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DOCUMENT OF INTERNATIONAL MONETARY FUND AND NOT FOR PUBLIC US

,COmNs CONFIDErnIALINI?OMTION

J uly 16, 1965

To: b, lers of the Execut i ve Boar dFrom: The Sccre arySubJ ect: Common Econom c I neti tuti ms n East Africa

The attached memor andum on Common Economic I nstitationsi n East Af r i ca 'a8been prepared as background f or the 1965 ArticleX N consul t at i ons repor t s on the three East African count r i ee- -Kenya, T anzania, and Uganda. These reports will be ocheduled f orconsi der at i on by the Execut i ve DLreators bef or e t he infcrmnl Boardrecess

Rtt: ( 1)Other Distributiou:Department HeadsDivlsion Zhlefo


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s < DOCUMENT OF INTERNATIONAL MONETARY FUND AND NOT FOR PUBLIC USEI

CONTATNS CONFIDENTIALINFOTMATION

Common Economic I ns ti tut i on s n East AfricaPrepared by A fri cun Depafiment and Exchangeand Trade Relations Department

J ul y 6, 1965

IntroductionA number of economic and monet ar y inst itut ions serve al l three EastAf r i can countries--K enya, Tanzania and Uganda. These Include the FastAf r i can Comon Services Organization, which controls and adminismrs maj ortransportati on and communicat!ans facllitles, certai n i ccal, research andstatistical services, and the East AfricanCurrency Board, which issuesthe common currency, the East Afr icanshil l lng,provides llmited centrale banking sw?vices, and mantlges the common reserves. An in form1 customsunion f or med by t he three count r i es har r esul t ed i n what i s commonl y knowna s the E a R t African Cor mon Market, within which a wide rangc of goods,services, l abor and capital move freel y. The trade and exchange cont r ol svis-&-vis countries outside the area are basically si m l ar .Tn order t o avoid lengthy repetit ions i n the 1965 Ar t i c le XI V consul-tations reports on these countries, the present paper has been prepared todescribe these comon features. It i s divided into four sect i ons:

I . East A fri can Comon Service8 Organization11. East African Curr ency Boar d111. East A f ri ca's Etllence of PaymentsI V. Trade and Fkchange C ontroh i n Eaat Af r i ca


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I. East Af r i can Common Ser vi ces Organization1, HxstoricaJ background

The present system of cooperation between Kenya, TanganyLka and Ugandahas developed gradually over thepast half century, It began with theformation of a j oi nt custcms uni on between Kenya and Uganda i n 1917. I n1926, cont r ol of transport services owned by Kenya and Uganda was vestedi n a s i ngl e authority end a conf er ence of' the Gover nor s of' Kenya, Tangmyikaand Uganda established machinery f or securing further cooper at don andcoor di nat i on between the three terr i tor ies on patters of ccmmon i nterest,The =ea of cooperation was greatl y ext ended during the Second World Wm,when a number of organiections oper at i ng on an Uast Af r i c an basis wasestabl ished.I n 1948, f ol l owi ng propoee;ls put forth by the t hen Br i t i sh Colonial

Secretary Arthur Cr eech J ones, the Ea& African High Comm ss i on consist iwol' the Gover nor s of Kenya, Tanganyika and Uganda, with a Central L egisla-t ive As s embl y and an executive vr gani zat i cn was est abl i shed, The HighCcmm ssl on was responsible for the J O ~ % dministration of variouc Ger Vi CeSi n the t h r e e count r i es. The Centra). L egislative Aosembl y ccns i der ed andappr oved budgets o f various services of t he High Comm ss i on rind legislatedon specific mat t er s connected with these Services. However, no b i l lcoul d be i nt r oduced i n t he AsGembL y wttl-out t he prior approval of the HighComm ss i on which &so had the power t o r ef use assent t o any b i l l passed bythe Atxembly and to declare a b i l l as passed even though i t had not beenpassed i n he Assembl y, The Hi gh Com s s i on appointed prjncipd execu-tive off icers who ac ted as i ts official adv i sor s i n thei r rcsgective fields.The Governor of Kenya wac the ex of'ficlo chairman of t he High Ccmmiscion-

The s w v l c e s provided by the High Comission included the collectionand administration of custcms, exciGe and iccome taxes, running of rail-ways9 harbors and c i v i l aviation, and pr ovi s i on oi ' post and telecomunica-t i om. These aerviccc were divided i nt o t wo groups: the "self-containedSPrVi ceR" whichpaid their way and t he "nonself-contained services" whichwer e prmcipal ly financed on R current, basis from f unds r ecei ved f romtheth ree East African Governments and grants from t he United Kt ngdomincludLng the Col oni al kvelopment and Welfare Funds.An Econom c and Fiscal Comm ss i on under the chairmanship of Si r J eremy

Raisrnan was appoi nt ed i n 1960 t o exam ne the existing East Af r i can comnonmarket and common services and t o recommend Eeacures t u achieve furthereconcmic coordination and fiscal uni f or m t y and t o provide *he East AfricanHigh Comission with independent revenue on a cont i nuous bmis.

