When plan for single East African currency came crumbling down in 1965

There have been media reports in the recent past about how the 2024 deadline by which the East Africa Community (EAC) was supposed to have formed a monetary union might not be achieved.

Formation of the EAC monetary union, which is expected to control the regional currency, is one of the four pillars on which the proposed East African Federation will be based.

However, with each passing day, the idea of the EAC monetary union looks an impossible political and economic dream for the regional bloc.
Originally, 2015 was the deadline set for the formation of the East Africa Monetary Institute (EAMI), which was to act as the community’s central bank. But it was later pushed forward to 2024, a date that is now said to be untenable.

The four pillars on which the community’s integration were premised are customs union, common market, monetary union and a political federation.
The first two have been met, but like it was in the 1960s, creation of the regional currency was to culminate in the formation of the region’s political federation. It was the last two pillars that failed the 1960s efforts.

Regional newspaper The EastAfrican earlier this month quoted Kenya’s cabinet secretary in charge of East Africa Community affairs Adan Mohamed as saying: “I think the first thing to do is to set up the East African Monetary Institute, then we take it from there in terms of making the necessary progress.”
This is not the first time that the region has tried to create a single currency and a political federation.

The failed opportunity
While under British rule, the colonialists created the East Africa Currency Board (EACB) in 1919, based in London and later transferred it to Nairobi, Kenya, in 1960. The EACB acted as the central bank for the then three East African countries.

As the three countries prepared for independence, there was concern over the future and shape the central banks of the independent states would take. The creation of a regional central bank was viewed as the final step towards a political federation.

In its 1963 report, the EACB stated: “Given the complexities of the East Africa situation, the operation of the central bank would seem difficult in the absence of some form of central political direction.”
In the early days of independence, the idea got a political nod during a regional heads of state meeting in Zanzibar in 1963.

Being the first independent state in the region, Tanzania looked ahead by appointing Dr Erwin Blumenthal from the Deutsche Bundesbank, the central bank of Germany, to lead a team of experts and study how regional cooperation in the monetary field would work.

The political commitment expressed at the heads of state summit in Zanzibar was, however, slowed by mutinies in the three countries in 1964 and the revolution in Zanzibar. These military adventures derailed the political attention to the financial union.

As the region recovered from the mutinies, the government in Tanganyika announced a proposed limitation of goods it would be importing from Uganda and Kenya.
It also proposed creation of a sovereign currency as an independent state, although it did not talk of a separate central bank.

In early 1965, Uganda jumped ahead of Tanzania when then Finance minister Kalule Settala announced the opening of two banks, a central bank and a commercial bank, to compete with the existing foreign banks in the country.
Quoting a press release from the Ministry of Finance, the Uganda Argus of February 2, 1965, wrote:

“Uganda was to have two new banks, a Uganda State Bank, which would provide full commercial banking services in competition with the existing commercial banks in order to keep pace with the demand of Uganda’s rapidly growing economy.
“It was equally necessary to have the instruments with which to control the credit so created in case of need arising out of both government’s and commercial banks’ activities so as to contain inflationary tendencies in the economy.”

The Uganda State Bank became Uganda Commercial Bank.
Uganda’s announcement was a bombshell to the other members. It came at a time when a team from the International Monetary Fund was due to visit the region, starting with Uganda, to discuss the road map for the creation of the East Africa central bank.

The budget presentation of the same year, 1965, was the final blow to the common currency and East African Central Bank.
In its June 1965 report, the EACB stated: “The announcements of June 10, 1965, and the explanations which followed led to some argument happily short-lived between the authorities of the three countries and to some difference of opinion as to the cause of the decision to fragment the currency union.

“Broadly speaking, the national attitudes can be summarised as follows: Tanzania held that the East African Central Bank could only work effectively under a political federation. Uganda considered that an East African currency and central bank system could be evolved within the framework of semi-autonomous national banks linked to a central reserve bank directing certain functions, but not on any other pattern, and Kenya took the view that a central bank responsible for a common currency must be centrally managed by agreement of the three governments.”

Renowned history scholar, Prof Phares Mutibwa, probably sums up the mixed feelings of Uganda towards the common currency in the region. Writing in the book, The Bank of Uganda (1966-2006): A Historical Perspective, he says: “While the common currency was a life-blood for the common man, political union was a life and death issue, a bread and butter issue for the political leaders of the day.”

During the 2005 Joseph Mubiru Memorial Lecture, an annual even organised by Bank of Uganda in memory of its first governor, guest speaker Edwin Mtei, a former member of the EACB representing Tanzania, recalled the early efforts to set up a regional currency and central bank.
“The absence of genuine political goodwill on the part of the leadership of East Africa, inexorably led the institutions they were supposed to nurture to an untimely end,” he said.

New dawn
Those overseeing the process of reviving the common currency and the total integration of the EAC blame past failure to history.
According to Mr Chris Magabo, the head of communication at the Ministry of East Africa Community Affairs in Kampala, the new East Africa Community is driven by the population and not the politicians as it was the case back then.

“There is periodical interactions between the heads of state in the respective countries with different sectors of the population and it’s these interactions that are forming the discussions during the summit of the heads of states which directs the Council of Ministers which oversee the implementation of the regional integration. This was not the case in the previous EAC of the 1960s.”
Since the signing of the East African protocol in 1999, the community has expanded from Uganda, Kenya and Tanzania and added Rwanda, Burundi and South Sudan to bring the number of members to six.

But in the past three years there have been tensions between EAC member states. There have been border closures between Rwanda and Uganda and between Rwanda and Burundi which affected some of the tenets of the protocol of free movement of goods and people in the EAC.

Just like it was in the 1960s when the common currency and political federation became a stumbling block for the EAC, the same hurdles pose similar challenges today.
But Magabo pushes mistakes of the past aside, saying this is a different community.
“We may not get into political integration immediately. We are likely to start with a political confederation and see how it works before a full political integration,” he explains.

With the 2024 deadline declared untenable by the Council of Ministers, the next course of action remains to be seen when the summit of heads of state meets next month.
“The summit will pronounce itself on the report of the council. That’s when we shall know how soon the single currency will be in place. The summit will set deadlines, issues that needs to be sorted out, it will also lay out the way forward and timelines in which to achieve the deadlines,” Magabo says.