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The East African Currency Board

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The East African Currency Board 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 inde- pendence 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 indi- vidual 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 con- stituent territories notes or coins in exchange for equivalent values in sterlingx lodged with it in London and to pay sterling in London equiva- lent 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 trans- actions 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.
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