The Coxmiscion pr oposed removal of the r emai ni ng impedinents t o inter=terr i tor ial trade and the establ ishment of a distributable pool of revenuemade up of fixed pmportions of recelpts from company taxes and customsand excise dutiec i n the territorleE. I t further r ec ommended t hut 50 percent CJ f these payments t o t he pool be earmarked for the High Commission*snonself-contained services snd t hat t he other h d f should be equally


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- 3 =

distributed among the three territor4.e~. Thi s latter r ccommendat l on hadthe effect of redistributing r evenues frcm ccmpany taxes and C u s t c r I l l s andexci se duties ir,favor of TanganyFka and Ugaada. I n keepingwith t herccommendatlon, t he Distributable Pool came into operation on J ul y 1 19610In anticipation of t h e independence of Tangalma, Kenya and Ugmda,the British Government convened E , conf erence of' pol i ti cal eaders andofficials of the three countries as well as the High Comlssion n1961 i n London to consider the future of East Afrlcan cooFeration. dmagreement was reached at thi s conference to continue to provlde commonservices on an East African basis and through an East African C@mmOnServlcesOrganization ( EACSO) s e t up to r epl ace t he East Afrxan High COI WI I L SS~O~. hecontracting governments agr eed to I ncream if necessary their contributiont hr ough t he Dlctr-l?,utablePool Wd , t o finance t he efficient oFeration ofthe Organization and to assume f inancial responsibil i ty f or i ts net l iab l l i -t i es,

The agreement Tins of indefinite duration, but each of t he contractinggovernments has the rlght t o terminate i ts participation at any tune bygiving not l es s than one year' s notice.Mdif'ication of the agleement maybe made with the consent of each of the contracting governments.2. Administrhtion of t he Organization

The UCSO, formally established on kcember 1, 1961, as authorized toadminlstcr on behaU of the three governments, the scheduled common Gervicest o providemachinery t o facilitate the coordination of t hose activitiesmeasures with respect to certain, L pecifxed matters t o which legislativeeffect muy be given i n t he three countries. The Organization may wind Upany GerviccRdmjnisteredby it and may esbablish advisory cr consultativebodieE i n r espect of any other services. The principal scheduled commonser vi ces m e :

which might be of commn interest to t he three count r i es and t o enact

The East Af r i can Railways and Harbours AdministratlonThe East African Post;, and Wlecomunications AdministrationThe East Africhn Directorate of Civil Aviation%he X abt African Mcteol ologicd DepartmentThe I ksert Locust SurveyThe East Mrican Customs a n d Exci se CepartmeutThe East African Income Tax Depar t mentme East African Reserlrch ServicesThe Eutst Af r i can Of f i ce in LondoriThe East A fri can ndustria CouncilThe East African Statuti cal DepartmentZanzibar, tlii%iii%o~a~rn%~~"6?%hxzfrican Hi gh Com~ission,had i n the past r ecei ved some of i t s ser vi ces on an agency basis, and senta an observer to the Conference.


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The East Af r i can L iterature BureauThe East A frican Acc ount ant Gener al ' s Depar t mentThe East A frican Audi t or Gener al ' s B p a ~mentThe Thlka Road House%he East African Hi des aud Leat her BureauThe principal. execut i ve bodies of t he Organization a r e the E a s tAf r l c an Common Services A uthori ty and Ml ni s t e r l al Committees. The formerCons i s t s at present of the Vice Presidents of Kenya and TanGsnyIka ~ n dhePr i me Minister of Ugancle, and nas responsibillty for , and the generadirwtion and contrcl uf , the per f or mance of t he executive unctions Of t heOrcyaization. The dec i s i ons of the AxLhority m e arrlved at by the Urn-mous vot e of i ts members. The A uthori ty appoi nt s a Secretary General ofthe Organization who i s the principal execut i ve ofricer.The Aut hor l t y i s ass ' l s t ed by various M1nisteria.l Comm t t ees (the 5 0 -called t r l m i r a t e s ) each of whi ch cons i s t s of one member ( aMinister) fromeach participating country. At pr esent there are five such M inisterialCommittees: t he F i nanc i al M i ni ster i al Cormnittee, t he CommunicationsM inisterial Cornittee, the Com.merci&l. and I ndus t r i al Co@rdlnationsbHaisteria

Co:rmlttee, t ke Tabor bI i ni s ter i a1 Cor ni t t ee, ~r .dhe M i ni sterid Cornittee I ncher;ZP of Reseer ch and SociRl Ser v i cec .The A uthority may ass i gn r es pons i bi l r t i es t o the Mi nl s t er i al Committeesf c r t he administration of any of I ts services or ?' unct i ons subject t o anydlrectionc it might issue. I n case of a di sagr eement on m y i s s ue betweenthe member s of a M j nisteri al Committee or be-tween the Cor n- t e e , on the onehand, and the Gener al Manager of the Rai l ways and Harbouss Adm ni st r at i on,the Postmaster-General and tile Chairman of the East M rican AirwaysCorporation, on the other hand, i n their respective meas of administratior,,the i ssue must be referred t o the Aut hor i t y for final. declsione T heA uthorfty may direct the holding of J oint meetines of various rninist1~r3.dconvnlttees t o ensure the necessary coordination of t hei r activltles-T he Organization, l i ke i ts pr edecessor , has a L egislative body calledthe Central Legl sl et j ve Assembly. It consists of a speaker appoultcd byt he A uthority alld 44 mmbers c ons i s t i ng of the 15 member s of the f ' l V e14inister ial Comm t t ees, ni ne member s f rom each of the participating COUII -tries el ec t ed by t he respecti ve egi sl atures, and two ex of f i c i o members,viz. J the Secretary General and the Legal Secretary of' t he Or gani zat i on-

