Exchange Systems
Exchange Rates
All countries in the Eastern and Southern African region except Angola and Mozambique are members of the Fund and maintain the exchange rates between their currencies and selected currencies or currency baskets within a relatively narrow margin.14 The currencies of Djibouti, Ethiopia, and Somalia are pegged to the U.S. dollar; the currencies of the Comoros and Madagascar to the French franc; and the currencies of Lesotho and Swaziland to the South African rand. The currencies of Kenya, Malawi, Mauritius, Seychelles, Uganda, and Zambia are linked to the special drawing right (SDR). Tanzania pegs its currency to a basket of the currencies of its main trading partners, Zimbabwe to a currency-weighted basket, and Botswana to a basket of currencies consisting of the SDR and the rand. Angola and Mozambique establish exchange rates for the kwanza and the metical, respectively,15 against the U. S. dollar.
The U.S. dollar serves as the intervention currency for 12 countries (Botswana, Djibouti, Ethiopia, Kenya, Lesotho, Malawi, Somalia, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe), the French franc for the Comoros and Madagascar, and the pound sterling for Mauritius and Seychelles.
Although the various practices pertaining to currency pegs have posed no major problems for intraregional settlements, experience in other areas indicates that regional integration would be facilitated by harmonization of pegging practices to promote exchange rate stability within the region.
Three countries maintain multiple currency practices. It is difficult to single out the purposes served by the multiple currency practices. Nevertheless, these measures can, by taxing or subsidizing exchange receipts and payments, distort the price-cost structure in the economy and, what is perhaps just as relevant in the present context, can lead to trade practices inconsistent with international agreements.16 In Ethiopia, levies on transactions with the public result in a spread of approximately 3 per cent between buying and selling rates for all currencies quoted. In Kenya, the advance import deposit scheme, the export compensation scheme, and the levying of fees on purchases of travel tickets represent multiple currency practices. In Zambia, certain agricultural producers are eligible for incentives in the form of foreign exchange. There is, however, no prima facie evidence that these specific practices have adversely affected intraregional trade.
Prescription of Currency
All the countries in the Eastern and Southern African region except Djibouti and Seychelles have prescription-of-currency requirements. There are variations among the countries as regards the currencies authorized for use in making international settlements. In general, these requirements limit export receipts to convertible currencies but permit foreign payments to be settled in a wider range of currencies.
In Kenya, Malawi, Somalia, Tanzania, Uganda, and Zambia, payments to nonresidents may be made in the currency of the paying country to an external account maintained by the recipient or in any convertible currency traded by the paying country. Payments from residents of other countries may be received in local currency from an external account maintained in the country receiving the goods or in any convertible currency.
For prescription-of-currency purposes, Mauritius distinguishes between former sterling area countries (which it defines as the United Kingdom, the Channel Islands, the Isle of Man, and the Republic of Ireland) and External Account countries. Settlements between residents of Mauritius and residents of countries outside the former Sterling Area may be made in rupees through External Accounts in Mauritius, in sterling through External Accounts in the United Kingdom, or in any non-Sterling Area currency.
In the Comoros, the Institute of Issue maintains an Operations Account with the French Treasury; settlements with France, Monaco, and Operations Account countries17 are made in Comoros francs, French francs, or the currency of any other Operations Account country. Settlements with all other countries are usually made through correspondent banks in France in any of the currencies of those countries or in French francs through foreign accounts in France.
The Comoros, Ethiopia, Kenya, Madagascar, Seychelles, Somalia, Tanzania, and Uganda prohibit settlements with South Africa.
The main reason cited for the prescription-of-currency requirements was the pattern of imports, the overwhelming majority of which originate in traditional markets in Europe, North America, and Japan. In order to pay for these imports, convertible currencies must be acquired and held as working balances. Moreover, as will be discussed later in this paper, traders prefer, with some exceptions, to invoice and settle intraregional trade in convertible currencies. The prescription-of-currency requirements can, in a sense, be looked upon as a reflection of this preference. Therefore, under the present system of channeling intraregional settlements, liberalization of prescription-of-currency requirements would not by itself lead to greater use of regional currencies in intraregional trade.
