million each was apportioned to Kenya, Uganda, and Tanganyika; <£EA 0.7 million to Zanzibar; and £EA 2.4 million to Aden. In May 1962, EACB made the first change in its exchange commissions since 1946 (see Table 5). For 16 years the rates for both issues and redemptions of East African shillings against sterling had remained at % per cent. The charge for buying sterling was now set at % per cent and the charge for selling sterling at % per cent. EACB's aim was to create some incentive for traders to return their export proceeds, to encourage the inflow of private investment capital from abroad, and to discourage the outflow of funds from East Africa. While the significance and practical impact of this move should not be overrated, it nevertheless demonstrated a break with EACB's former inflexible approach. EACB also reserved the right to deal in the exchange market at its discretion. The commercial banks followed EACB in readjusting their charges to the public. The considerations prompting EACB to change its commissions and to favor inward remittances did not, however, apply to Aden. There, the exchange market had remained broadly in balance, and the demand for sterling was matched by sufficient demand for East African shillings. It was therefore not necessary to introduce any changes, and the equal issue and redemption commissions of 1A per cent were kept in force. However, to avoid undesirable arbitrage movements, EACB imposed a Vs per cent charge on transfers from East Africa to Aden, which, like other transfers within the currency area, had previously been free of charge.

©International Monetary Fund. Not for Redistribution TABLE 6. EAST AFRICAN CURRENCY BOARD: DISTRIBUTION TO GOVERNMENTS FROM NET INCOME, FISCAL YEARS ENDED

JUNE 30, 1961-65 ι 24 2

Amount British Per Cent

Tanzania Tanzania Somali- Total of Net Income INTERNATIONA L MONETAR Y FUN D STAF F PAPER S Kenya Uganda (mainland) (Zanzibar) Aden land distributed Distributed 2

Thousand East African pounds 1951 51.6 42.6 50.6 5.3 — — 150.0 28.1 1952 49.6 39.8 44.2 7.7 6.7 2.0 150.0 16.0 1953 79.5 68.7 66.7 10.8 20.8 3.5 250.0 23.9 1954 157.6 127.5 151.3 17.1 41.2 5.3 500.0 41.7 1955 159.5 128.2 138.5 29.0 38.4 6.4 500.0 34.3 1956 125.9 171.9 140.3 18.3 36.5 7.1 500.0 29.9 1957 217.7 221.4 215.4 27.3 57.3 10.9 750.0 35.1 1958 351.8 398.5 342.2 45.5 94.5 17.5 1,250.0 54.9 1959 374.0 371.0 345.6 45.4 91.4 22.5 1,250.0 56.4 1960 346.2 344.5 347.8 43.3 143.8 24.6 1,250.0 47.7 1961 347.6 347.6 347.6 43.1 148.0 16.0 1,250.0 40.0 1962 563.3 563.3 563.3 70.0 240.0 — 2,000.0 59.3 1963 563.3 563.3 563.3 70.0 240.0 2,000.0 67.0 1964 633.7 633.7 633.7 78.7 270.0 2,250.0 79.3 1965 716.2 716.2 716.2 89.0 262.5 — 2,500.0 68.8 Total or average 4,737.6 4,738.3 4,666.8 600.5 1,691.1 115.9 16,550.0 51.6