Al questL on6 proposed f or deci si on i n the As s embl y al e det er m ned by amnJ orlty of the v o t e s of the members present and voting. T ne Asselnbly,however, i s not authorued t o initiate b i l l s i mposi ng any changes on t heOrganization. A b i l l passed by the Assembly mhst be msented t o by eachof' tlhe East Africangovernmcnt~.


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General. Fund whi ch receives i ts revenues principally frcm the DistributablePool Fund. The Organization a l s o maintains a Contingencies Fund to meetunforeseen expenditures f or which no other f i nanc i al provision exi s t h3. The Distributable Pool Fund

As mentioned earl ier, the Distrl butaSlc Pool F'und w as established onJ ul y 1, 1961, i n accor dance w'ith the recommendation of' the Raisman Report.The pur pose of the arraement was to a s s u r e nonse1f"contained services fit' ar el i abl e and steady source of revenue and to distribute contributions bythe Participating goverrmentE to the budget of the Organlzatfon, accor di ngto the financial strength of each of the participating countries*The Distributable Pool Fund receives as i ts revenues 6 per cet he custcms and exc i s e t a x e s , and 40 per cent of t he company taxeslected by the Organization on behalf of the t hr ee government s, plus cm3Xd.nother minor mounts from miscellaneoussources. The Pool 'sshare i n tmCoUections i s determined on the basis of revenues net of the C o s t s Ofconect?.on of taxesI The three governments al so reimburse he &gmlzationfor Costs of collection of taxes, which mounts a r e credited to the ' OO*The latter amount pl us one half of the Pool ' s receipt from t a x e s i s sub-SeqUelltly credited to the General Fund andthe remaining one ha.f i s Paidback t o the three participating governments i n equal shares.I n 1962/ 63, the Distrilmtable Pool Fund received E4.87 million 86 i tsshare of company tax, customs and excise duties; uf th is amount E - 4 4milkon Was credited t o the General Fund and the balance was paid t o the

from the countries U. 59 minion behg t he assessed cos t of tax co2leCkiOn*Pmticipating ountries n equal Shares, The General Fund a l s o received

4 Ser vj ccr ; provided by FACSOThe self-contained serviceo provided by EACSO compri se the EastAfrican Railways and Harbours Adrninistrat,ion, the East African P. s t s andTelecomunictttions AdmLnlGtration end the East African Airways Corporation.Fhe nonself-contained services include Gcrvices in reopect of col l ect i on oftaxes, meteorology, agriculture and f isheries, ctatlstics, l aw and order,and socidservi ces Luch a6 health,education, etc. In 1963, the commonservices eruphyed Gome 50,000 persons and paid out newly E22 milliorl i n

' 1/ These t w d o are levied on the income of manuf act ur i ng and finance""ompanies oper at i ng i n East Africa,


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( I n m l l i ons of pounds)

Distributable PoolFund' s share of collec-t i onrl of revenues f romCustoms and ExclceCompany taxtaxes

TotalLess total refunds t oparticlpating govern-ment s (-)

1.191 0 72.26

-0. 76Net contributions bypartfcipating countriest o Gener al Fund 1.50Per cent contrlbuted byeach government 46.7

2-66 1- 09 1.21

- 0. 61.18 1 2 3

1.81 0.33 0.36 0.42 0.38

Source: Data obtained during consultations."

T otal revenueg of the Or gani zat i on i n 1963/64 j n r espect of both theself-contained and noneelf-contsined services amounted t o E 49.4 million,and total expenditures E 54.8 m l l i on (Table 2) . Recurrent revenues andexpendi t ur es of t he three sel f - cont ai ned services i n 1963 amounted t o E 42.3m l l i on and E 42.7 million, respectively. I n addi t i on, the three servicesi ncur r ed a capi tal expenditure of E 5.1 m l l i on during the year . Railways andHar bour s Adr ni ni at r at i on, w i t h recurrent r evenues and expendi t ur es i n 19G3 ofE 27. 3 m l l i on and E 28.0 m l l i on, is the largeot enterprise among theseadministered by t he EACSO.

s;/

Thi s does not I nc l ude capital pr oceeds of t he self-contained ser vi cee,the relevant data f or which ar e not readily obt ai nabl e.


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.' - 7 -Table 2. Composite Budget of Common Services ;/

(I n thousands of pounds)?&venue Expenditure

Railways and Harbour8CurrentCbpital I I 3,956Subtota1

Post and Telecammunlcat ionsCurrentCapitalSubtotal

AirwaysCurr entCapitalSubtotal

Total:Self -contained ervi ces ( 1963)Nonself-contained (1963/64)

27,315

7, 453-7,4537,623

42,3911/7,042

31,941

7,187402

Grand to ta1 49,433 54,849-Source: Dat a obtained durlng consultations.1/ The f i nanci al year of nonself-contained ser vi ces i s the mne as that ofparticipatingcountries, i.e., J u l y t o J une. The f i nanci al . year of the sel f -containedoervicea coincides with the calendar year. Dat a f or self-rontainedservices are t hose for 1963 and data for nonsel f - cont amed 3er 'ices ar eest i mat es f or 1963/64.

