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EXPERIENCES OF UGANDA IN THE
IMPLEMENTATION OF CURRENCY CONVERTIBILITY
WITHIN THE EAST AFRICAN COMMUNITY
by
Charles A. Abuka PhD
Assistant Director
Research Department
Bank of Uganda
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A: MONETARY & FINANCIAL
COOPERATION (ARTICLE 82 (1))
Provided for in the EAC treaty
 Maintain convertibility as a basis for
establishment of a monetary union
 Harmonize macroeconomic policies
especially exchange rate, interests rate
and monetary and fiscal policies
 Remove obstacles to free movement of
goods, services and capital within EAC.

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MONETARY & FISCAL
HARMONISATION (ARRTICLE 83
(2))

Remove all exchange restrictions on imports &
exports
 Maintain free market determined exchange rates and
enhance level of reserves
 Adjust fiscal policies & credit to government to ensure
monetary stability and economic growth
 Liberalize financial sectors, enhance competition and
efficiency in system
 Harmonize tax policies, remove tax distortions and
lead to efficient resource allocation.
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B: IS THE EAC AN OCA?

See debate in Nkenda (2001) & IMF
(2004)
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IS THE EAC AN OCA?
Factor mobility
 Openness
 Product diversification
 Flexibility of prices and wages
 Similar inflation rates
 Similarities in Industrial structures
 High covariation in economic activities

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C: CONVERGENCE CRITERIA IN
EAC









Inflation
Real GDP growth
Current account sustainability
Budget deficit
National savings
Foreign exchange reserve cover
Market determined interest rates
Market determined exchange rates
Debt sustainability
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D: CURRENCY CONVERTIBILITY
An integral part of monetary integration
 Ability to freely exchange the local
currency into any foreign exchange at
any given rate.

7
CURRENCY CONVERTIBILITY

Convertibility in practice implies
freedom from exchange controls.
8
CURRENCY CONVERTIBILITY

Agreements exist in EAC for full convertibility
for foreign exchange transactions.
 Full convertibility in the EAC is a key element
of monetary union.
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CURRENCY CONVERTIBILIY

An initial step to gradual elimination of
exchange risk in EAC.
 Crucial step in lowering cost of cross border
business
 Individuals benefit from knowledge of existing
exchange rate and that their currency will not
be rejected when traveling in the region
 Business benefits from the transparency
associated with transferring funds in the
region
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CURRENCY CONVERTIBILIY

Easier cross border comparison of prices of
goods and services should lead to increased
trade.
 Critical step in improving the payment system
for goods and services.
 Reduces transactions costs and encourages
competition.
 Currency convertibility is a first step to
overcoming obstacles created by relatively
small individual domestic markets.
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CURRENCY CONVERTIBILITY

Currency convertibility in EAC dates back to
1995 when Governors agreed to allow free
convertibility.
 Modalities for repatriation of excess holdings
of local currencies were worked out.
 The Governors meeting on 25 October 1996
made central banks buyers and sellers of last
resort to inspire confidence.
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E: GUIDE ON CONVERTIBILITY

The institutional and operational
framework
 Visibility of exchange rates-All dealers to
quote currencies of Kenya, Uganda and
Tanzania alongside other foreign currencies
 EAC Currencies to be competitively traded
like any other foreign currencies

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GUIDE ON CONVERTIBILITY
Settlement modalities
 Commercial banks to open and
maintain in their books EAC currency
Shilling accounts for their own accounts
and for their customer
 Commercial banks to establish
correspondent relationships with banks
in Kenya, Uganda and Tanzania.

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GUIDE ON CONVERTIBILITY
Commercial banks to be responsible for
the repatriation of surplus partner
currencies to their correspondent banks
for the credit of their accounts
 Commercial banks with no
correspondent banks would be assisted
in repatriation on a collection basis by
the central banks at a fee.

15
F: Experience with the convertibility
arrangement 1998 to 2005

Mixed progress in attainment of
macroeconomic convergence
 Acceptance of each others currency
facilitated flow of trade & investment
 Convertibility has been an important avenue
for promoting regional cooperation
 Regional Governors have continued to
interact regularly
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Experience with the convertibility
arrangement 1998 to 2005

Authorized dealers in all the EAC
countries are expected to quote the three
regional currencies
 Trading is effected all EAC currencies.
Kenya shilling is the most widely traded
 Magnitude of pressures on the exchange
rates of EAC countries has declined over
the recent years and so has the volatility
of exchange rates.
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EXPERIENCE WITH
CONVERTIBILITY ARRANGEMENT


