On june 10, 1965 each of the Finance Ministers of the three East African Government (Kenya, Tanzania, and Uganda) announced in budget speeches that his Government intended to establish its own central bank and issue its own currency. But the creation of central banks and preparations for issuing national currencies take time. Meanwhile the East African Currency Board will continue operations. As the end of its operations becomes foreseeable, however, this short history and description of its functions almost takes on the nature of an epitaph.
This paper sketches the history of the East African Currency Board (EACB), emphasizing the period since the beginning of political independence for the East African countries, when EACB made special efforts to adjust its modes of operations to the changing political situation and economic conditions. These new activities of EACB are seen against the economic developments of these years. The last section provides a short appraisal of EACB’s enlarged role and a brief look at the responsibilities that may have to be shouldered by the new central banks succeeding it.
Mr. Kratz, economist in the African Department and formerly in the Research and Statistics Department, studied at the universities of Marburg, Paris, and Nancy and graduated from the School of International Affairs, Columbia University.
At the rate of EA Sh 20 = £ stg. 1.
While the currency unit of the East African Currency Board is the East African shilling, the widespread custom in East Africa of using East African pounds (£EA 1 = EA Sh 20) has been followed throughout this paper.
East African Currency Board, Report for the Year Ended 30th June 1955, pp. 5 and 11.
The periods referred to are EACB financial years, July 1 to June 30.
£EA 0.6 million was withdrawn before June 30, 1961 and £EA 0.2 million in July and August of 1961.
Coffee, tea, cotton, sisal, cloves, and pyrethrum. It was made clear that this list could be expanded to include other crops, if needed.
To the extent that the minimum overdraft rate charged by the commercial banks had remained at 8 per cent since the fall of 1960, EACB’s rate of 7 per cent had little penalty effect.
Since the principle of equal quotas ($25 million) for the three mainland territories applied by IMF was not followed by the 1964 Finance Ministers’ Conference, which established quotas for the African Development Bank, EACB decided to make available to each of the three Governments an equal amount commensurate with the smallest quota (£EA 1.6 million for Uganda). The two other Governments with larger quotas and subscriptions (£EA 2.1 million for Kenya and £EA 1.9 million for Tanzania) had to find the difference out of their own resources.
East African Currency Board, Report for the Year Ended 30th June 1963, p. 15.
Imports were calculated on the basis of the monthly average of imports in the first quarter of 1965, not including interterritorial trade.
For expositions of this approach, see Edward Nevin, Capital Funds in Underdeveloped Countries (London and New York, 1961), pp. 57-58, and Graeme S. Dorrance, “The Instruments of Monetary Policy in Countries Without Highly Developed Capital Markets,” Staff Papers, Vol. XII (1965), pp. 276-77.
East African Currency Board, Report for the Year Ended 30th June 1964 p. 14.
To the extent that EACB’s distributed income was generated from earnings on foreign assets, this income provided an expansionary influence and addition to East Africa’s income stream; to the extent that it stemmed from the commissions charged locally by EACB, it offset the deflationary impact caused at the time these commissions were paid.
Within the framework of this paper, it has not been possible to explore fully the history, theory, merits, and defects of currency boards and their limitations compared with central banks. For further discussion and bibliographic references, the interested reader may turn to H.A. Shannon, “Evolution of the Colonial Sterling Exchange Standard” and “The Modern Colonial Sterling Exchange Standard,” Staff Papers, Vol. I (1950-51), pp. 334-54, and Vol. II (1951-52), pp. 318-62; W.T. Newlyn and D.C. Rowan, Money and Banking in British Colonial Africa, Oxford Studies in African Affairs (London, 1954); and Edward Nevin, op. cit.
For an exploration of the difficulties confronting the framers of monetary policy in an environment where the major commercial banks are branches of powerful international banks, see Edward Nevin, op. cit.; W.T. Newlyn and D.C. Rowan, op. cit.; and Donald C. Mead, “Monetary Analysis in an Underdeveloped Economy: A Case Study of Three East African Territories,” Yale Economic Essays, Vol. 3 (1963), pp. 56-103.
In this respect a remark of the Governor of the International Monetary Fund for Tanzania, at the time of the Fund’s 1965 meeting is indicative. He said: “Turning to the wider monetary discussions, I find it difficult to share the calm and dispassionate optimism of the Fund’s Report on the international monetary system and international liquidity. In the course of the present year my country has faced the serious prospect of heavy foreign exchange losses through the possible devaluation of a major international currency. Over this situation our authorities had no vestige of control. Had such a devaluation taken place, it would have occurred for reasons entirely extraneous to our own economic situation and would have seriously undermined all our development efforts” (International Monetary Fund, Summary Proceedings of the Twentieth Annual Meeting of the Board of Governors, September 27-October 1,1965 (Washington, 1965), p. 193).