-

2/ Current revenue onl y.9 Curr ent and capital expenditure.The Grgaalzation's budget i n respect of t he nonself-contained services i1963/64 was E 7.0 million, up E 2.0 mil l ion f r o m 1960/ 61. O f t h i s amount ,E 1.4 mill ion (20 per cent) was received as grants f r om foreign (mainl y U K.governments end organizations. Most of t he balance was suppl i ed by t heparti ci pati ng governments t hr ough t he DistributablePool Fund. I n 1963,expenditures on provision of econom c services ( i.e ,meteor ol ogy, avi at i on,


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agr i c ul t ur e, f o r e s t r y and f i s her i es , s t at i s t i cs ) accounted for 29 per centof the total, general ser vi ces (I ncluding defense) f or 27 per cent, recurl'cntfinancial obligations (debt ser vi ce, pensions, e t c . ) f or 18 per cent, ands O C l a 1 s er vi c es (health and education) f or 11 per cent. The number and scopeOf tlCtiVitieS of nonself-contained s er vi c es have expanded over the years.

Chart I shows t he geogr aphi cal di s t r i but i on of t he common services.


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CHART IGeographical Di s t r i but i on of Common Services

-

I FRESHWATER I


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- 10 -11. East Af r i can Cur r ency Board

1. Hi s tor i cal backgroundThe East African Currency Board (EACB) was es t abl i shed i n Decenhx- 1919t o provide currency for t he Kenya Colony and Protectorate and t he UgandaProtectorate. I n 1920 Tanganyika was also added t o t he East Africancurrency ar ea, after a League of Nations mandat e had been glven t o t heUni t ed Ki ngdom t o adm ni s t er t he territory. On J anuary 1, 1-936, ZanzibarJ oined the currency m e a and, I n 1342 and 1943, t he F a c tAfrican shl l l i ng was i nt r oduced as legal tenAer i n t he Br i t l sh- occuPi edI tal ian Somal i l and, Er i t r ea, and Ethiopia, as w e l l RS i n the Br i t i sh pro-t e c t o ra t e of Somd. i l and. A t present the East African currency areaCOmPr l ses Kenya, Tanzania, Uganda, and Aden.

Thus, t he East IifrAcarhCur r ency Board operated L k e other Rr l t i shcurrency bnards as an aut omat i c money changer. I t i s sued l e gal tenderlocally on demand against deposit,s of s t e r l hg I n London, and r edeemedthe l ocal currency on demttnd by payi ng oct sterling. The Boar d had nodi s cr et i on over the auant l t y of currency i n cl r c ul at i on which was de-terminea by changes i n t he bal ance of mayments pos i t Lon af the canst i t ucntt er r i t or i es . The Board or t he colorliai aut hor i t i es could therefore not""" "" " " "" -""" -At the rate 01 EA Sh 20 t o E s t g . 1.


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a follow an mdependent monet ar y, credi t , or bal ance of payments policies.It had some discretion n the- sel ect i on of invetkments-provided t hesecuri ti es chosen were gllt-edged public securl ties expressed i n asterling area currency other t han i ts am, and eas i l y d~sposabl eon t heLondon market. I t did not invest i n l oans i ssued by t he autnorities ofthe constltuent terri tories it served until 1955 when t he regulations wer eamended.

Uhile the Board was authorized to deal wi t h any on (provzded t heminimum l i m t s set by t he Board wer e adhered t o ) , i n pl aL tlce it dealtalmost exc l us i vel y wlth the commercial banks operating i n the East Africancurrency area.A t the out set , t he East Af r i can Currency Bmrd was faced uith con-slderable dif f icul tles n i ts attempt to replace the Indian sl lver rupecwhich circulated i n Kenya and Uganda, and, l ater , t he coins of Indiastandards i ssued by t he German Government and Ger man companres t hat wereused I n Tangatlylka. The urgent need to replace t hese coins arose primarilyf rom their fh.I ctuQtlng value which f ol l owed the changes I n the s i l ver prlce.But , wher eas the West African Currency Board after i t s egtablishment i n1912 had been abl e to repatri ate the Br i t i sh s i l ver coins formerly circu-lQtinfZ i n West Af r i ca at their face value, the East Af r i can Currency Bardwas not Successf ul i n maki ng slmilar arrangements wit!] the Govert~entsf 'India and Ger many. I t had no alternative but to r et i r e t he c oi ns at theirbuUlon value at o. l oss of about E1. 75 mll l lon.Table 3 contuins data on the currency i n clrculntion, t he currencyreserve f'und, and t he extent t o which the currency wa3 covered by the