Bilateral Payments Agreements
The proportion of overall intraregional trade being conducted under bilateral payments agreements is relatively small, although in one or two instances a substantial part of bilateral trade may be carried out under bilateral payments agreements. There is only one identified instance of a bilateral payments agreement between countries in the region—an active agreement between Mozambique and Tanzania. All payments between the two countries are settled through clearing accounts maintained by the respective central banks, and to date no settlement has been made in convertible currencies. It is understood that, according to the terms of the arrangement, each country may accord preference to the other’s goods within “tolerable” margins regarding price and quality.
The bulk of such arrangements involve non-Fund members of the region and are with partners outside the PTA region. Angola has bilateral payments agreements with Zaire and Cape Verde. Mozambique has active agreements with Bangladesh, Egypt, Iran, Pakistan, Romania, the Syrian Arab Republic, and Viet Nam and an inactive agreement with the Congo. Somalia maintains an agreement with the U.S.S.R. In addition, both Angola and Mozambique have long-term economic cooperation agreements with other non-Fund member countries that may involve bilateral payments features, although the staff team obtained no official information regarding them.
A common feature of many bilateral payments agreements is that payments for imports are made by crediting the exporting country’s clearing account, which may be denominated in U.S. dollars or pounds sterling. As trade under these agreements is usually not balanced, there is a constant risk that the net exporting country will build up inconvertible balances. Such balances could not, unlike convertible currency balances, be used for making settlements with any other country. Often the only way to reduce an inconvertible foreign balance is to import goods from the net importing country that would otherwise have been imported—whether for price, quality, or other reasons—from elsewhere. Bilateral agreements are not very commonly used for the settlement of intraregional trade. They undermine the objective of liberalizing intraregional trade and payments to the extent that they involve the granting of preferential treatment to one country vis-a-vis the others.
Export and Import Controls
Djibouti and Seychelles excepted, all countries in the region maintain restrictions on exports and imports. These appear to have been intensified in the last few years as a result of balance of payments difficulties in many of the countries. Lesotho, Swaziland, and South Africa together form the Rand Monetary Area and, with Botswana, a customs union. No restrictions are applied to payments among these countries; they are uncontrolled and unrecorded. Furthermore, goods of domestic origin may move freely between Botswana and Malawi provided they are not intended for re-export. Exports to, and imports from, South Africa are prohibited in the Comoros, Ethiopia, Kenya, Madagascar, Seychelles, Somalia, Tanzania, and Uganda.
Most exports are subject to licensing, mainly to ensure adequate domestic supplies of such needed goods and strategic materials as armaments, certain minerals, and petroleum products. In some countries, the licensing system is used to ensure that foreign exchange receipts are surrendered and that export receipts are received in an appropriate currency. Surrender of export receipts is required in all countries except Djibouti and Seychelles. In general, proceeds from exports to foreign countries must be collected within 90–120 days of shipment; in the landlocked countries of Malawi, Uganda, and Zambia, up to 6 months are allowed for surrender. However, in Madagascar, export proceeds are due not later than one month after arrival of the goods at their destination, and in Tanzania, proceeds must be collected within one to two months from the date of exportation. In certain countries(Ethiopia, Somalia, and Tanzania), state enterprises are the sole exporting agents for some goods.
Most countries with import restrictions maintain relatively high tariff and nontariff barriers, and no regional preferences are accorded. The general aims of restrictions are to conserve scarce foreign exchange, to protect domestic industries, and to promote import substitution in the manufacturing sector. The degree of nontariff protection varies between countries and commodities and ranges from no restrictions on, to total prohibition of, imports. Foreign exchange is sometimes not made available for imports of goods considered nonessential or for which domestic products can readily be substituted.
Imports may be controlled through exchange allocations, import licensing, or both. In general, importers are required to obtain either general or specific import licenses prior to placing orders abroad. Import licensing aims at containing imports within yearly or half-yearly exchange allocations established by the authorities. The authorities administer the foreign exchange plans, adjusting the license quotas according to foreign reserve developments and the availability of financing. Once the import license has been obtained, foreign exchange is generally granted freely. In Ethiopia, in addition to an import license, importers have to obtain an exchange license that limits the amount and value of goods to be purchased.
Even in countries where a relatively important role has been assigned to central planning, there is a general desire to obtain supplies from the most competitive sources in terms of price and quality. In Kenya, Tanzania, and Zambia, all consignments of imports exceeding certain amounts are subject to quantitative and qualitative inspection and price comparison by a private company acting as agent for the importing country.
