Journal Issue

Evolution of African Currencies: Part II: The Sterling Area and Unattached Currencies

International Monetary Fund. External Relations Dept.
Published Date:
December 1964
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J. V. Mládek

ADEFINITION of membership in the sterling area as it exists in our time is almost impossible, unless one is satisfied with the formal answer that membership is tantamount to inscription on the list of scheduled territories. Yet in its younger years the sterling area seems to have had a code of behavior of which many provisions are still applied in various sterling area countries. Here are some of the characteristics: rates of exchange of member currencies based on fixed rates for sterling; official reserves held in sterling; a more or less important part of private assets held in London; exchange transactions with countries outside the area normally carried out through London; payments within the area entirely free; imperial tariff preferences, but no preferences through import quotas, for those members of the area which were also members of the British Commonwealth, as were the great majority of sterling area members; London as the main source of investments and capital. Africa is no exception in the development over the last 15 years which has reduced the “fullness of membership” in the sterling area by the elimination of some of these characteristics.

Mr. Mládek is Director of the Central Banking Service in the Fund, and until recently was in charge of the Fund African Department. He has occupied various other positions in the Fund, including that of Executive Director and Director of the European Office in Paris. Before joining the Fund he served in the Czechoslovak Ministry of Finance and was Director and Commissioner of the National Bank of Czechoslovakia.


All African countries formerly under British sovereignty have remained members of the sterling area, as has the Republic of South Africa. The only exception is British Cameroon, which has merged with French Cameroun into the Republic of Cameroon, which is in one of the CFA franc areas, and former British Somaliland, which has been absorbed in the Republic of Somalia. Similarly, Gambia, which at present is still a member of the sterling area and under the jurisdiction of the West African Currency Board (see below), will become part of the West African Currency Union if it joins the Republic of Senegal.

AFRICA: Sterling Area Countries and Territories

Until recent years, the African territories of the sterling area, with the single exception of Libya, were grouped in four currency unions. One was managed by the South African Reserve Bank, another by the Bank of Rhodesia and Nyasaland, while two were under the jurisdiction of currency boards, the East African Currency Board and the West African Currency Board.

South African Reserve Bank

The South African Reserve Bank has been issuing currency not only for the Republic of South Africa but also for the League of Nations’ trusteeship territory of South-West Africa and the British protectorates of Basutoland, Bechuanaland, and Swaziland. Thus, technically, the arrangement may be labeled as a currency union, although the South African monetary authorities are free from the difficulties which are likely to beset any monetary symbiosis of independent states possessing full autonomy in financial policies. South-West Africa is under the direct administration of the Republic and none of the three British protectorates is likely to create problems arising from divergent financial policies.

South Africa exercises control over the movement of funds, including transfers to other parts of the sterling area. Restrictions on these and other payments are applied in a nondiscriminatory fashion. Most of South Africa’s reserves are held in gold, but insofar as currencies are used, sterling appears to be the most important. The rate of the currency unit—the South African pound was replaced in 1961 by the rand, equal to 10 British shillings—is based on a fixed rate for sterling and follows the London market quotations with regard to other currencies.

Federation of Rhodesia and Nyasaland

It has been known for some time that the political tensions leading to the split of the Federation of Rhodesia and Nyasaland would also be an insurmountable obstacle to attempts to maintain the monetary union of the three countries. The Bank of Rhodesia and Nyasaland is still operating, but plans for its replacement by three banks are already progressing. The exchange regime prevailing in Rhodesia and Nyasaland resembles that in South Africa; in particular, it subjects to license transfers from resident accounts to other parts of the sterling area. This restriction was introduced in 1961 on a temporary basis but has been renewed from year to year.

West African Currency Board

The first monetary union which was exposed to the forces of disintegration was the one administered by the West African Currency Board, originally covering what today is Gambia, Ghana, Nigeria, Sierra Leone, and former British Cameroon.

Early in 1957 Ghana established its central bank, the Bank of Ghana, and introduced the Ghana pound, which in turn is to be replaced by the cedi. Initially, payments from Ghana to other countries in the sterling area were not subject to control, but in 1961 the rapid deterioration of Ghana’s balance of payments position induced the authorities to extend licensing to both capital and current transactions with the sterling area. Ghana has entered into a great number of payments agreements,1 mainly with African and Eastern bloc countries.