reserve fund, I t was not until 1950, more t han 30 years after t he e s t a -bl l shment of the East African Currpncy ba ld , 1,ba.t; t he rccierve fund t-:n07~ll%tdomor e than 100 per cent of thecurrency i n circulation. The low point vasreached i n 1932 dur l ng the Great Depression when currency i n circuhtlonhad fallen to E3. 6 rn i l l m n and vas covered by a reserve fund of l es s thanEO 4 m l l i on, 1 .e. , about 10 per cent, Part of the gap beforc 1950 bet weenthe currency i n clrculatlon and the anlount of the currency reserve f undwas covered by clams on the Roverlments of the mainland terrl tori es whl chwere Woranteed up to E1. 5 m l l l on by means of local legislation i n Kenya,Tanganylka and Uganda which included aut hor i t y t o take up equivalentsterling oans i n London. The consideruble increase .in currency bet ween1941 and 1945 was the result partly of the much larger area i n which kheEast Af r i can s h i l l i n g circulated, and F r t l y of t he increased trade sllrpluswhich led to 3arge nccumulations of sterl ng balances i n London.2. zeveloprnents i n 1955- 60

The year 1955 was marked by the first departure from the U C U ' s roleas a pur el y aut omat i c money changer, f or i n that year I t was allowed t oholdsecurltier; of i t s constltuent terrltories. Thus, wlth ln t he limitsfor the fiduclary issue s e t by t he Secretary of Stute, the U C B I n a,pos i t i on to extend credit to the gover nment s of the constituent territories0


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- 12 -Table3. Movement s of East African Currency, 1925-55

( I n miliions of pounds)Y ear endingJ une 30 Currency Currency Per cent ageoutstanding reserve f und cover1 9 2 5193019351940194119421943194b1945194619b7194819491950195119521953195b1955

-Sources t

5.6 2.4 b3.64.7 1.3 27. 94.3 1.3 30.269 3.7 54. 08.2 5.1 62.1

14.1 11- 0 780321.1 18.2 86.0248 22.5 YO- 728.4 26.6 93.924.5 23.4 95.424.b 23.6 96.823e 8 23.2 98. 127.2 26.0 98.329.6 29-9 101.239.4 3909 501.3

03 b6.5 96.248.6 50.3 103 653 3 57.6 108.060.b 61.8 10203"

JRe o r t s of t he East African Currency Board.


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= 13 -e i n the form of holding government or government-guaranteed securxtles tot he mtlximum of E10 million. The first such local l nvest ment by the EACBt f a s in securlti es i ssued by Kenya and hol di ngs a t the end of J une 1956mounted t o Fil91,OoO at nominal value. n the f ol l ow ng year a U threemainland terrltories t ook up l ong- t er m loans frcm the EACB and the amountatdtaxrding at t he end of June 1957 had r i sen t o Ej .8 mlliion ( s e c Tabl e 4) aI n December 1957 t he regulations wer e again amended and the maximum limitof fiduciary issue by the EACB WRS increased to E20 mlllion, Tot al lendingon June 30, 1958 had, however, not cxcecded ,~6.3uJ.1ibn. A yearlater clams by the EACB on the governments of the consti tuent terri tori eshadclimbed t o ~8. 9million ncluding the f i rst l s sue of secur i t i es byEden amounting to E0.g miuion,

I n 1959 the EACB was aut hor i zed t o acquire l ocal Treasury b i l l s(within the specified l i m t for f i duc i ar y i ssue to government s) , and thl:sprovide short -term finance f or the governments concerned. The aut hor i t i esof Uganda and Tanganyika trere the f i rst t o avai l themselves of t hi s newfacil lty. A t t he end of December 1959 and J une 1960 t he EACB held E3.8million and E3. 1 mlUlon, r espect l vel y, of whi ch E2.3 m l l i on and EI.6million were f or t he account of Uganda and the remainder f or TanganyikaThe total fiduciary issue (i .e., Treasury b i l l s and l onger - t er m securities)at June 30, 1960 amounted to ~13. 1m] lion, i. , , E6 3 m l l i on bel ow theauthorized max l mum3. Reconstltutlon I n 1960

I n anti ci pation of independence of the var i ous constituent t er r i -tones, he Boar d WCLSeconstituted i n 1960, enl arged from *'our members t oseven, and I t s seat was transferred from London to East Africa w9t h i tshead off l ce i n Iiairobl. Instead of comprlslng Br r t i ah Government repre-sentntives f r om the Colonial Of f l ce, t he Treasury, and t he o f f i c e of t heCrown Agents, as i n the past , I t s new membe r s wer e now the SecretaryGenwal of t he East African Common Ser vi ces Organization as chairman (defacto, but not ex of f l cl n) , the remanent Secretary to the Treasury ofKenya, the Per manent Secretary to the Treasury of Tanganylka, the Seeretar)b t he Treasur y of Uganda, the Flnanclal Secretary, Aden, the FmancialSecr et ary, /adbar, and a technic11 expert . These member s wer e st111appointed by the U. K. Secretary of State f or the Colornes, but the actualmanagement was now i n t he hands of representatives of the member govern-ment s, and the day to day directlon of the Board was exermsed f r om a seatwithin the teI rL tory of the currency area i t s e l f .