As a result of balance of payments difficulties, some countries in the region—namely, Madagascar, Somalia, Tanzania, Uganda, and Zambia—have recently developed external payments arrears. In settling overdue import payments, these countries generally do not differentiate between suppliers, effecting payments only in chronological order and according to certain priorities. In some instances where trade is denominated in regional currencies and settled through reciprocal accounts maintained by central banks, regional suppliers may, in practice, receive payment more quickly than suppliers who have invoiced in convertible currencies (and must therefore enter a queue for payments). The existence of arrears threatens trade and payments relations generally and may be particularly detrimental to the building of confidence that is so important in the development of new institutions for regional cooperation and trade expansion. The general consensus of bankers and traders interviewed was that the existence of payments arrears—a symptom of acute foreign exchange difficulties—has discouraged intraregional trade, just as it discourages trade generally. In particular, traders have probably been reluctant to establish or maintain commercial links or to expand their exports where there has been uncertainty about eventual payment. Although the establishment of an export credit insurance facility can generally be helpful in promoting confidence among traders, it would be difficult for governments or central banks to support such a facility if its viability could be jeopardized by payments problems in countries that were potential markets for their exports.
Banking Relationships in Region
Commercial Banks
Commercial banks in the region maintain relationships both with each other and with banks in major financial centers—primarily London, Paris, and New York. Branch relationships in these countries are generally maintained with foreign banks. The location of branches is influenced both by historical ties with the ex-metropolitan country and by the perceived potential for expansion of financial and commercial links between countries. The foreign banks with the widest network of branch/subsidiary relationships in the region are those headquartered in the United Kingdom (see Table 4). Of the regional banks, only the Commercial Bank of Ethiopia and the Commercial and Savings Bank of Somalia have extraterritorial branches, both in Djibouti. About half the countries in the region have branches or subsidiaries of foreign banks.
Principal Branch or Subsidiary Relationships of Foreign Banks in PTA Region
Principal Branch or Subsidiary Relationships of Foreign Banks in PTA Region
| Bank | Countries in Which It Has Branches or Subsidiaries |
|---|---|
| Barclays Bank | Botswana, Kenya, Lesotho, Mauritius, Seychelles, Swaziland, Uganda, Zambia |
| Standard Bank | Botswana, Lesotho, Kenya, Seychelles, Swaziland, Uganda, Zambia |
| Citibank | Kenya, Mauritius, Seychelles |
| Grindlays Bank | Kenya, Uganda, Zambia |
| Habib Bank | Kenya, Mauritius, Seychelles |
| Bank of Baroda | Kenya, Uganda |
| Banque Naitonale pour le Commerce et L’industrie | Djibouti, Mauritius |
| Bank of Credit and Commerce International | Djibouti |
| Banque de L’Indochine et de Suez | Djibouti |
| British Bank of the Middle East | Djibouti |
Principal Branch or Subsidiary Relationships of Foreign Banks in PTA Region
| Bank | Countries in Which It Has Branches or Subsidiaries |
|---|---|
| Barclays Bank | Botswana, Kenya, Lesotho, Mauritius, Seychelles, Swaziland, Uganda, Zambia |
| Standard Bank | Botswana, Lesotho, Kenya, Seychelles, Swaziland, Uganda, Zambia |
| Citibank | Kenya, Mauritius, Seychelles |
| Grindlays Bank | Kenya, Uganda, Zambia |
| Habib Bank | Kenya, Mauritius, Seychelles |
| Bank of Baroda | Kenya, Uganda |
| Banque Naitonale pour le Commerce et L’industrie | Djibouti, Mauritius |
| Bank of Credit and Commerce International | Djibouti |
| Banque de L’Indochine et de Suez | Djibouti |
| British Bank of the Middle East | Djibouti |
The absence of a more extensive branch network in the region is not a significant hindrance to intraregional trade, since widespread correspondent or agency relationships among banks enable most of the normal business of international settlements to be effected. However, settlements between countries having only correspondent relationships are reported to take somewhat longer than settlements between countries in which there are branches of the same bank. Correspondent relationships involve mutual issuing of telegraphic or mail transfers or letters of credit, forwarding of bills of collection, drawing of drafts, and providing of trade information. Correspondent relationships in the region appear to be extensive among the countries with the largest volume of reciprocal payments (see Table 5). Banks in Kenya, the largest exporter in the region, have correspondent relationships in all other countries in the region.