Sources: East African Currency Board, Report for the Year Ended 30th June, various years. 1 Payment usually made in the year following the one indicated. Because of rounding, figures do not add to all totals. 2 Through 1961, these percentages were calculated by matching the amounts distributed to the Governments, as shown in the EACB's balance sheet in the years in which actual payment was made, with EACB's net income as shown in its balance sheet of the previous year, the year for which the distribution to the Governments was intended. In 1961, the new EACB showed in its balance sheet not only the payment to the Governments of the previous year's distribution, but also an allocation to a newly created income distribution reserve account. For easier comparison, only the former entry has been used here in calculating the percentage. Starting with 1962, the figures shown in this column present the percentage of EACB's net income allocated to the income distribution reserve account as shown in each year's balance sheet. ©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 243 DEVELOPMENT SINCE 1962 After the middle of 1962, economic conditions in East Africa improved, partly because of more favorable weather, but also because of a general revival of confidence in East Africa's economic position and potential. Investment increased somewhat and higher commodity prices led to larger receipts from abroad. The downward trend of currency in circulation now reversed, as the end of June figures for 1963 and 1964 show (see Table 3). The amount continued to increase in 1964/65 if allowance is made for the £EA 11.4 million withdrawn from Aden. Without the withdrawal, currency in circulation in June 1965 (actually <£EA 60.8 million) would have been £EA 72.2 million, against <£EA 68.3 million in June 1964. Super- imposed on this persistent upward trend, however, was a recurring pattern of seasonal fluctuations caused mainly by the rhythm of crop seasons. After the middle of the year, currency in circulation usually rises, reaching a peak in December or January. Thereafter, it declines until the next crop season starts, around June. Other events, of course, may weaken or reinforce these natural cycles. In the general setting of a reviving economy and encouraged by the continued strong position of EACB and the East African currency, even throughout the years when the pace of economic development had slackened, EACB decided that a further increase in its fiduciary issue would not be inconsistent with prudent currency management. At first, in December 1962, it increased its limits for crop financing through the commercial banks from <£EA 5 million to <£EA 10 million; then it raised its ceiling for lending to the Governments in 1963 from £EA 20 million to <£EA 25 million and again in the fall of 1964 to <£EA 35 million, bringing the maximum limit for the total fiduciary issue to £EA 45 million. If full use were made of the new powers, the fiduciary issue could amount to more than 50 per cent of the currency in circulation. At the end of December 1965, however, EACB's total fiduciary securities actually amounted to <£EA 23.8 million, equal to 36 per cent of the total currency in circulation, while external assets represented 76 per cent of the currency issue. Seasonal and other fluctuations in the Governments' need for short-term financing can be discerned from EACB's lending to them after mid-1962 (see Table 2). EACB's holdings of Treasury bills are usually higher at the end of the year, when the commercial banks are in a less liquid position because their funds are employed in connection with the marketing of crops. Toward the middle of the year, EACB's Treasury bill holdings decline. For example, its holdings of Treasury bills

©International Monetary Fund. Not for Redistribution 244 INTERNATIONAL MONETARY FUND STAFF PAPERS decreased from £EA 7.4 million at the end of 1963 to £EA 3.8 million by the middle of 1964 but then increased again to <£EA 12.3 million at the end of December 1964. The rise was especially sharp in the second half of 1964 because of large borrowings by the Governments of Uganda and Tanzania (mainland). The Government of Kenya had not found it necessary to issue Treasury bills since early in 1962 because it had been able to borrow from companies and other sources direct, a sign of a relative abundance of liquid funds in Nairobi. Tanzania (mainland), on the other hand, had borrowed up to the limit by August 1964 and had to approach EACB for permission to borrow beyond its apportioned share. After consulta- tion and careful consideration, EACB permitted the Government of Tanzania to exceed its allotment of the fiduciary issue to the Govern- ments by applying the amount above Tanzania's mainland share against the unused portions of Kenya and Aden. However, EACB'S increase in the maximum limit of the fiduciary issue to Governments in October 1964 to <£EA 35 million brought Tanzania back within the permissible limit with some margin to spare. Long-term borrowing by the Governments from EACB did not expand after 1962. It totaled £EA 9.7 million on December 31, 1964 and declined to <£EA 8.8 million by the end of June 1965, after Aden's long-term debt had been wiped out in connection with the currency conversion in its territory. EACB has not encouraged long-term borrowing by the Governments because it might tie up resources needed for short-term financing and limit flexibility in monetary policy. EACB continued after 1962 to distribute part of its profits to the Governments in accordance with the established formula, raising the amount distributed to £EA 2V* million in 1963/64 and to £EA 2V2 million in 1964/65 (see Table 6). Earlier, EACB had decided to help strengthen the financial system in East Africa by providing for the East African Government's subscriptions to IMF and the World Bank without charging the funds against the credit lines available to the Governments in connection with fiduciary issues. On August 23, 1962 it allocated £EA 1.1 million to cover the Government of Tanganyika's subscriptions. On the same day, it set aside comparable amounts in a trust fund to cover the other Governments' gold subscriptions to IMF and the World Bank and its affiliates. When Uganda became a member of IMF and the World Bank in September 1963 and Kenya in February 1964, EACB made available from this trust fund <£EA 1.1 million to each Govern- ment for payment of its gold subscriptions. A second trust fund was established to provide for the Governments' subscriptions to the African

