Photograph — Brookings Institute

Sequel to the launch of the African Continent Free Trade Area (AfCFTA) last month, member states of the East African Community (EAC) plan to link the regional electronic payment system to other payment solutions in Africa.

Launched in May 2014, the East African Payment System (EAPS) allows citizens of member countries to make and receive payments in regional currencies such as the Kenyan shilling, Ugandan shilling, Tanzanian shilling, Rwandan franc, and Burundian franc, while South Sudan is yet to join the system.

The idea behind the regional payment system is that by allowing regional currencies to be freely convertible, traders can transact without having to convert national currencies into dollars which will ultimately protect them from foreign exchange shocks associated with dollar movements.

However, the payment system has reportedly underperformed due to the reluctance of member countries to trade in one another’s currency, with Kenya dominating transactions in the EAPS. Kenyans accounted for over 98 percent of the transactions in the system during the 2017/2018 financial year. This amounts to $ 2.37 billion out of $2.41 billion, with a meagre $40 million transacted by the other four countries.

As a result, Central Banks in the region are now considering ways to transform the system by connecting it with other payment systems in Africa to allow seamless transfer of cash across the continent at retail and wholesale levels. This will serve as a boost to intra-Africa trade and also support the growth of regional firms, Bank of Uganda’s Deputy Governor, Dr Louis Kasekende said.

A threat to the single currency regime

In 2014, EAC member states signed an agreement to make all regional currencies tradable to promote intra-regional trade as well as gear up for a single currency regime in 2024. In line with this, regional central banks have opened reciprocal accounts with one another but participant countries are hesitant to trade in regional currencies.

The unwillingness of EAC member countries to transact in regional currencies is likely to hinder efforts by the regional central banks to achieve a system of tradable currencies ahead of a monetary union in five years time. Moreover, regional currencies like the South Sudanese pound portray differing features which are making it difficult to promote a freely convertible regional currency regime.

Other obstacles to achieving the 2024 goal include the increased strength of the Kenyan shilling compared to its regional peers, the existence of parallel exchange rate markets in Uganda and South Sudan, difficulties in repatriating Tanzanian and South Sudanese currencies and the difficulties in promoting the acceptability of regional currencies to member states, the East African reports.

Comments

Elsewhere on Ventures

Triangle arrow