Inflation still leaves bitter taste for EAC’s governors

From left: Dr Kamau Thugge, Governor of the Central Bank of Kenya, South Sudan Central Bank governor Dr James Alic Garang, Mr Emmanuel Tutuba, Governor Bank of Tanzania and Dr Adam Mugume, Representative of the Deputy Governor, Bank of Uganda, pose for a photo during the MAC conference in Juba, South Sudan on May 3. Photo/Tobbias Jolly Owiny

What you need to know:

  • Growth. The outlook for the region is equally impressive, with the EAC growth expected to be 5.5 percent in 2024, which is stronger than the 3.8 percent that is projected for Sub-Saharan Africa and the 3.2 percent for the global economy.
  • Future. Through the Monetary Affairs Committee (MAC), the EAC central banks have so far made significant progress in harmonising monetary policy frameworks, harmonisation of statistics, and financial reporting standards.   

Central bank governors in eastern Africa are worried about how a strong dollar continues to cast a long shadow over their local currencies. The governors were forthright about the headwinds that are buffeting their respective economies.

Dr Adam Mugume, the director for research and policy at the Bank of Uganda (BoU), represented Uganda at 27th East African Community’s Monetary Affairs Committee conference in Juba, South Sudan. He talked about Uganda’s dwindling forex reserves putting the country in a precarious position.

While Dr Mugume stopped short of decrying events that have led to the shrinking of external budgetary support that has been a traditional source for replenishing the reserves, the Burundi central bank governor called for a paradigm shift. Mr Edouard Normand Bigendako said East African states should wean themselves of external borrowing. He said the concessional loans make them susceptible to foreign economic interests.

“In the advice given to us by the international financial institutions, what we hear is the same message: ‘We have to devalue’. Probably all the central banks are facing the same,” he noted, adding, “We don’t need to be dictated to on what we need to do because I believe that there are many other options.”

According to Mr Bigendako, East African countries need to strengthen cooperation and collaboration among themselves as policymakers to address community issues and ensure the achievement of their common objectives. The economic performance of EAC states faces various challenges and threats. These include: the current account deficit deterioration and the fiscal deficit widening owing to persistently low domestic resource mobilisation and increased spending. 

To address the problem, Mr Bigendako revealed that the Bank of Burundi last year undertook several critical policy actions. Top among the several actions was reforming the monetary exchange rate policies. 

“In this regard, the foreign policy interest rate has been increased by 200 basis points due to foreign exchange market reforms,” Mr Bigendako said of the situation in his native Burundi.
Contrasting fortunes
Mr Emmanuel Tutuba, the Tanzania central bank governor, explained that “the country’s external sector continues to face vulnerabilities from the global environment, despite the challenges where the current account deficit that was so high in 2022/2023 at US$5.3b is now starting to narrow. As of March, our current account deficit was at US$2.7b.” 

Currently, Tanzania’s inflation level has remained relatively low and stable compared to its neighbours. For more than four months, statistics from the country’s central bank put inflation at 4 percent.  Mr Tutuba opines that the woes besetting economies in eastern Africa are squarely down to the over dependence by East African Community (EAC) partner states on foreign currencies whilst trading with each other. 

“Joint efforts are also needed to address the challenge of high exchange rates in the way we have been exercising by reducing the dependence on foreign currencies, especially US dollars, in our market,” he said, adding, “This can be done by promoting the acceptability and usability of local currencies in our markets by enhancing the usage of our East African payment systems.”
While Tanzania’s gross domestic product (GDP) is estimated to have grown by 5.1 percent in 2023, it is expected to grow by 5.5 percent in 2024. Yet Kenya, the region’s powerhouse, finds itself under the cosh. “This year we are projecting foreign direct investments in the region of just slightly below US$500m, which in terms of GDP is very small and it’s like 0.5 percent,” Dr Kamau Thugge, Governor of the Central Bank of Kenya, told Sunday Monitor in Juba, adding, “You can imagine having a current account deficit of 4 percent of GDP, and it’s being financed by non-debt, creating capital inflows of only about 0.5. Meaning that the remaining 3.5 percent is funded by debt-creating inflows.”

To enhance monetary policy transition, Dr Thugge says the Central Bank of Kenya has now adopted a new monetary policy implementation framework that is based on inflation targeting. The approach dictates itself to tightening monetary policy to address inflationary pressures and pressures on the exchange rate. 
“We do endeavour to build reserves in line with the East African Monetary Union (EAMU) convergence criteria of 4.5 months of import cover; currently, we have reserve cover of about 3.8 months of import cover,” Dr Thugge reasoned.

Dr Mugume, however, says that empirical data has made clear rhetoric “distributional impact” monetary policies can have on income.
The road ahead  
Through the Monetary Affairs Committee (MAC), the EAC central banks have so far made significant progress in harmonising monetary policy frameworks, harmonisation of statistics, and financial reporting standards. Significant progress has also been made around cross-border payments, Dr Thugge added.

Yet things are far from looking prim and proper. In Rwanda, despite efforts to stabilise prices, inflation remained stubbornly high at 14 percent in 2023, following a similar level of 13.9 percent in 2022. These inflationary pressures stem from various sources, including the mismatch between global demand and supply, the aftermath of the Covid-19 pandemic, and the geopolitical tensions arising from the war in Ukraine in 2022, Dr Thierry Kaliisa, the executive director of Monetary Policy and Research at the Bank of Rwanda, disclosed.  

“As a result, the National Bank of Rwanda had to tighten its monetary policy stance. As a result, inflation is now in our hands and came back to 4.2 percent as of March 2024,” Dr Kaliisa further opined. 
The single digit inflation across most of the EAC partner states means that hope springs eternal. Global headline inflation, per the International Monetary Fund (IMF), is estimated to fall to 5.8 percent in 2024 and 4.4 percent in 2025, with the 2025 forecast revised downward. 

Cautious optimism
The macroeconomic outlook in South Sudan appears promising, with GDP projected to grow by 4.0 percent in 2024. But Dr James Alic Garang, the country’s central bank governor, says achieving the figure will entirely depend on the resumption of crude oil exports, which were recently interrupted due to the ongoing conflicts in the region. 

“Externally, geopolitical tensions, including the conflict in Sudan, have affected our oil pipelines to Port Sudan, and the conflict that is also raging between Hamas and Israel has also disrupted the major trading route in the Gulf of Eden where the shipment of our crude oil takes place, posing a challenge to our economic outlook,” he said.
“As a result of the above challenges, including the conflicts in the neighbouring countries, our reserves are now at a historically low level. This has huge implications for the balance of payments, with negative consequences of currency depreciation and volatility manifested in the prices of goods and services,” he added. Boasting of new partner states such as the Democratic Republic of Congo and Somalia, the EAC is now approximately half the size of the Common Market for Eastern and South Africa (Comesa) in terms of land area, population, and combined GDP.

This implies that the region has now emerged as an important vehicle through which the member countries can secure economic prosperity in the wider region of Eastern and Central Africa.   The outlook for the region is equally impressive, with the EAC growth expected to be 5.5 percent in 2024, which is stronger than the 3.8 percent that is projected for Sub-Saharan Africa and the 3.2 percent for the global economy.  

 EAMU roadmap
The committee noted that a lot of work is required around cross-border payment systems and agreed to continue rolling out interoperability initiatives at the national level, enhancing the East African Payment System (EAPS), while engaging other stakeholders at the continental level on further integration of cross-border payment systems. 

The governors also signed the addendum to the memorandum of understanding on currency convertibility and repatriation, an important achievement in the process of enhancing transactions across the region regarding the implementation of the Protocol of the Monetary Union.