By bemg abl e t o f ol l ow economjc event s from a much cl oser range andthrough mor e frequent and intimate contacts wlth Government off ici als andbusillees L ircles, the Board was now i n a better posi tion to take a mor eactive role In making i ts own contribution tc the f lnmcing of economicactivities. While the nev Board r et ai ned much of the strength and sirnpllcltyof t he old system whlch helped to mslntbin general confidence i n the EastAfrican currency at d high l evel , I t was now w ~l l i r l g o venture into newdirections and to undertake f unct i ons ~n t he monetary f i e l d whi ch are


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!Cable 4. EACB F l duc r a r y I ssue t o M vermn&( I n m l l i o n s o i pounds)

a_lunMal taken q pTotal avai&ble

of which: Treaeuy b i l l s

Total taken upTotal avai l abl eo f which: Treasury bi l l s

Totel W en ugTotal uval l abl co f whi ch: Treasury bills

otal taken upTots rvairnleof which: Treasury b U e

denTot al taken upTota avai l abl eof whi ch: Treasury b i l l s

.AfY icanCurrency Boar dWtal fiduciary isarle: Gover nmentof whi ch: Trsaeury bi l l slbtal fiduciary irsw toQovsrmentauthorizedlourco: R e~ortsof the Eaat African Curr ency Board,

Inca t e o e t , b i l l s a t aomnsl value.


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. - 15 -0 generallyassociated with operations of central banks. We Board'sregulations i n I t s amended form prolx ed sufficient egal basis f orenlargedaction. I t explored ways in which i ts lending to t he govern-

ments could make %he greatestcantribution. I t startedcrop inancingfaci l it ies with the dusl aim of promoting e x p o r t s and of acting 8 s abanker of I ss resort Lo t he ccmerci al banks. I t became mor e flexiblei n i ts policies withregard to interest rates and exchange cGmmSSiOnS*To f aci l i tate banking operations i n general, it opened nnd maintainedaccounts for the commercial banks, thus ntroducing a multilateral zlearine;systembetween the banks. I n order to mprovecurrencydistribution Overthe whol e territory of the currency ar ea, the Boardopened new currencyc Acenters and "safe custody" facilities i n r emot e areas.

General econcrnic conditions in East Africa n 1960/ 61, and par t l yalso i n 1961/ 62, were affected by a climate of political and other uncertain-ties. These led t o anoutflow of funds, a decr ease in private capi talinvestment and a drawing down of bank deposits. Currey n ci rculatlonat the end of J une 1961had decreased by E l12millic.? as compar ed n t hthe end of June 1960 ( see Table 5 ) . Thi s decrease woul d haveheen evenlarger had not the capital outflow been financed i n part by the commer ci albanks who reduced their over seas cash holdings and ncreased credits tot he private sect or , These operatlons led t o a considerable deteriorationin the hquidi ty poslti on of the ccmmercialbanks. I n order to redressthe si tuat~on the ommer ci al banks rai sed then mnimum lending r a t e t o7 per cent i n Ju ly 1960 and to 8 per cent n October of the adme year.Dur i ng 1961/62 not es and coi ns i n cfrculatlon decreased by onl y El.4 m l l l ono

The general downturn i n econcmlc activities al so had the effect of0 reducing gover nment revenue. The governments, therefore, had ecourse t oshort-term bor r owi ng from t he M C B on a l arger scale than n the past. A tthe end of December 1960 t he Board' s holding of Treasury b l l l s amount ed toE4. ? milllon of' whi ch al most 2O million each w as issued by Kenya andTanganylka. By February lgGJ, the total renlalncd roughly the same, butthe borrowers had changed. The Boar d*s sho;t-term claim on the Govern-ment of Tanganylka had r i s en to E~. G milhon, I t held no Kenya Treasurybil ls, and I ts short-term cl ai ms on t he Government of Uganda had risen t oal most E1. 7 million, By end June 1961 TreasurJ bj 11s mad2 up only E2,8milllon out of a total flduclary ssue of ~12. 8mllllon, but at the endof 1961 t hey had r i s en again to ~ 6 ~ 0lllion. I n lending to the gover n-ment s the Board al loceted the various amounts to di f ferent governments andI t f ol l owed the pr act i ce d leavlng an unused nlargln withln the lmlt ofthe aut hor i zed fiduciary i s sue to the governments for exccpt l onul demandsand ot her unforeseen contingencles as trcll as for recllscourlts of Governmentsecuritles or Treasury b i l l s held by the carmerclal banks. I t was t her ef or emade a condition that al l gover nment s would have to consult w1t;ll the Boardbef or e issuing bonds or blU s.

1/ Part of the decreare ,tab due to t he wlthdraml of East Africans hi l l Lngs from the f or mer l3rltu.h Protectoldte of Soma1lland i n 1961:EO.6 ml l ion v as Jithclrclwn bef or e J une 30, 1961 and EO, 2 m l l i on i n J ul y0 and August of 1961.


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.I.16 -Table S r . EACB: Si gh* L iabilities and Currency Reser ve Fun?

(Inmilllokrs o f pounds)

Currency Curr ency&/ Total currency Deposits Currencyoutside hel d by i n bY Reservebanks banlcs ci r cul at i on banlcs Fund

19571958JuneJ une*TuneJuneJuneJUneMar. IJ uneSept .bec.Mar .J uneDec.Mar.J uneBept .Dec .Mar.Sspt

53.356. .