Correspondent Relationships in Selected Countries in PTA Region
Correspondent Relationships in Selected Countries in PTA Region
| Country | Regional Correspondent Relationships in: |
|---|---|
| Kenya | All countries |
| Ethiopia | Kenya, Tanzania, Uganda, Zambia |
| Tanzania | Kenya, Malawi, Mozambique, Somalia, Uganda, Zambia |
| Zambia | All countries except Angola and Comoros |
| Botswana | Kenya, Lesotho, Malawi, Swaziland, Zambia, Zimbabwe |
Correspondent Relationships in Selected Countries in PTA Region
| Country | Regional Correspondent Relationships in: |
|---|---|
| Kenya | All countries |
| Ethiopia | Kenya, Tanzania, Uganda, Zambia |
| Tanzania | Kenya, Malawi, Mozambique, Somalia, Uganda, Zambia |
| Zambia | All countries except Angola and Comoros |
| Botswana | Kenya, Lesotho, Malawi, Swaziland, Zambia, Zimbabwe |
Another aspect of correspondent relationships is the maintenance of accounts with each other denominated in each other’s currency. The size of these accounts usually depends on the volume of trade between the two countries, but it may be limited by official regulations on holdings of foreign exchange by commercial banks.18 Maintenance of accounts with correspondent banks in the region avoids the need to settle each individual transaction through London or New York. Balances accumulated in these accounts in excess of official limits are generally transferred to respective central bank accounts in the same country. If the amount of a currency in the correspondent bank is not sufficient to cover the demand for that currency, the central bank concerned usually replenishes the account through the sale of convertible currencies for the local currency.
In general, the consensus of bankers, traders, and authorities interviewed was that international settlement of trade transactions took place efficiently and that the commercial banking network—including branches, subsidiaries, and correspondents—was sufficiently extensive to handle intraregional settlements. Furthermore, all bankers emphasized the relative ease with which new correspondent relationships could be opened, should the volume of transactions warrant.
Reciprocal Accounts Maintained by Central Banks
Although most payments for intraregional trade are channeled through the commercial banks and settled in convertible currencies, several central banks in the region have established reciprocal accounts with each other on a bilateral basis. These account relationships probably originated during the life of the EAC, when the central banks of Kenya, Tanzania, and Uganda each maintained reciprocal accounts in shillings with the other two central banks to clear payments within the Community.
Reciprocal accounts are now maintained between the central banks of Kenya and Ethiopia, Kenya and Swaziland, Kenya and Tanzania, Kenya and Uganda, Kenya and Zambia, Malawi and Swaziland, Tanzania and Ethiopia, Tanzania and Somalia, Tanzania and Uganda, Zambia and Botswana, Zambia and Malawi, Zambia and Swaziland, and Zambia and Tanzania.19 Where there is a sufficient volume of trade, such accounts are also maintained with other neighboring countries outside the region.
In general, the balances in these accounts may be used in settlement for imported goods and services, for transfer to other external accounts, and for purchases of foreign exchange.20 Payments through the accounts are generally effected at the rate calculated from the middle rate of each currency on the day the transaction is advised, without any commissions or charges. Each central bank quotes daily exchange rates for currencies in which it maintains reciprocal accounts. In Kenya and Ethiopia, most of the transactions go through commercial channels rather than through the reciprocal accounts. However, in Zambia, most imports from countries with which Zambia maintains reciprocal accounts are settled through these accounts. This practice presumably stems from the existence of payments arrears for imports—the exporter is assured of payment without entering the foreign exchange queue if the settlement is effected through these accounts. In Tanzania, reciprocal accounts are used primarily to replenish Tanzanian commercial bank accounts in partner countries and to make direct payment for government expenses rather than to make settlements for goods and services, since the Bank of Tanzania attempts to minimize direct involvement in actual payments for international trade. In Uganda, payments for imports are channeled through such reciprocal accounts.