©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 245 Development Bank.8 Additional gold payments to IMF, for the 25 per cent general quota increase approved by the Fund's Board of Governors in March 1965, will also be made out of these trust funds. During this time also, EACB further solidified its relations with the commercial banks, especially in three areas—crop financing, rediscount of Treasury bills for the banks, and operation of clearing settlement accounts. Crop financing reached a peak in January 1963. During the following crop season, funds made available by EACB for this purpose were somewhat less but were more evenly spread over the crop season (see Table 4). To facilitate these operations, EACB accepted promissory notes from the banks' customers as security for advances to the banks, and, for discounts, the banks were allowed to tender their own accept- ances when customary bills of exchange were not available. EACB continued to urge the Governments to standardize the ad valorem documentary stamp duties on commercial bills. In November 1964, EACB lowered its rate for rediscounts and advances in connection with crop financing from 5l/2 per cent to 5 per cent. It took this step at a time when rates were rising in London. The effect of lower rates in Nairobi than in London was soon apparent. Within a month from the end of November 1964, lending by EACB to banks for crop financing rose from <£EA 0.6 million to <£EA 3.2 million. Although it declined at the end of the crop season, it remained higher than during earlier comparable periods (see Table 4). By December 1965 it had again risen to <£EA 3.0 million. Nevertheless, even at its peak, the amount lent was only a small part of the <£EA 10 million which EACB is authorized by its Regulations to lend for crop financing. The limited use made by the commercial banks of this facility is due partly to EACB's deliberate encouragement of short-term borrowing from abroad during the main crop season. Under a special cover facility, EACB reported that it . . . offered the banks an opportunity to cover their net requirements or sur- pluses of shillings at finer rates at the beginning and at the end of the two main crop seasons. Previously the high cost of bringing funds from overseas and of returning them at the end of a short period of use had militated against the temporary drawing of funds from abroad for seasonal purposes.9 8 Since the principle of equal quotas ($25 million) for the three mainland territories applied by IMF was not followed by the 1964 Finance Ministers' Conference, which established quotas for the African Development Bank, EACB decided to make available to each of the three Governments an equal amount commensurate with the smallest quota (£EA 1.6 million for Uganda). The two other Govern- ments with larger quotas and subscriptions (£EA 2.1 million for Kenya and ¿£EA 1.9 million for Tanzania) had to find the difference out of their own resources. 9 East African Currency Board, Report for the Year Ended 30th June 1963, p. 15.

©International Monetary Fund. Not for Redistribution 246 INTERNATIONAL MONETARY FUND STAFF PAPERS Treasury bills rediscounted by EACB for the commercial banks fluctuated between <£EA 300,000 and ¿£EA 600,000 per annum during 1962-65. All transactions were for the benefit of banks operating in Uganda. The amounts of rediscounted Treasury bills were rather small, but EACB attached considerable importance to its readiness and ability to act as a lender of last resort in this way. The rate at which the Board stood ready to rediscount Treasury bills remained unchanged at l/2 per cent above the tender rates in the constituent territories. During 1962-65 the number of EACB's bank customers rose and the operations of their clearing settlement accounts with EACB expanded. These accounts can be used for almost all transactions between the commercial banks and EACB and between the banks themselves. This faculty has greatly reduced the necessity of handling and holding cash and has enlarged the resources available to the commercial banks for lending. EACB made it a rule that no commercial bank with an office in one of the capitals of the three mainland territories could obtain any of its services other than those available to the general public unless the bank maintained an account with EACB. EACB lacked legal authority to oblige the commercial banks to hold a minimum balance in these accounts. It has stated that this authority would have been useful, especially in the last few years, when credit extension has risen and the commercial banks have become increasingly overlent. Over the years EACB has endeavored to improve its currency services through the establishment of new currency subcenters in various parts of East Africa and on the islands of Zanzibar and Pemba, and through the conclusion of new currency agency arrangements with commercial banks. Under these arrangements the banks have been authorized to hold coins (but not notes) on behalf of EACB. These measures have eliminated unnecessary shipments of coins to and from Nairobi, reducing some of EACB's costs. EACB saw no need to alter its general commissions on foreign exchange operations when a temporary spurt in outflow of funds occurred in early 1964 as a result of political events. Until November 1964 the charges had remained unchanged at Vs per cent for buying sterling and at % per cent for selling sterling. On November 25, 1964, in response to the rise of the bank rate in London from 5 per cent to 7 per cent, EACB increased its commission on selling sterling from 3/8 per cent to 1A per cent. As the buying commission remained at V& per cent, the spread between the two rates widened, making it less attractive to send funds to London in search of higher rates. A three-