9.60.26.95.96.1594.6325.23.64.84.35.14.44.14. 36.2

5.7

...

60.760.758-757.360.459. 261. 857.863. 068. 069.565.571.975.772*368.375. 679-876. 0

_ ~Sources: ?worts of t&$,.rst;AE_r~;~Currency Bosrd and dat a supplied by theEACB author t i es.

I ncl udes currcnly held by comerci s1 bankb i n Aden whi ch i D not separ at el yavailable f or al l data. I t nmounted t o CO 6 mrllun on J une 30 I n 1962, 1.963, an21964.


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- 17e The Board searched for an equitable f or mul a to be used I n the shmingof that part of i t s profi ts that it intended t o distrlbute t o the membergmernments. I t tras thought that, i n theory, each government ' s proportionshoul d be equal t o the amount of currency i n circulation i n i ts territory.After the withdrawal of East African shil l ings frcm t he Somali Republicwas ccmpleted, the Board renewed the estmates of currency circulationi n the remainmg five member terri tories. I t was fel t that statistics ofissue and redemption by t he Board i n each of the various countries werenot a s uf f i c i ent gui de since trade and capital movements between the tend-t or i es were allowed freely ~mndhad t aken pl ace on o. l ar ge scale I t wastherefore found mor e practlcal and politlcall ly mor e accept abl e to adopt af or mul a whl ch gave equal shar es t o the three mainland territorles. eachreceiving 28.2 per cent, Zanzibar 3. 5 per cent, and Aden 12 . O per centOf the Board's prof i t, 2 milllon was distributed I n 1962 accor di ng t ot hi s formula (see Tabl e 6) The use of this new f ormul a was noL restrictedto t he dLstrilution of profits, but was also used t o determine each govern-ment' share of the fiduciary issue Thus, t he 20. 0 million allowed forfiduciary i ssue to the gover nment s w as apportiolled 1n the following \.ray:sl i ght l y over E5. 6 miUlon each to Kenya, Uganda and Tsnganyilca; EO. 7million to Zanzibar; and E. nlil l ion to Aden.

With n vlev t o actiw as lender t o the banklng system in a period ofscarce liquidity and to enxtl;le t he processing and marketing of crops, theBoard, i n November 1960, approached t he Secretary of State for perm ss l onto di scount and rcdlscount bCLs and other approprmt instruments isswdi n connection with themarketing of specifled crops. 9 These new polremwere granted to t he Board, pr ovi ded that this type of financlng 1Joud.d notu5.0rnilllon But ~n 19601' 61, rather high ad valorem st amp dut l es Oncrop b lUs i n the const l t uent t er r i t or i es operated as a dlsincentlve f orthls type of fmancing, and no use tras therefore made of ~t until 1961/62when the ccmmerclal banks, f or the firs', t i me, turned to t he Board t oobtain refinanring. Such recourse remained, on a inoderate male, notexceedmg EO 8 million at, any one tlme during that period (see Table 7 ) ,for two mdl n reasons: there was a sharp drop L n cotton poduction iAlUganda, and the Bmrd observed the hl ghest standards i n the types of paperused I n this n ew form of l endl ng to the banklnE oyLltern.

exceed E5 m l l i on nor increase he otal f i duci ary i ssue to mor e than

I t 1s worth mentioning that the Board declded not t o apply any tern-t o na l divislon of i ts crop flnanclng f n c l l l t y . I t was fe lt thL i t , wath dbankln@system wher e most commercial banks operate I n al l const i t uenttcrrltorles, I t vas mportant LO i nf l uence the over - al l l ~ p ~ d i t yositionof t he corrmercial banks r at her than that of those hranches of the banksl ocat ed 111 the country whose produce Wds, a t any pcwtlculnrmomenl, beingharvested and processed, Lmits [ere, ,lowever, placed on t he lrldiVidLmLconunercial banks,

1/ Coffee, t ea, cotton, si sal , cloves and. pyrethrum. I t was made c leutha; t hi s l ist coul d be expanded to include other crGps, i f needed,


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- 18 -Tabl e 6 . a EACB: Di st r l but Aons t o Gover nment oOut of Board' s Tncomeg

( I n thousands of pounds)Year Br i t i sh Totalendi ng Tnngan- Soma- f or a11

J une 30 Kenya Uganda yika Zanzl bar Aden l i l and countries50.644.266. 7

151. 3130 5140. 3215. 4342.345-6347.8347.6563. 3563. 3"33.7

5. 37.7

10.817.129.018.327. 345.545.443.3$11 .o70. 070.o78- 7

511 5-

"2.03 . 45 a 36.47. 1

10.917. 522 .524.616. 0"""

115. 4

130. 0150 0250. 0TOO. 0500.0503. 0750.0

1, 250. 01, 250. 01, 250. 01, 250. 02,000.02,000.02,250.0

14, 050. 00

S o u r c e s : Reports of t he East AfrLcan Cur r ency Board.1;/ The di s t r i but i on i s f or t he years i ndi cat ed, but payment 15 usually

"- "- * .-effected m the folloving ycar.


