East Africa Wants To Phase Out The US Dollar As Cross-Border Trade CurrencyWednesday, August 10, 2016 > 11:02:37
Evelyn Uwera, a small-scale Rwandan dealer who imports clothes from Uganda and Kenya, usually has to convert her cash to dollars when she travels for cross-border trade, and then convert it back to local currency after the transaction.
Being able to use francs across the borders rather than U.S. dollars will save her money and reduce the uncertainty of profit margins that depend on the value of the dollar, she said in a report in The New Times.
At a time when African economies are struggling with U.S. dollar shortages, central banks of the East African Community have agreed to promote trade using various local currencies instead of the dollar — the conventional medium of exchange in the area’s cross-border trade.
Dealing in U.S. dollars for cross-border trade is expensive and time-consuming for business people, The New Times reports.
Some 43 percent of Africans are involved in some form of informal cross-border trade, with women representing the lion’s share – around 75 percent – of the sector, according to Switzerland-based International Centre for Trade and Sustainable Development.
Informal cross-border trade is vital to Africa in general and the Common Market for Eastern and Southern Africa (COMESA) in particular, contributing to economic growth, job creation and food security for the majority of the region’s population.
Traders in East Africa have to convert their national currencies to the dollar before making transactions, then must later convert the currency back to their national currency. In the process, they pay exchange-related costs at least twice, New Times reported.
An agreement between central banks of the East African Community member countries hopes to gradually phase out the U.S. currency as the common currency in cross-border trade in the region.
Trade across the East African Community — Kenya, Uganda, Tanzania, Burundi and Rwanda — has risen in recent years thanks in part to customs union protocol, removal of non-tariff barriers and diversification of products among other factors.
Experts say the move to trade in local currencies will cushion economies against volatile exchange rate markets which often expose traders to high exchange rate costs.
Central banks have opened accounts for the five regional currencies — Burundi franc, Kenyan shilling, Rwandan franc, Ugandan shilling and Tanzanian shilling — so that they can accept currencies from commercial banks, said Thomas Kagabo, chief economist at the National Bank of Rwanda.
“Each central bank will work with other stakeholders to sensitize people (to) accept regional currencies,” Kagabo said. “These include commercial banks, traders and sellers.”
Rwanda wants to raise awareness among cross-border traders and commercial banks in the East African Community to accept regional currencies in the exchange of goods and services.
When the initiative was first announced earlier this year, there were concerns that volatile exchange rates in the region would doom it.
However, central banks agreed unanimously on an exchange rate that will be shared daily across the region, Kagabo said.
“As for the exchange rate, we have agreed that at the end of each day, we will share the exchange rate of the currencies across the region to maintain the rates. We will be using a bilateral unanimously agreed upon exchange rate,” he said.
This means that a Rwandan trader importing goods from Nairobi or Kampala will be able to travel and use the franc for buying and spending, unlike now, when they have to convert their money before travelling.
“What this means is that if somebody is leaving Kigali to buy goods in Kampala, Nairobi or Dar es Salaam, they don’t need to change their francs into dollars, then change the dollars into local currencies,” Kagabo said. “They will be sure that the currency can be accepted in commercial banks now that the central bank will also accept it. If someone comes into the country with regional currencies, we should accept it in trade.”
Kagabo said the impact will depend on traders accepting it.
“Let’s wait and see. It will largely depend on the speed and how people will be responsive. I am sure people will be responsive. This is about business. Impact depends on speed of uptake,” he said.
Traders have welcomed the move, The New Times reported.
Rwanda’s exports to other East African Community countries went down in volume and at least 10 percent in value from $142.45 million in 2014 to $127.76 million in 2015, according to Tralac Trade Law Center.
The decline comes at a time when East African Community is implementing a common market protocol expected to drive up trade in the region.
The decline was blamed on falling international commodity prices and a drop in exports to neighboring Burundi.
Imports also dropped from about $546.8 million in 2014 to $519.4 in 2015. Rwanda’s main exports to EAC members are tea, coffee, raw hides and skins, vegetables, beer and milling industry products.
Rwanda imports products such as clothing, cement, and palm oil.