East_african_shilling

What Is East African Shilling?

The East African Shilling refers to two distinct but related concepts in the realm of currency and monetary policy. Historically, it was the official currency unit used in British-controlled East African territories from 1921 until 1969. In its contemporary context, the East African Shilling is also the proposed common currency for the East African Community (EAC), an intergovernmental organization comprising several East African nations, as part of their broader agenda for economic integration.

History and Origin

The first East African Shilling was introduced in 1921 by the East African Currency Board (EACB), replacing the short-lived East African Florin. This currency served as the sterling unit of account across British East Africa, including Kenya, Tanganyika (now mainland Tanzania), and Uganda. The introduction of the East African Shilling was a response to fluctuating silver prices after World War I, which had impacted the value of the Indian Rupee—the primary currency in use at the time. The East African Shilling was subdivided into 100 cents and maintained a peg to the British shilling. Over its lifespan, its usage expanded to include Zanzibar in 1936 and parts of what are now Somalia, Ethiopia, Eritrea, and Aden during periods of British control, particularly after World War II.,,
^23
22The East African Currency Board’s main function was to issue and maintain the East African Shilling's parity with the British shilling, ensuring it was backed by sterling securities. Following the independence of the East African territories in the 1960s, individual nations began to establish their own central banks and national currencies, leading to the phasing out of the East African Shilling by 1969.,

More recently, the concept of an East African Shilling has re-emerged as a strategic goal for the East African Community. The EAC Partner States signed the Protocol on the Establishment of the East African Community Monetary Union (EAMU) on November 30, 2013. This protocol outlines a roadmap for progressively converging their national currencies into a single currency, aimed at fostering deeper economic ties within the region., Th²¹e²⁰ objective of the EAMU is to promote and maintain monetary and financial stability to facilitate economic integration and sustainable development.,

#¹⁹#¹⁸ Key Takeaways

• The historical East African Shilling was the currency of British East African territories from 1921 to 1969, issued by the East African Currency Board.
• It was pegged to the British shilling and replaced national currencies in various regions of East Africa during its circulation.
• A new East African Shilling is the proposed single currency for the East African Community (EAC), envisioned as part of a monetary union.
• The EAC's plan for a common currency involves harmonizing monetary and fiscal policies, financial systems, and payment systems.
• Challenges remain in achieving this monetary union, including varying economic development levels among member states and the need for greater macroeconomic convergence.

Interpreting the East African Shilling

In its historical context, interpreting the East African Shilling involved understanding its fixed exchange rate against the British shilling. Its value reflected the economic stability and policies enforced by the East African Currency Board, which backed the currency with sterling securities. This provided a consistent and predictable valuation for trade and financial transactions across the British East African territories.

In its contemporary proposed form, the future East African Shilling represents a significant step toward deeper economic integration among EAC member states. Its successful implementation would imply a unified monetary policy, allowing for seamless cross-border transactions and potentially reducing trade barriers related to currency conversion. The East African Shilling, if adopted, would function as a common medium of exchange, unit of account, and store of value across the EAC bloc, similar to how the Euro operates in the Eurozone.

Hypothetical Example

Imagine a merchant in Dar es Salaam, Tanzania, wishes to purchase coffee beans from a farmer in Kampala, Uganda. Currently, this transaction involves converting Tanzanian Shillings (TZS) to Ugandan Shillings (UGX) or a common third currency like the US dollar, which incurs foreign exchange fees and potential delays.

If the proposed East African Shilling were fully implemented, the merchant in Dar es Salaam could directly pay the farmer in Kampala using the East African Shilling, eliminating the need for multiple currency conversions. For example, if coffee beans are priced at 100 East African Shillings per kilogram, the Tanzanian merchant would simply transfer 100 East African Shillings. This streamlines cross-border trade, reduces transaction costs, and fosters greater economic activity within the region.

Practical Applications

The East African Shilling, both historically and in its proposed future form, has practical applications in facilitating trade, investment, and financial stability within East Africa.

Historically, the unified East African Shilling simplified commerce across Kenya, Uganda, and Tanganyika by providing a single, stable currency under the East African Currency Board. This facilitated cross-border transactions and reduced the complexities associated with multiple national currencies.

In the modern context, the planned adoption of the East African Shilling by the EAC aims to bolster regional trade and investment by creating a more predictable and efficient monetary environment. The EAC has established a framework for a Customs Union and a Common Market, and a monetary union is the subsequent stage of integration. Cen¹⁷tral bank governors from EAC member states are actively working on harmonizing monetary and exchange rate policies, as well as modernizing and integrating their payment systems., Ef¹⁶f¹⁵orts are underway to enhance cross-border payment systems to facilitate trade growth, as highlighted by calls for central banks to adopt advanced technology to improve such transactions., Th¹⁴i¹³s integrated approach aims to reduce the costs and time associated with cross-border payments, making transactions cheaper and faster.

##¹² Limitations and Criticisms

Despite the aspirations for a unified East African Shilling, several limitations and criticisms have been raised regarding the readiness and implementation of the proposed monetary union.

One major concern is the varying levels of economic development and macroeconomic convergence among EAC member states. For a monetary union to be successful, countries ideally need to align their inflation rates, fiscal policies, and foreign reserves. The International Monetary Fund (IMF) has noted that while some progress has been made, disparities remain in achieving these convergence criteria, particularly concerning fiscal deficits and foreign reserves.,

A¹¹d¹⁰ditionally, the loss of independent monetary policy is a significant drawback. Once a single currency is adopted, individual countries lose the ability to use their national currencies and exchange rates as tools to respond to country-specific economic shocks. Thi⁹s requires robust risk-sharing mechanisms and strong central institutions, which are still under development within the EAC framework. Disagreements over the location of the proposed East African Central Bank have also contributed to delays in the launch of the single currency, which has been pushed back from its initial target of 2024 to 2031. Cha⁸llenges such as non-tariff barriers and different tax regimes further complicate the path to a fully integrated monetary system.

##⁷ East African Shilling vs. Kenyan Shilling

The terms East African Shilling and Kenyan Shilling refer to distinct currencies, though they are historically connected and often cause confusion due to their regional context.

What is the purpose of the proposed East African Shilling?

The proposed East African Shilling aims to establish a single common currency for the East African Community (EAC) member states. The primary purpose is to deepen economic integration, facilitate trade, reduce transaction costs, and enhance financial stability across the region.

Which countries would use the East African Shilling if it is introduced?

If introduced, the East African Shilling would be used by the member states of the East African Community. These currently include Burundi, the Democratic Republic of Congo, Kenya, Rwanda, Somalia, South Sudan, Tanzania, and Uganda.

Is the East African Shilling currently in circulation?

No, the East African Shilling is not currently in circulation. The historical East African Shilling ceased to be legal tender in 1969. The proposed new East African Shilling is a future project of the East African Community, with its launch pushed back to 2031.

##³# What are the main challenges in establishing the East African Monetary Union?
Key challenges include achieving macroeconomic convergence among member states (e.g., aligning inflation and fiscal policies), establishing a strong regional Central Bank, and overcoming political and economic disparities that could affect the equitable distribution of benefits from a single currency.,

#²#¹# How will the East African Shilling impact regional trade?
A successful adoption of the East African Shilling is expected to significantly boost regional trade by eliminating foreign exchange risks and costs associated with converting multiple national currencies. This would streamline cross-border transactions, making it easier and cheaper for businesses to operate across the EAC.