The Central Bank of Nigeria began its operations in 1959, more than one year before Nigeria’s accession to independence, and replaced the West African shilling by the Nigerian pound. Again, at the outset, Nigeria practiced complete freedom of payments within the sterling area. Nigeria has been for a number of years the net recipient not only of foreign aid but also of private capital. In anticipation of strains resulting from a development program, an Exchange Control Act has been introduced which redefines “foreign currencies” and “nonresidents” in such a fashion that payments within the sterling area could be subject to the same regulations as other transactions. However, the regulations issued maintain a liberal regime for payments within the area.

Sierra Leone, independent since 1961, created its institute of issue, the Bank of Sierra Leone, in 1963, and is introducing a new currency unit, the leone. The exchange rate of the leone is based on the fixed rate of the pound sterling, and all payments within the sterling area are free.

East African Currency Board

The East African shilling issued by the East African Currency Board circulates in three independent states, Kenya, Uganda, and the United Republic of Tanganyika and Zanzibar, and the British colony of Aden. Institutionally, the Currency Board and the Common Services

Organization are the only important agencies common to the three East African states. The Currency Board has shown considerable alertness in adjusting to the changing scene, and its composition has been progressively modified to give greater representation to the member countries. The scope of operations of the Board has been broadened so that it is no longer limited to the creation of money against sterling but may perform certain credit operations, including extension of credits to governments. Yet it is almost certain that the Board is not going to remain indefinitely. The question before the three governments now is whether eventually the Board should be replaced by a central bank common to the three countries, or by two or three central banks. The answer to this question is, of course, related to the outcome of negotiations on the East African Federation. Obviously, a federal setup would enhance the chances of the monetary union’s survival.

In 1960 and 1961, East Africa experienced a considerable outflow of funds, which, however, appears to have subsided in 1963, when some private capital from outside the sterling area entered. Throughout the crisis and until now the East African Currency Board has observed the full and free convertibility of the shilling into sterling.


Libya, having attained its independence in 1951, replaced the three currencies (Italian lira, Egyptian pound, and Algerian franc) circulating in the different parts of its territory by the Libyan pound, equal in value to the pound sterling. At the same time, the Provisional Government chose that Libya should be a member of the sterling area. Libya has been benefiting from considerable foreign aid, but with the increase of exchange proceeds and revenue from mineral oil exports, both the budget and balance of payments position have been gaining strength. The exchange rate of the Libyan pound is based on the fixed rate for sterling. Exchange restrictions are not discriminatory in favor of the sterling area.


Technically, Liberia is part of the dollar area (and is considered as such by the exchange authorities of most countries). By virtue of its use of the U.S. dollar as its currency, it forms a currency union sui generis with the United States. The monetary mechanism is not basically different from the systems originally operated by the currency boards, in which the balance of international payments was the dominant determinant of the money supply. Liberia has, of course, no restrictions on payments and resorts to no discrimination in imports.


Ethiopia in 1945 separated the commercial and central banking functions of the State Bank of Ethiopia and established the National Bank of Ethiopia. The exchange and import system is not severely restrictive and is basically nondiscriminatory. The Ethiopian dollar has remained remarkably stable since 1946.

In 1947 Egypt, comprising at that time what today are two countries, the United Arab Republic (U.A.R.) and the Sudan, left the sterling area. In 1960 the National Bank of Egypt lost its prerogatives of note issue and other central banking to the Central Bank of Egypt. No preferences toward the sterling area remain in effect. The exchange regime of the U.A.R. remains generally restrictive of both current and capital payments, and relies on a great number. of bilateral payments agreements.

In the Sudan, independent since 1956, the Currency Board replaced the Egyptian pound by a Sudanese pound. Since 1960 the Bank of Sudan has been the central bank and in charge of the issue of currency. Although the Sudan is not a member of the sterling area, the exchange rates of other currencies are related to the exchange rate between the Sudanese pound and the pound sterling. The Sudan’s reserves are predominantly held in pounds sterling.

The attainment of independence by Guinea in 1958 was marked by a dramatic deterioration of relations with France. At that time Guinea belonged to the franc area and to the West African Currency Union. In 1960 the Banque de la République de Guinée was created and began to issue the Guinean franc, at par with the former currency, the CFA franc. Guinea tightened restrictions on payments, concluded many bilateral payments agreements, and suppressed preferences for the franc area, of which it no longer considers itself a member.