The maximum and minimum limits of reciprocal accounts are agreed upon by the countries concerned and vary depending on the volume of trade. For example, Kenya’s accounts with Ethiopia, Tanzania, Uganda, and Zambia have minimum and maximum limits of K Sh 1 million and K Sh 10 million, respectively (or equivalent amounts in partner country currencies). Kenya’s account with Burundi has a minimum limit of K Sh 100,000 and a maximum limit of K Sh 500,000, and its account with Swaziland has a minimum limit of K Sh 8,000 and maximum limit of K Sh 800,000. The accounts between Kenya and Rwanda have no minimum limit but have a maximum limit of K Sh 4 million. In practice, these accounts may sometimes be drawn down below the agreed minimum limits, but no overdrafts are permitted. There is no offsetting of debits and credits and no automatic provision for periodic settlement of balances below the maximum. In many instances, the maximum limits to which the accounts are subject do not exceed the equivalent of 1–2 months’ bilateral trade between the countries concerned.
Central banks consider reciprocal accounts to be an important link between them that has brought about more frequent contacts and consultations; they also believe that in some cases these accounts have been helpful in facilitating prompt payments to exporters during periods of uncertainty. The accounts are also thought to provide needed flexibility in bilateral trade relations. For example, a recent agreement consolidated Zambia’s payments arrears vis-a-vis Kenya that had arisen as a result of a buildup of balances in the account of the Central Bank of Kenya at the Bank of Zambia. Under the agreement, the Central Bank of Kenya paid off Kenyan exporters, and Zambia obtained a longer-term repayment facility amounting to about K Sh 50 million. At present, Tanzania’s reciprocal account arrangement with Uganda is dormant, since virtually all trade between the two countries takes place between the two governments. The Bank of Tanzania operates a temporary trade credit facility allowing Uganda’s imports from Tanzania to be financed on overdrafts for 90 days. However, this facility is expected to be discontinued and replaced by the usual commercial instruments of bills and letters of credit as trade in Uganda shifts back to the private sector.
To the extent that reciprocal accounts are replenished periodically with the proceeds of sales of convertible currency, there is, as a rule, no net saving in working balances held in convertible currencies for trade settlement purposes. Some saving in convertible currency working balances may result from the reciprocal funding of the accounts in local currencies. Moreover, to the extent that convertible currency settlement is avoided, there is a saving of transactions costs. In relation to the value of the transaction, however, the amount saved is likely to be small. No reciprocal credit as such is envisaged in the system of reciprocal accounts. However, a small implicit credit may arise in favor of the net importing country to the extent that, on average, it holds lower balances of its partner’s currency than the latter holds of its currency.
Other Aspects of Payments and Trade Financing
Currencies Used in Settlements
Information obtained through questionnaires or during discussions with the officials visited helped to identify the currencies used in trade, although detailed data on the currency composition were not available for all countries.
In general, both intraregional and international trade are invoiced and settled in convertible currencies. The main reasons cited for the use of convertible currencies were inconvertibility of most of the regional currencies, nonexistence of forward markets or other means of obtaining forward exchange cover for regional currencies,21 overvaluation of certain regional currencies, low volume of trade within the region, and the practice of invoicing certain traditional exports in convertible currencies.
Table 6 gives the currency composition of international trade for five countries that were able to supply the staff team with detailed statistics. However, no separate breakdown was available for the currency composition of intraregional settlements.
Selected Countries in PTA Region: Currency Composition of International Trade
(Percentage of total trade)
Based on 1978 data.
Based on 1979 data.
Including regional currencies.
Selected Countries in PTA Region: Currency Composition of International Trade
(Percentage of total trade)
| Kenya | Botswana1 | ||||||
|---|---|---|---|---|---|---|---|
| Currency | Receipts | Payments | Receipts | Payments | Malawi2 | Seychelles | Zambia |
| U.S. dollar | 60 | 36 | 83 | 1 | 34 | 25 | 60 |
| Pound sterling | 15 | 32 | 10 | 2 | 25 | 45 | 20 |
| French franc | 7 | 4 | 3 | — | — |  | |
| Deutsche mark | 2 | 2 | — | — | 7 | ||
| South African rand | — | — | 4 | 88 | 29 | ||
| Others3 | 16 | 26 | — | 9 | 5 | ||
Based on 1978 data.
Based on 1979 data.
Including regional currencies.
Selected Countries in PTA Region: Currency Composition of International Trade
(Percentage of total trade)
| Kenya | Botswana1 | ||||||
|---|---|---|---|---|---|---|---|
| Currency | Receipts | Payments | Receipts | Payments | Malawi2 | Seychelles | Zambia |
| U.S. dollar | 60 | 36 | 83 | 1 | 34 | 25 | 60 |
| Pound sterling | 15 | 32 | 10 | 2 | 25 | 45 | 20 |
| French franc | 7 | 4 | 3 | — | — | | |
| Deutsche mark | 2 | 2 | — | — | 7 | ||
| South African rand | — | — | 4 | 88 | 29 | ||
| Others3 | 16 | 26 | — | 9 | 5 | ||
Based on 1978 data.