©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 247 month placement in London would have to earn over 2l/2 per cent more than the rate in East Africa, compared with 2 per cent more when the two commissions totaled only l/2 per cent of the funds moved. When EACB raised its commission on selling sterling to l/2 per cent, it reached the maximum permitted under its Regulations. In March 1965, in order to assure continued flexibility, the Regulations were amended to increase the permissible dealing margin from l/2 per cent to 1 per cent of either side of par. So far, EACB has not made use of this new authority. Throughout the whole period since 1961, EACB has sometimes dealt with the banks at rates between the two official limits for its exchange commissions. It did so with the dual aim of (1) encouraging temporary short-term borrowing by the banks from abroad to finance crop movements and (2) bringing finer rates to the public and thus making dealings in the unofficial "compensation market" outside the banking system less attractive. By charging lower rates to the banks on certain operations, EACB has enabled the banks, in turn, to reduce their charges to their customers for transactions amounting to ¿£EA 100,000 or more. As a result, more exchange transactions have been handled through the banking system and "compensation arrangements" have been reduced. "Compensation arrangements" were largely eliminated when the three East African Governments introduced exchange control in June 1965. In 1964, EACB relaxed the relatively automatic link between changes in the local rates for Treasury bills and those in London. From the fall of 1961 to early 1964, these rates in East African territories had remained approximately Vs per cent below the London rates. When the bank rates in London rose to 5 per cent in February 1964 and to 7 per cent in November 1964, EACB intervened to keep the rates for Treasury bills of its constituent Governments from rising sharply in sympathy with the London rates although it still allowed day-to-day changes to be related to the London market. This policy led to broadly parallel moves of the rates in East Africa and in London, but to spreads that widened and narrowed with increases or decreases of the bank rate in London. Early in 1965 the maximum local rate was 4.4 per cent compared with the Treasury bill rate in London of 6.6 per cent. The proportion of EACB's sterling assets to total investments ranged between 82 and 86 per cent during 1961-64 (Table 7). By June 1965 it had declined to 72 per cent. This decline resulted mainly from the currency conversion in Aden. By June 30, 1965, EACB had redeemed <£EA 11.4 million from the South Arabian Currency Authority in exchange for £EA 0.9 million of Aden Government securities and <£EA 10.5 million of sterling securities. Sterling assets at market value

©International Monetary Fund. Not for Redistribution TABLE 7. EAST AFRICAN CURRENCY BOARD: COMPOSITION AND DEGREE OF LIQUIDITY OF ASSETS,! FISCAL YEARS ENDED

JUNE 30, 1961-65 24 8

Amount Per Cent of Total 1961 1962 1963 1964 1965 1961 1962 1963 1964 1965 INTERNATIONA L MONETAR Y FUN D STAF F PAPER S

< • Million East African pounds - » Sterling assets Cash, Treasury bills, and crop- financing advances 26.4 26.6 33.6 35.2 22.5 47.0 47.2 52.1 55.6 44.8 Securities maturing in 5 years or less 18.1 21.9 22.3 24.9 27.5 32.2 38.8 34.6 39.3 54.8 Over 5 and up to 10 years 10.1 6.3 8.4 3.1 0.1 18.0 11.2 13.1 4.9 0.2 Over 10 years 1.6 1.6 0.1 0.1 0.1 2.8 2.8 0.2 0.2 0.2 Total and per cent of grand total 56.2 56.4 64.4 63.3 50.2 83.5 82.3 85.6 83.4 71.8 East African assets Cash, Treasury bills, and crop- financing advances 2.8 5.1 3.2 4.6 12.3 25.2 42.1 29.6 36.5 62.4 Securities maturing in 5 years or less 0.3 0.3 1.4 1.1 1.0 2.7 2.5 13.0 8.7 5.1 Over 5 and up to 10 years 1.2 2.3 1.7 1.8 2.0 11.0 19.0 15.7 14.3 10.2 Over 10 years 6.8 4.4 4.5 5.1 4.4 61.1 36.4 41.7 40.5 22.3 Total and per cent of grand total 11.1 12.1 10.8 12.6 19.7 16.5 17.7 14.4 16.6 28.2 Total assets Cash, Treasury bills, and crop- financing advances 29.2 31.7 36.8 39.8 34.8 43.4 46.3 48.9 52.3 49.8 Securities maturing in 5 years or less 18.4 22.2 23.7 26.0 28.5 27.4 32.4 31.5 34.1 40.8 Over 5 and up to 10 years 11.3 8.6 10.1 4.9 2.1 16.8 12.5 13.4 6.7 3.0 Over 10 years 8.4 6.0 4.6 5.2 4.5 12.4 8.8 6.2 6.9 6.4 Grand total 67.3 68.5 75.2 75.9 69.9 100.0 100.0 100.0 100.0 100.0