Somalia, after its accession to independence in 1960, replaced the currencies in the former British and Italian sectors by the Somali shilling, issued by the Banca Nazionale Somala. Somalia has not formally remained part of either the sterling area or the lira area, although it has continued to look to the United Kingdom and Italy for support, and the trade and payments regime provided for mutual preferences with Italy. The exchange control systems in the two sectors have remained different until now, but a new nondiscriminatory exchange control system is being introduced.

Until June 30, 1960, Congo (Leopoldville), as well as the trust territory of Ruanda-Urundi, was part of the Belgian franc monetary area. The exchange restrictions on payments for settlements to countries outside the area conformed to the Belgian exchange regulations, and there were no restrictions on payments within the area, except that in March 1960 certain controls on capital exports were introduced. The currency was issued and administered by the Central Bank of the Belgian Congo and Ruanda-Urundi, which maintained its reserves also in currencies other than the Belgian franc and in gold. In conformity with the Treaties of Berlin (1885), Brussels (1890), and St.-Germain-en-Laye (1919), Congo pursued an open-door policy for imports, avoiding discrimination both in licensing and in customs duties. Belgian capital was the main, but not exclusive, source of investment in Congo. The monetary area arrangements between Congo and Belgium were terminated in the months following Congo’s independence (June 30, 1960), and restrictions were imposed on all payments, including those to Belgium and Ruanda-Urundi. Both import and payments restrictions have become much stricter as a result of the financial crisis which came in the wake of political events. The Congolese currency unit, the Congo franc, originally at par with the Belgian franc, depreciated as a result of strong inflationary pressures, and has been devalued twice.

A few months after Congo (Leopoldville) became independent, the trusteeship territory of Ruanda-Urundi was provided with a new central bank, the Banque d’Emission du Rwanda et du Burundi, which replaced the currency then shared with Congo. When in 1962 the territory became the two independent states of Burundi and Rwanda, the two Governments decided to maintain the common central bank and currency as well as the customs union, but no monetary area with Belgium was formed. However, difficulties developed rapidly and at the end of 1963 the union was denounced. The exchange regimes of the two countries have since become very restrictive. In the spring of 1964 two separate central banks were established and two separate currencies are being introduced. The reasons leading to the dissolution of the union furnish an example of the typical pitfalls threatening any monetary union between independent states: divergence of budgetary policies and problems of foreign exchange allocations had been the bone of contention. The political sentiment between the two countries was not sufficiently cordial to help the union over the first hurdles.


The changes in the currency arrangements in Africa that have been described suggest several general observations:

1. The two large monetary areas (sterling and franc) have preserved most of their African membership. Habit, the facility of well-established financial and trade links, and the influence of expatriates in business, have all played a part in this continuance of membership. However, there seem to be also more potent motives, since membership in an area is only part of a more comprehensive relationship, including tangible advantages, such as outlets for exports, sources of capital and investments, and intergovernment aid.

2. The disappearance of the two smaller monetary areas, the Belgian franc and the Italian lira, is attributable less to the size of these areas than to particular circumstances. For Congo (Leopoldville), Burundi, and Rwanda, and also for Belgium, the trade incentive to maintain the area was missing, as Congo’s exports enjoy world-wide marketability and import preferences were absent both in Belgium and in Africa. In any case, the stormy climate surrounding the birth of the independent Republic of Congo ruled out any consideration of its maintaining the area arrangements. Libya’s ties with Italy were severed by war events. Somaliland, consisting of the former British and Italian territories with two entirely different exchange regimes and receiving (until recently) support from both the United Kingdom and Italy, found it difficult to consider a monetary area relationship with either one of them.

3. A scrutiny of the practices within the monetary areas shows signs that relationships are becoming looser. Tunisia and Morocco have unpegged their currencies from the French franc, although in the case of Morocco the difference in exchange rates is small. In many instances exchange reserves are held partly in other than metropolitan currencies, and transactions are channeled through other than metropolitan markets. Even more important, the principle of entirely free intra-area transfers has lost some ground. In the sterling area, only Sierra Leone, Gambia, and East Africa—all of which are only at the threshold of their monetary autonomy—maintain unlimited transfers. In the franc area, the two currency unions and the Malagasy Republic still observe free transferability, but the Maghreb group and Mali have departed from it.