Based on 1979 data.
Including regional currencies.
It was apparent from the discussions that at least 90 per cent of intraregional trade transactions are settled in convertible currencies. Among the convertible currencies, the U.S. dollar and the pound sterling are the main trading currencies, accounting for 60–85 per cent and 10–45 per cent, respectively, of the value of trade in the various countries. Trade is also denominated in the French franc and the deutsche mark; however, these currencies are not widely used for intraregional trade.
The South African rand is used generally for trade settlements in Botswana, Lesotho, Swaziland, and Malawi—owing to their heavy volume of trade with South Africa—and is used only marginally in Zambia. Almost 90 per cent of payments made by Botswana are settled in rand.
In general, the currency in which contracts are invoiced is also the currency in which payments are effected. Some intraregional trade is invoiced and settled in regional currencies, especially among countries where the central banks maintain reciprocal accounts with each other. The Kenya shilling is the regional currency most widely used in settlements with countries that maintain reciprocal accounts. Some trade between Djibouti and its regional trading partners, Ethiopia and Somalia, is settled in their respective regional currencies. Invoicing of trade in regional currencies is, in principle, encouraged by the authorities concerned.
Even though the amounts involved are reported to be insignificant, local currency notes are probably used widely in border trade. The use of such notes has the advantage of ensuring prompt settlement, since it enables traders to avoid dealing with the administrative complexities, delays, and prohibitions involved in using official channels. The use of currency notes in border trade is officially recognized in some countries.
Methods of Payment
With a few exceptions,22 there are no official regulations prescribing one or another method of settlement. As in international trade generally, the methods of settlement used for intraregional trade are determined by the degree of previous contact and confidence between the exporter and the importer. For trade with a new importer in the region, the first few transactions typically take place under letters of credit. If no difficulties are experienced in settlement, the exporter may move to a less rigorous arrangement, which could involve surrendering the documentation to the bank for collection in his behalf. Trade on an open account basis is insignificant within the region and is confined mostly to transactions between foreign companies and their subsidiaries.
Given the serious balance of payments difficulties of many of the countries, suppliers—whether in the region or outside—have tended to prefer settlements under confirmed letters of credit. There are two advantages to trade under letters of credit—first, it gives the exporter an assurance of payment on the due date that derives from the guarantee by the bank opening the credit, and second, it facilitates access to trade financing. However, it is also relatively costly, as will be shown later in this paper.
Most countries were not able to provide the staff team with a classification of regional payments by method of payment, but they did acknowledge the predominance of trade under letters of credit. Almost all trade in Ethiopia, Uganda, and Zambia is covered by confirmed letters of credit; and in Tanzania, about 90 per cent of imports and 50–60 per cent of exports are covered by letters of credit. In Djibouti, an estimated 60–70 per cent of trade transactions are covered by letters of credit. The proportions are smaller for Kenya and Malawi, amounting to about 50 per cent and 25 per cent, respectively. Some trade in Botswana, Kenya, Malawi, and Seychelles takes place on a bills-for-collection basis.
Usually, the head offices of international banks restrict the amount of letters of credit that may be opened by branches in accordance with their exposure limits. However, if the importing country allocates the foreign exchange when the letter of credit is opened, exposure is not affected. Bankers interviewed affirmed that exposure limits for the countries in the region have been set high enough to ensure that they would not be threatened by even a substantial increase in intraregional trade.
Costs of Intraregional Payments
Costs of effecting international settlements are broadly similar for intraregional trade and other trade. Charges and commissions of banks in the region for typical bank services rendered in connection with international settlements—such as opening or confirming letters of credit, negotiation under letters of credit, and handling of bills for collection—are roughly comparable to, or occasionally slightly higher than, charges for similar services rendered for local clients by banks in London or other financial centers. Generally, they are similar between banks in the region and reportedly constitute an insignificant fraction of the value of the underlying transactions.