The coefficient of variation of
average monthly exchange rates of
EAC countries vis-à-vis the U.S
Dollar has declined over 2000 to 2005
period.
Relative stability of bilateral
exchange rates is reflected by the
fact that the fluctuations have stayed
within a narrow 2- % margin.
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Table 2: EAC: Variability of Exchange rates
(Against the US$ monthly data; 1980-2003)
Country/Period
Standard deviation
Mean
Kenya
1980-2003
25.8
39.4
1980-1990
4.5
15.0
1990-2000
17.3
51.9
2000-2003
1.7
77.8
Tanzania
1980-2003
342.7
370.6
1980-1990
62.0
54.9
1990-2000
198.7
509.4
2000-2003
75.1
956.2
Uganda
1980-2003
678.9
742.7
1980-1990
133.4
75.3
1990-2000
321.1
1082.6
2000-2003
97.0
1837.5
Source: IMF study on monetary union among EAC countries
Coefficient of
variation
0.65
0.30
0.33
0.02
0.92
1.13
0.39
0.08
0.91
0.77
0.30
0.05
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Table 3: EAC: Variability of bilateral nominal
exchange rates (monthly data; 1980-2003)
Bilateral rate between Kenya and Tanzania (K Shs/T Shs)
1980-2003
1980-1990
1990-2000
2000-2003
Bilateral rate between Kenya and Uganda (K Shs/U Shs)
1980-2003
1980-1990
1990-2000
2000-2003
Bilateral rate between Tanzania and Uganda (T Shs/U
Shs)
1980-2003
1980-1990
1990-2000
2000-2003
Source: IMF study on monetary union among EAC countries
Standard
deviation
Mean
0.42
0.43
0.02
0.01
0.37
0.69
0.08
0.08
Coefficient
of
variation
1.12
0.63
0.24
0.09
23.85
33.16
0.01
0.00
7.55
16.42
0.05
0.04
3.16
2.02
0.19
0.07
25.38
35.43
0.11
0.03
8.24
17.40
0.47
0.52
3.08
2.04
0.24
0.05
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Table 4: EAC: Variability of bilateral real
exchange rates (monthly data; 1980-2003)
Bilateral rate between Kenya and Tanzania (K Shs/T Shs)
1990-2000
2000-2003
Bilateral rate between Kenya and Uganda (K Shs/U Shs)
1990-2000
2000-2003
Bilateral rate between Tanzania and Uganda (T Shs/U Shs)
1990-2000
2000-2003
Source: IMF study on monetary union among EAC countries
Standard Mean Coefficient
deviation
of variation
1.46 4.68
0.31
0.73 10.02
0.07
0.97
0.28
5.94
4.37
0.16
0.06
16.00
1.99
65.70
43.67
0.24
0.05
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G: The Ugandan market



Gross transactions have risen by more
than six fold from 1998 to 2004.
Ken Shs. traded rose from Shs 0.535
bn. to Shs. 3.897 bn.
Tz Shs. traded rose from Shs. 1.035
bn to Shs. 7.819 bn.
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Volume of Kenya currency traded
in the Bureax
Period
5,386.81
3,443.30
2,700.60
0.00
1,949.34
1998
952.65
1999
1,355.34
1,278.32
2000
971.61
2001
689.38 632.52
472.77 534.63
977.73
665.96 645.80 479.88 266.17
268.46
2002
1,711.12
2003
2,686.21
1,732.19
2004
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
Millions of Shillings
Purchases
Sales
Gross
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Volume of Tanzanian currency
traded in the Bureaux
20000
18000
16000
Millions of Shillings
14000
12000
10000
8000
6000
4000
2000
0
1998
1999
2000
2001
2002
2003
2004
Period
Purchases
Sales
Gross
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H: EARLY ISSUES WITH
CONVERTIBILITY








Initial evidence of arbitrage for other EAC currencies
Large spreads between buying and selling rates for some
currencies
Impact of the transactions charge on repatriated funds.
Public awareness of the convertibility arrangement.
Costs involved in fund repatriation by commercial banks.
Differences in external openness in EAC.
Trade imbalances.
Regional FDI
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ISSUES WITH CONVERTIBILITY

Differences in export structures and degree of
diversification in production structures
 All three countries still trade mainly with nonEAC countries.
 For exports, Kenya has the largest share of
the regional market. Its regional exports are
much less than those outside the region
 For imports Uganda has the largest share of
imports originating from the region, Tanzania
follows and Kenya has the least.
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Table 1: Trade indicators for the East African Community countries
Memorandum item
Kenya
1990
Two main exports as a % of total exports
37.7
Exports of gds & servs % of GDP
26.9
Imports of gds & servs % of GDP
28.5
Openness
55.4
Shares of bilat trade with 2 other countries in 7.0
total trade
CAB excl. transfers, % of GDP
-11.0
2003
32.4
25.4
30.1
55.6
10.7
Tanzania
1990 2003
9.3 53.0
11.5 11.2
29.0 20.1
40.5 31.2
2.2 6.2
Uganda
1990
75.0
9.5
29.6
39.1
30.1
2003
32.8
8.0
27.2
39.9
36.5
-8.6 -18.9 -8.9 -8.1 -10.8
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Direction of Uganda’s exports in
2004
35.8
36.9
7.1
1.7
9.8
European Union
27.3
Comesa
Kenya
Tanzania
Rest of Africa
Others
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Source of Uganda’s imports in 2004
European Union, 18.9
Others, 55.5
Comesa, 25.6
Rest of Africa, 8.7Tanzania, 0.9
Kenya, 22.6
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I: THE FUTURE OF
CONVERTIBILITY IN THE EAC


Macroeconomic convergence to support a degree of stability in
bilateral exchange rates of East African countries
Policies to improve the EAC economies, increase stability and
strengthen their capacity to absorb socks
30
THE FUTURE OF CONVERTIBILITY
IN THE EAC

Strengthening of institutions to ensure the
adoption and coordinated implementation of
appropriate monetary and exchange rate
policies.
31
THE FUTURE OF CONVERTIBILITY
IN THE EAC
Free market determined exchange rates
will be maintained
 Existing convertibility of EAC currencies
will be maintained

32
THE FUTURE OF CONVERTIBILITY
IN THE EAC


Measures to facilitate trade and capital movements
within the community will be enhanced
Development, harmonization and integration of
financial systems in the EAC
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THE FUTURE OF CONVERTIBILITY
IN THE EAC

Continue to strengthen the institutional and
operational arrangements for greater
convertibility.
– Technology for productivity and efficiency
of settlement arrangements: minimize risks
to convertibility.
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