Sources: East African Currency Board, Report for the Year Ended 30th June, various years. 1 Value at or below market. ©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 249 at the end of June 1965 ( £EA 50.2 million) were equal to 81 per cent of EACB's sight liabilities (<£EA 61.8 million). Its balance sheet entry for sterling assets included (1) the sterling portion of the shares of profits that will be distributed to the Governments, (2) the amounts that will be paid in foreign exchange to IMF to cover the increase in the quotas of the three East African countries, and (3) Aden's residual share of the eventual "surplus assets." After allowing for these three items, EACB estimated in its annual report for 1965 that its sterling holdings were equivalent to nearly 3V4 months of imports into the East African area.10 EACB has made continuous efforts to shorten the maturities of its assets and thus strengthen its liquidity structure. The proportion of sterling assets maturing in less than five years grew from 79 per cent in 1961 to almost 100 per cent of total sterling securities in 1965. The maturities of almost a third of the East African assets held by EACB in June 1965 stretched over a longer period than the sterling investments. EACB also intends to improve the liquidity structure of its local investments during the remaining period of its operations.

Appraisal and Outlook

By 1965, EACB had moved a long way from the traditional role of a currency board—to be only an automatic exchanger of sterling against local currency, and vice versa. Most of the changes took place after 1960, when each constituent territory had an official of its own on EACB. This closer identity with local interests and developments made it possible to interpret EACB's role and its Regulations in a more liberal and progressive fashion. EACB was therefore able to widen its scope of operations considerably with relatively few amendments to its Regu- lations. Its new activities can be broadly grouped into those which are administrative or service and those which are related to monetary and credit policy. In the second group, the significant advances were (1) greater authority to extend credit where at the outset there had been only authority to issue and exchange currency, (2) deliberate use, as a policy instrument, of changes in charges for buying and selling sterling, and (3) successful intervention to insulate, at least partly, the local Treasury bill rates in East Africa from rates in London. EACB's lending to the Governments alleviated some of the criticism

10 Imports were calculated on the basis of the monthly average of imports in the first quarter of 1965, not including interterritorial trade.

©International Monetary Fund. Not for Redistribution 250 INTERNATIONAL MONETARY FUND STAFF PAPERS customarily leveled against currency boards when they adhere to a 100 per cent currency cover. In credits extended to the Governments, EACB acted rather conservatively, especially as earnings on its foreign investments made its holdings of foreign assets much larger than the difference between the fiduciary issue and the total of currency issued. To some extent, this conservatism was offset by steadily increasing amounts distributed to the Governments out of net income. These amounts reduced the Governments' need to borrow and, to the degree that they were paid in sterling, decreased the percentage of EACB's foreign assets to currency in circulation. An important reason for EACB's caution in lending apparently was its intention to limit its long-term lending to the Governments. By dissuading the Governments from drawing the permissible fiduciary issue all at once and from looking to EACB as a ready source only for long- term financing, EACB gained flexibility for using this facility as an instrument of monetary policy. Through crop financing and through readiness to rediscount Treasury bills, EACB was able to act, within specified limits set by its Regulations, as a lender of last resort to the commercial banks. Throughout most of the period under review, the banks availed themselves of this facility only on a limited scale, mainly because EACB indicated through its special cover arrangements its desire that the commercial banks borrow on the London market. Furthermore, the commercial banks, as branches of international banks, were accustomed to look to their head offices for temporary financing and often found this financing cheaper than turning to EACB. However, EACB's intention of acting as a lender of last resort was unequivocal in November 1964, when it lowered its rate for advances and rediscounts in connection with crop financing at the time when rates in London increased sharply as a result of the rise in the U.K. bank rate. Thus, through its authority for fiduciary issue, EACB had limited powers and capability to expand credit, similar to those possessed by central banks. However, these powers were largely asymmetrical, for, unlike central banks, it lacked authority to control and contract credit apart from the initial control inherent in the statutory ceiling on the fiduciary issue and apart from the use of moral suasion. While commercial banks did maintain accounts with EACB for settling their clearings, EACB had no legal power to require minimum reserves and no influence on the level of reserves through open market policy. Also, unlike central banks, EACB was not empowered to act as full banker to the Govern- ments. It did not accept deposits from the Governments, which used the services of commercial banks. This situation deprived EACB of yet another potential tool of monetary policy—the control and manipulation