Bank charges and commissions associated with international transactions occasionally vary, depending on the size of the transaction or on the customer-banker relationships involved. Available information on various direct charges in connection with intraregional payments is shown in Table 7. The main charge is the commission for opening letters of credit, which are widely used for trade transactions in the region. Typically this charge is ½ per cent per quarter, although it ranges from 1/4 per cent (for government transactions) in Seychelles to 1 per cent in Ethiopia and Zambia. Banks charge a flat fee for postal and cable expenses and for advising and amending letters of credit.
Kenya and Botswana: Banking Charges and Commissions Levied on Trade Transactions
Kenya and Botswana: Banking Charges and Commissions Levied on Trade Transactions
| Charge or Commission | Kenya | Botswana | ||||
|---|---|---|---|---|---|---|
| Letters of credit | ||||||
| Outward | ||||||
| Establishment commission | ½ per cent per quarter | ½ per cent per quarter, minimum of P10 | ||||
| Inward | ||||||
| Confirmation fee | 1 per mil per quarter | 1 per mil per quarter, minimum of P25 | ||||
| Negotiation of documents | ¼per cent, minimum of K Sh 100 | ¼ per cent on first PI0,000; ⅛ per cent on balance | ||||
| Bills for collection | ||||||
| Negotiation commission | ⅛ per cent | ¼ per cent | ||||
| Acceptance commission | ⅛ per cent | ¼ per cent | ||||
Kenya and Botswana: Banking Charges and Commissions Levied on Trade Transactions
| Charge or Commission | Kenya | Botswana | ||||
|---|---|---|---|---|---|---|
| Letters of credit | ||||||
| Outward | ||||||
| Establishment commission | ½ per cent per quarter | ½ per cent per quarter, minimum of P10 | ||||
| Inward | ||||||
| Confirmation fee | 1 per mil per quarter | 1 per mil per quarter, minimum of P25 | ||||
| Negotiation of documents | ¼per cent, minimum of K Sh 100 | ¼ per cent on first PI0,000; ⅛ per cent on balance | ||||
| Bills for collection | ||||||
| Negotiation commission | ⅛ per cent | ¼ per cent | ||||
| Acceptance commission | ⅛ per cent | ¼ per cent | ||||
The other charges are paid by traders for converting domestic currency into foreign currency and vice versa. These charges are reflected in the buying and selling rates of banks. If a payment is effected in a third currency, such as U.S. dollars or pounds sterling, the transaction is subject to the exchange spread both in converting the local currency into dollars or sterling and then in converting the proceeds into the trading partner currency. Where transactions are invoiced in the currency of a trading partner, the cost of converting domestic currency at one end is saved. In the relatively few instances in which transactions are channeled through the reciprocal accounts maintained by central banks and the contracts are invoiced in either trading partner’s currency, there is an additional saving if one party to the transaction is allowed to purchase or sell foreign exchange at the buying or selling rates quoted by the central bank.
Regarding the determination of exchange rates, most central banks quote daily buying and selling rates for the U.S. dollar. Buying and selling rates for other currencies are determined on the basis of appropriate rates in international markets. Most central banks do not deal in foreign exchange directly with the public. In their dealings with commercial banks, central banks charge a commission on sales and purchases of foreign exchange. Authorized banks are permitted to charge an additional margin on either side for sales and purchases of foreign currencies when quoting their rates to customers. The National Bank of Ethiopia deals with authorized banks at the official rate. However, in dealing with the public, authorized banks levy prescribed commission charges, which accrue to the central bank, as well as service charges for their own account.
Commission charges on exchange quotations for some countries are given in Table 8. These charges vary substantially from one country to another. For example, a customer importing goods would pay a 0.6 per cent commission in Mauritius, whereas in Zambia, an importer would pay 1.5 per cent if payment were in U.S. dollars or 2 per cent if payment were in other currencies.
Selected Countries in PTA Region: Commissions Levied on Foreign Transactions
(In per cent)
1 per cent for U.S. dollars and 1.5 per cent for other currencies.
The first figure indicates the amount that accrues to the central bank.
Selected Countries in PTA Region: Commissions Levied on Foreign Transactions
(In per cent)
| Commission | Botswana | Ethiopia | Mauritius | Uganda | Zambia | |
|---|---|---|---|---|---|---|
| In central bank dealings with commercial banks | ||||||
| Buying | 0.125 | – | 0.125 | 0.25 | 0.25 | |
| Selling | 0.125 | – | 0.25 | 0.125 | 0.50 | |
| In commercial bank dealings with the public | ||||||
| Buying | 0.5 | 0.5 plus 0 253 | 0.25 | 1 | 1.0, 1.502 | |
| Selling | 0.5 | 1.5 plus 0.753 | 0.35 | 1 | 1.0,1.502 | |
1 per cent for U.S. dollars and 1.5 per cent for other currencies.
