AFRICANGLOBE – Conventionally, businesses from the East African Community states involved in cross-border trade use the American Dollar as the medium of exchange.
This requires that they have to convert their national currencies to the Dollar before conducting transactions and later convert the currency back to their national currency.
In the process, they incur exchange related costs at least twice.
However, this is set to soon change following the operationalisation of an agreement between central banks of the EAC member states to promote trade using the various local currencies as opposed to the Dollar.
This will see the gradual phasing out of the American currency as the common currency in cross-border trade in the region.
Experts say the move will cushion respective national economies against volatility of exchange rate markets, which often expose traders to high exchange rate costs.
Thomas Kagabo, the chief economist at the National Bank of Rwanda (BNR), said following the signing of the memorandum of Understanding between the countries, central banks had also opened accounts for the five regional currencies so that they can accept the currencies from the commercial banks.
“The first step was signing the agreement. The last meeting recommended that each central bank will work with other stakeholders to sensitise people accept regional currencies. These include commercial banks, traders and sellers,” he said.
Kagabo said the next step is raising awareness among traders and commercial banks in the region to accept regional currencies in the exchange of goods and services.
This will help reduce the number of traders across the region using the dollar as the preferred currency for cross border trade and increase use of local currencies.
“We have designed tools for sensitisation. Governors have been requested to identify key players to make it accepted,” Kagabo said.
Exchange rate concerns
When the initiative was announced earlier this year, there were concerns that its success and uptake would be marred by the volatility of exchange rates in the region.
However, Kagabo said central banks will use a unanimously agreed upon exchange rate shared daily across the region.
“As for the exchange rate, we have agreed that at the end of each day, we will share the exchange rate of the currencies across the region to maintain the rates. We will be using a bilateral unanimously agreed upon exchange rate,” he explained.
This means that a Rwandan trader importing goods from, Kampala or Nairobi will be able to travel and use the Franc for purchases and expenditures unlike now when they have to convert their money before travelling.
“What this means is that if somebody is leaving Kigali to buy goods in Kampala, Nairobi or Dar es Salaam, they don’t need to change their francs into dollars, then change the dollars into local currencies.
They will be sure that the currency can be accepted in commercial banks and now that the central bank will also accept it. If someone comes into the country with regional currencies, we should accept it in trade,” Kagabo said.
The initiative comes at a time when regional economies have been largely affected by the volatility of the American currency in the economies.
However, Kagabo said the impact will be felt depending on the pace and scale of uptake.
“Let’s wait and see. It will largely depend on the speed and how people will be responsive. I am sure people will be responsive, this is about business. Impact depends on speed of uptake,” he said.
Traders welcome move
Traders have welcomed the move, saying it will save unnecessary expenditure incurred in exchange rates and price hikes depending on the value of the Dollar.
They said, depending on the scale of trade, whether large or small scale, the initiative will come in handy.
Evelyn Uwera, a small scale clothes dealer who imports from Uganda and Kenya, said, ordinarily, she converts her capital to dollars prior to travel and converts it to sellers’ currency.
She said being able to use francs across the borders will enable her save a lot and reduce uncertainty of profit margin that depends on the value of the Dollar.
Trade across the region in recent years has been on the rise owing to customs union protocol, removal of non-tariff barriers and diversification of products among other factors.
Last year, Rwanda’s exports to other regional countries stood at $127.76 million, while imports from were valued at $519.4 million, according to figures from the central bank.
Rwanda’s main exports to EAC members are tea, coffee, raw hides and skins, vegetables, beer and products from the milling industry.
Rwanda, in turn, imports products such as cement, refined and non-refined palm oil, vegetable fats and clothing.