©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 251 of Government accounts.11 On the other hand, the scope for practical application of this tool in East Africa would have remained limited as long as the commercial banks adjusted their reserve positions by recourse to their head offices overseas rather than to EACB. The intention of EACB to use changes in its external transfer charges as a policy instrument was a progressive break with earlier practices. The first step in 1962 was to vary through adjustments in its commissions the spread between buying and selling rates for sterling in favor of inward movements with the aim of exercising some influence on the inflow of foreign funds and on the repatriation of export proceeds. While undoubtedly a step in the right direction, the inducement offered was too limited for much effect. The decision to deal with the banks at rates within its regular commission charges, on the other hand, appears to have been quite successful in attracting temporary funds from London during times when the commercial banks' liquidity was strained. Widening the spread between buying and selling rates in 1964, in order to curtail the temporary outflow of funds attracted by higher rates in London, also seems to have produced the intended effect. In the last few years, EACB has also had as one of its objectives the establishment of an East African money market, though aware of the difficulties of the undertaking, given the rudimentary financial system in East Africa and the special characteristics of the commercial banks there. With this objective in mind, it used its influence in the narrow market for short-term securities in East Africa to prevent local rates from following the successive rises in the U.K. bank rate in 1964. Its success demonstrated a degree of independence that would have been unthinkable for the colonial type of currency board and banking system. To provide a more propitious basis for a money market, EACB prepared for consideration of the Governments detailed suggestions for the creation of an East African Treasury bill to replace the three territorial Treasury bills. As stated in its report for 1964,12 EACB expected the suggested system to have major advantages over existing arrangements by- (a) permitting a greater measure of support for the Treasury Bill market; (b) opening the door to an important range of central banking functions, including the more intensive employment locally rather than overseas of any surplus cash of banks and other institutions; 11 For expositions of this approach, see Edward Nevin, Capital Funds in Under- developed Countries (London and New York, 1961), pp. 57-58, and Graeme S. Dorrance, "The Instruments of Monetary Policy in Countries Without Highly Developed Capital Markets," Staff Papers, Vol. XII (1965), pp. 276-77. 12 East African Currency Board, Report for the Year Ended 30th June 1964 % p. 14.

©International Monetary Fund. Not for Redistribution 252 INTERNATIONAL MONETARY FUND STAFF PAPERS (c) sharing more equitably between the three countries the short-term funds available in East Africa as a whole; (d) allowing a greater float of Treasury Bills to be carried with safety; and (e) initiating a continuous contact between Governments regarding the short-term borrowing needs of Treasuries: such will in any event be essential for the functioning of a central bank. However, these proposals, together with a request by EACB to amend its Regulations so as to provide it with powers for liquidity and credit controls, were superseded by the events that led to the decision to establish three separate national central banks. Another area in which the reconstituted EACB proved to be more progressive than its predecessor was the allocations to Governments out of its net income. The absolute amounts distributed doubled between 1961 and 1965; their share of total net income also rose sharply between 1961 and 1964, when the share approached 80 per cent (see Table 6). In 1965 this share decreased, although the absolute amount continued to rise. The percentage drop can be explained partly by the much higher earnings in 1964/65 on EACB's investments in London, which increased income at an unusual rate and, apparently, also by EACB's desire to strengthen its surplus assets for the time when they will be divided and turned over to the new central banks that succeed it.13 This summary has shown the areas in which EACB had moved toward central banking and those in which it had lacked customary powers of monetary authorities.14 Presumably the institutions succeeding EACB will be endowed with the full range of instruments available to modern central banks. Theoretically, they should have much greater freedom of choice in monetary, credit, and foreign reserves policies. However, given the economic setting in which the new central banks will have to operate, their initial policies may be expected to go little beyond those pursued by EACB. Despite-a foreseeable increase in government demands for funds, the central banks will have to act cautiously because of the strain that greater lending is likely to produce on their limited foreign exchange 13 To the extent that EACB's distributed income was generated from earnings on foreign assets, this income provided an expansionary influence and addition to East Africa's income stream; to the extent that it stemmed from the commissions charged locally by EACB, it offset the deflationary impact caused at the time these commissions were paid. 14 Within the framework of this paper, it has not been possible to explore fully the history, theory, merits, and defects of currency boards and their limitations compared with central banks. For further discussion and bibliographic references, the interested reader may turn to H.A. Shannon, "Evolution of the Colonial Sterling Exchange Standard" and "The Modern Colonial Sterling Exchange Stand- ard," Staff Papers, Vol. I (1950-51), pp. 334-54, and Vol. II (1951-52), pp. 318- 62; W.T. Newlyn and D.C. Rowan, Money and Banking in British Colonial Africa, Oxford Studies in African Affairs (London, 1954); and Edward Nevin, op. cit.