The first figure indicates the amount that accrues to the central bank.
Selected Countries in PTA Region: Commissions Levied on Foreign Transactions
(In per cent)
| Commission | Botswana | Ethiopia | Mauritius | Uganda | Zambia | |
|---|---|---|---|---|---|---|
| In central bank dealings with commercial banks | ||||||
| Buying | 0.125 | – | 0.125 | 0.25 | 0.25 | |
| Selling | 0.125 | – | 0.25 | 0.125 | 0.50 | |
| In commercial bank dealings with the public | ||||||
| Buying | 0.5 | 0.5 plus 0 253 | 0.25 | 1 | 1.0, 1.502 | |
| Selling | 0.5 | 1.5 plus 0.753 | 0.35 | 1 | 1.0,1.502 | |
1 per cent for U.S. dollars and 1.5 per cent for other currencies.
The first figure indicates the amount that accrues to the central bank.
An important element in determining the ease of settlement is the transit time required—that is, the time that elapses between the issuing of a payment instruction by one party to a transaction and the receipt of funds by the other party.23 The normal transit time in effecting payments does not vary substantially between payments to countries in the region and to other countries. The people the staff team interviewed did not express dissatisfaction over the time required to make intraregional settlements under existing arrangements.
Transit time for settlements is generally 2–3 days for telegraphic or telex transfers—the most commonly used method of effecting payments, both in intraregional and other trade, especially for large amounts. Also, the time required is the same irrespective of whether the settlement is made in U.S. dollars, pounds sterling, or one of the currencies of the region, provided the paying bank has branch or correspondent relationships with banks in the receiving country. In settlements involving correspondent relationships, the receiving bank acts immediately on payments instructions up to agreed limits without waiting for confirmation of provision of cover. However, where correspondent relations between banks do not exist, payments made through major financial centers may take longer. As already noted, however, correspondent relationships generally exist wherever the volume of trade justifies them.
Payments by mail are subject to varying delays, and the transit time ranges from 7–14 days. Mail transfers are more frequently used for invisible transactions than for visible trade. The customer usually decides the method used.
Financing of Intraregional Trade
External trade credit facilities are generally available for financing the region’s imports from outside the area but not imports from within the region. Although, in principle, discounting of bills for collection, mostly documentary drafts, on behalf of exporters can be done by branches or subsidiaries of major international banks, the impression the staff team received was that discounting of bills in intraregional trade is not very frequent. A small proportion of this trade is financed by foreign companies that have subsidiaries in the region.
Although commercial practice in both intraregional and other trade would call for the exporter to extend credit terms of 60–180 days for most imports and longer terms in many cases for imports of capital equipment or durable goods, foreign exchange difficulties in many countries have obliged the authorities to require exporters to repatriate export proceeds within shorter periods. In some cases, these restrictions have worked to the disadvantage of regional exporters, in comparison with exporters from outside the region who are able and willing to extend longer credit terms. Moreover, the availability in industrial countries of financial accommodation to the exporter during the credit period—often aided by an export insurance scheme, such as that provided by the Export Credits Guarantee Department—enables him to receive payment for the value of what he has exported, minus a discount. This facility is, in practice, not available for intraregional trade.
As far as domestic facilities for financing intraregional trade are concerned, commercial banks finance most exports by discounting export usance bills drawn under letters of credit. During the discussions, the staff team was told that much of the discounting was done for traditional exports—such as coffee, tea, and copper—that are exported to ex-metropolitan countries.
As already mentioned, Kenya is in the process of establishing an export credit insurance scheme that will apply to exports to any destination. It should serve to facilitate trade with neighboring countries—for example, by enabling exporters to obtain unconfirmed letters of credit drawn on importers or commercial banks in neighboring countries, something they are not able to do at present.
Bankers, traders, and the authorities in the countries visited attributed the paucity of credit facilities in the region to the low volume of intraregional trade and the acceptable credit terms provided by outside suppliers for the bulk of the region’s imports.