The reasons for the imposition of controls on capital movements and some current transactions were not identical in all countries. In some, a general deterioration of the balance of payments was the cause; in others, the tendency for private capital to leave. In some instances, the outflow of private funds was closely related to the exodus of the expatriate population. In others, it reflected the feeling of insecurity, which was intense enough to move out liquid capital but not to cause the relinquishment of enterprises and landed property. In some places, private funds tended to leave for monetary reasons, as a reaction to what was interpreted as a too expansionist inflationary policy which would inescapably lead to the imposition of restrictions. However, in certain countries, particularly those which did not resort to restrictions, there has been a partial return of capital, and there are signs that capital which did not originate in the former metropolitan countries is making an entrance.

It is difficult to avoid the conclusion that the private capital account of many new African countries is likely to remain vulnerable for some time. Many African countries make an effort to encourage foreign capital by various foreign investment codes. While guarantees to capital entering new countries are desirable, it is difficult to attract capital through such assurances when the general attitude toward foreign investments and private enterprise remains unclear or even apparently hostile. In countries where foreign settlers were numerous, the climate will undoubtedly improve once the process of exodus and liquidation comes to an end.

4. As the system of preferential exchange and import measures is modified or abandoned, nonmembers cease to be subjected to discrimination. One may only hope that this nondiscrimination will be achieved through removal of restrictions on nonarea transactions rather than through their introduction on intra-area trade and payments.

5. Under the colonial currency regimes, currency unions were a convenient arrangement, not too difficult to run since the credit and financial policies were centrally controlled, and since in the countries with currency boards no independent credit policies were actually practicable. It was obvious that the real test of currency unions would come with the advent of independence, when participating countries would be endowed with financial and credit autonomy. Two currency unions have actually dissolved before being subjected to such a test. The West African union disappeared gradually as territory after territory gained independence and created central banks and national currencies. The Rhodesia and Nyasaland currency union disintegrated when one of its constituents became an independent state. The Rwanda-Burundi union was subjected to the test and split after one year, on account both of economic and of political divergencies. The two CFA unions have remained operative, and their future depends essentially on the strength of the member countries’ political will to stay together. The fate of the East African currency union is also likely to be determined mainly by the political decisions defining the relations between the three African countries in it.

6. In very recent years a great many bilateral payments agreements have been signed by African governments. Some of these arrangements came to life because they were considered an inevitable concomitant of trade agreements. The expansion and redirection of trade is sought through bilateral arrangements, and indeed in a few instances—and at a high price—a radical geographical redistribution of trade has been achieved. Sometimes countries negotiating these agreements are prompted to do so in order to find outlets for goods that are particularly difficult to market. To the financially hard pressed, the appeal of “swing credits” (the limited credit afforded to the partners in a payments agreement) is not negligible. For some countries, payments agreements enable the traditional metropolitan exchange markets to be avoided. The pitfalls of bilateralism, however, seem to have been unknown on most of the African continent, and only now are they being discovered through experience. Already certain countries find themselves extending credits to considerably wealthier partners in payments agreements, or ending up with imports of nonessential or low quality merchandise.

There is, however, another danger arising out of a wide use of bilateral payments agreements, and even from the application of too coercive trade agreements. In order to force trade into the channels prescribed by such agreements, a discriminatory application of restrictions is an obvious expedient. The increasing freedom to pursue Africa’s interests by seizing the best available economic opportunities is the beneficial consequence of gradually receding discrimination in the monetary areas to which so many African countries belong. But this advantage would be lost to the extent that a maze of new discriminatory measures was imposed by the African states themselves in order to implement their bilateral agreements. The fashion of bilateralism, so attractive to all those who seek to put to work the apparatus of exchange or import controls, appears still to be gaining ground in Africa, while in other continents its popularity is waning as a consequence of rich and conclusive experience. It is hoped that African countries will manage, in contrast to the older nations, to learn otherwise than through their own mistakes.

1Trade agreements are arrangements between two countries which specify the volume of trade in each direction which is to be licensed or otherwise facilitated. Payments agreements are arrangements for the bilateral settlement of payments for exports and imports between the two countries concerned, providing for a limited amount of credit and designed to make these settlements with the least possible use of gold and convertible currencies.

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