©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 253 resources inherited from EACB. Although the central banks will be empowered to supervise and control the credit operations of the commercial banks, they will be faced with a banking system that is generally loaned up and one in which the constituent banks, to the extent that they are branches of foreign banks, are rather heavily indebted to their home offices. This situation, however, does not exclude the possibility of their obtaining further short-term overdrafts from their parent office abroad.15 But the central banks will also have to make new decisions. They will have to evolve international reserve policies. EACB's freedom of action in this respect was constrained by the legal limits set for its fiduciary issue and by its close ties with the London money and capital markets. The new central banks will have to decide on the size and the composition of their international reserves.16 They will also be called on to assist their Governments in finding ways to keep payments arrangements between the East African countries free from restrictions and to provide efficient facilities for transfers. If funds cannot be easily transferred from one commercial bank or branch to another across the borders of these countries, demands on the three central banks for crop financing may turn out to be considerably greater than the amounts hitherto lent by EACB for this purpose. The new institutions will need to make concerted efforts to maintain for their new individual currencies the high degree of confidence, at home and abroad, that EACB established for the East African shilling, and to preserve under the new regimes as many as possible of the advantages that the former common currency offered to East Africa. 15 For an exploration of the difficulties confronting the f r amers of monetary policy in an environment where the major commercial banks are branches of powerful international banks, see Edward Nevin, op. cit.; W.T. Newlyn and D.C. Rowan, op. cit.; and Donald C. Mead, "Monetary Analysis in an Underde- veloped Economy: A Case Study of Three East African Territories," Yale Eco- nomic Essays, Vol. 3 (1963), pp. 56-103. 16 In this respect a remark of the Governor of the International Monetary Fund for Tanzania, at the time of the Fund's 1965 meeting is indicative. He said: "Turning to the wider monetary discussions, I find it difficult to share the calm and dispassionate optimism of the Fund's Report on the international monetary system and international liquidity. In the course of the present year my country has faced the serious prospect of heavy foreign exchange losses through the possible devaluation of a major international currency. Over this situation our authorities had no vestige of control. Had such a devaluation taken place, it would have occurred for reasons entirely extraneous to our own economic situation and would have seri- ously undermined all our development efforts" (International Monetary Fund, Summary Proceedings of the Twentieth Annual Meeting of the Board of Governors, September 27-October 1,1965 (Washington, 1965), p. 193).

©International Monetary Fund. Not for Redistribution 254 INTERNATIONAL MONETARY FUND STAFF PAPERS Le Conseil Monétaire Est Africain

Résumé La décision prise en 1965 par les trois gouvernements du Kenya, de la Tanzanie et de l'Ouganda de créer chacun sa propre banque centrale et d'émettre sa propre monnaie signifie que le Conseil Monétaire Est Africain va mettre un terme à ses activités. Fondé à Londres en 1919, ce Conseil avait pour mission d'émettre et de racheter des monnaies natio- nales contre du sterling; ses membres étaient des fonctionnaires britanni- ques nommés par le Colonial Office. Au début, le Conseil se heurta à des difficultés, en raison notamment des variations du cours de l'argent, sur lequel était basée la valeur des monnaies qu'il remplaçait; il fallut attendre 1950 pour que la couverture de sa monnaie atteigne la proportion de 100 pour cent. A une certaine époque, les territoires représentés par le Conseil comprenaient l'Ethiopie, la Somalie britannique et italienne, ainsi qu'Aden. En 1960, en prévision de l'indépendance des pays qui le cons- tituaient, le nombre des membres du Conseil fut porté de 4 à 7; ces membres devaient être des fonctionnaires de pays représentés. Son siège fut transféré à Nairobi. Le nouveau Conseil élargit son champ d'activité et assuma des fonctions qui sont normalement celles des banques centrales. Les modifications les plus importantes furent les suivantes : 1 ) expansion accrue du crédit au moyen d'émissions fiduciaires, alors qu'à l'origine, il pouvait seulement échanger des monnaies; 2) utilisation délibérée, comme instrument de politique, de la manipulation des commissions d'achat et de vente de sterling; 3 ) intervention tendant à isoler — au moins partiellement — les taux des Bons du Trésor de l'Afrique orientale des taux pratiqués à Londres. Le montant des émissions fiduciaires autorisées fut finalement porté de 10 à 45 millions de livres d'Afrique orientale (35 millions de livres d'Afrique orientale pour les gouvernements, et 10 millions de livres d'Afrique orientale pour les banques commerciales afin de soutenir leurs opérations de financement de récoltes). Jusqu'à présent, l'émission fiduciaire n'a de fait jamais dépassé 25,2 millions de livres d'Afrique orientale; le 31 décembre 1965, elle se montait à 23,8 millions de livres d'Afrique orientale au regard d'une masse monétaire totale de 65,3 millions de livres d'Afrique orientale. La différence la plus significative entre le Conseil et les banques centrales est que le Conseil n'est pas légalement investi du pouvoir de contrôler le crédit et d'en réduire le volume.

©International Monetary Fund. Not for Redistribution EAST AFRICAN CURRENCY BOARD 255 La Junta Monetaria del Africa Oriental

Resumen La decisión adoptada por los tres gobiernos de Kenya, Tanzania y Uganda en cuanto a establecer sus respectivos bancos centrales y a emitir sus propias monedas marca el próximo fin de las operaciones de la Junta Monetaria del África Oriental. La Junta fue creada en Londres en 1919 con la finalidad de que emitiera moneda contra la libra esterlina y redimiera dicha moneda; sus funcionarios eran empleados civiles ingleses designados por la Oficina Colonial. La Junta desde temprano encontró dificultades debido mayormente a variaciones en el precio de la plata, en el cual se basaban las monedas que reponía, y únicamente en 1950 fue que alcanzó una cobertura del cien por ciento para su moneda. Hubo una época en que la zona en que la Junta operaba incluía a Etiopía, a la Somalia Británica y a la Italiana, y a Aden. En 1960, en previsión de la independencia de los países miembros, el número de integrantes de la Junta fue ampliado de cuatro a siete, los cuales habrían de ser funcionarios de los países miembros. La sede de la Junta fue trasladada a Nairobi. La nueva Junta ensanchó el campo de sus operaciones y asumió fun- ciones que normalmente realizan los bancos centrales. Los cambios más importantes fueron (1) una mayor ampliación del crédito mediante emisiones fiduciarias en vez de la autorización original limitada al inter- cambio de monedas, (2) el empleo deliberado, para fines de política, de variaciones en los cargos sobre las compras y las ventas de libras esterli- nas, y (3) intervención a fin de aislar, al menos en parte, las tasas sobre las letras de la Tesorería del África Oriental de las tasas de Londres. La emisión fiduciaria autorizada fue posteriormente aumentada de 10 millones de libras del África Oriental (£EA) a <£EA 45 millones (<£EA 35 millones para los gobiernos y <£EA 10 millones para los bancos comerciales a fin de ayudarlos en sus financiamientos de las cose- chas). La emisión fiduciaria real hasta ahora no ha excedido en ningún nomento de <£EA 25,2 millones; el 31 de diciembre de 1965 llegó a <£EA 23,8 millones de los £EA 65,3 millones de monedas que se encontraban en circulación. La Junta difería de modo muy ostensible de los bancos centrales en que carecía de autoridad legal para controlar y restringir el crédito.