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Table 7 . EACB: Crop Financlne( I n t housands of pomds)

- - -1961 1962 1963 1964Mace Ous tanding Nade Outstanding Made O u tstandmg Made Ou t st andavailable at end avai l abl e at end avai l abl e at end avai l abl e at endcluing month of month during month of month dur i ng month of month cluing month of month

an.b .ar.r .

ayUtl!ul y

.ct ,ov,cc .

~

I , 650 1, 2001, 000"" 1,650

200"" """ " ""45063

"450226226200200

"50

750

"226450

Source: Re'ports of t he East Af r i c an CurrenLy Board, and data sugpl l ed by the M C B uuthonties.Amounts not lnade avai l abl e


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To make borroalng by the commercicl banks f lm the central insti-t ut i on more attractive, t he Boar d, In May 1962, lowered i t s discount rateforbcrop f i nance bi l l s f r a m 7 per cent t o 5 1/ 2 per cent (see Tabl e 8).It j ust i f i ed thl action by indicating t hat i t did not wi sh t o i mpose a" penalty ra te" 3 f or crop finance. At t he s a n e time the Board made i tc l ear t hat I t woul d see that the f unds obtained fram t he Boar d were usedby t he commercial banks f or the f nanclng of craps, and that the banksconsidered the Board as a l ender of l ast resort. Si mul t aneousl y wi t h theBoard, t he cmer c i a l banks l owel ed theix minimum overdraft r a t e from 8per cent ( to which i t had been r ai s ed i n Oct ober 1560) t o 7 per cent .The Ward's r edi scount r a t e f or Tr easur y bi l l s or s i m l a r b i l l s oft he gcwernments remained at 1/ 2 per cent above the current terrder rate.The latter was 1/ 8 per cent below t he London Tr eagur y b i l l rate and moveddur i ng t he period accordlng t o the f l uc t uat l ons i n that rate. I n 1961/ 62r edi scount ed Treasury b l l l s reached E350, 000.I n May 1362, the Board made t he f irst change i n i t s exchange comm s s i ons since 1946. For 16 year s t he rates for both i s sues and re-demptions of &st African s hi l l i ngs against sterling had r emai ned at 1/ 4per cent , The Boar d now set i t s char ge for buyi ng st er l i ng at l/8 percent and i ts charge f or selling st er l i ng at 3/8 per cent . I ts ai m was t ocr eat e scme incentive for t r ade r s t o return their export proceeds and t oencourage the Inflow of pr i vat e investment capi t al f r o m abroad. The Boar da l s o made i t known that i t would henceforth reserve the right f or i t sel ft o deal i n the exchange mar ket . The commer ci al banks followed t he Boar di n r educi ng their char ges t o the publ l c.The consi der at i ons that had caused t he Board t o change i t s com

m s si ons and t o f avor i nwar d 1-emi t ances dl d not, however , appl y to Aden.Ther e t he exchange market had r emai ned broadly i n balance, and t he r e-quirements of sterling were matched by s uf f i cl ent demand for East Afrlcanshilhngs. I t was t her ef or e not necessary t o introduce any changes andt he equal usue and r edempt i on cornmlssions of 1/ 4 per cent, r espect i vel y,wer e kept i n for ce. However , t o avoi d undesirable arbitrage movemenks,t he Board imposed a 1/8 per cent charge on transfers from East Af r i c l t oAden. Such transfers, l i ke any other transfers wlthln t he currency ar ea,had pr evi ous l y been f r e e of charge.4. Operations s i nce 1962

After t he rnlddle of 1962 economic condltlons i n East Africa unproved.Thi s w as par t l y due t o more f avor abl e weat her , but t h e re were al so signst hat a general revival of conf i dence i n East Af r l ca' s econcxnfc potentlalhAd occur r ed. I nvest ment showed some i ncr ease, and higher commodity~ ~ ~1/ To t he extent that the mmi r num overdraft rate char ged by t hecorrmerclal banks had remained u t 8 per cent s i nce t he f aU of 1960, theDoar d' s r a t e of 7 per cent had never been a true penalty rate.


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Year

- 21 -Table 8. EACB: Rates of I nterest andof Exchange Conrmissions

( I n per c en t )

Exchange comm ssi ons Rediscount Redi scountrat e rate Treasury bi l l s rate forbuying sel l i ng rate for and advancecrop financing

1955 June1960 J une1961 J une1962 J une

0 l s64 Nov,

" "" "" 7

1/ 2 per cent 5 112above t hel ocal 5 1/ 2tenderrates 5 1/2a * * * 5

Sou r ce s : Reports of the East Afrxan Currency Board and data suppl i ed bythe EnCB aut hor l t l es,r/ The exchange coLJ?ic;iolls i n connection with tlze buying and scl l l ng ra tesi n Aden r emal ned at 1/ 4 pcr cent, ~espect ~vel y , ut a charge of' t/8 per centwas applied for t r ansf er s from East Africa t o Aden.


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- 22 -pr i ces led t o larger r ecei pt s f r c m abroad.showed a steady rise of 13 per cent bet ween4 per cent i n t he f ol l cwi ng year (see Tabl e

Tot al cur r ency i n ci r c ul at i onJ une 1962 and J une 1963 and of5. By J anuary 1965, i t rehchedan all-time high of E8O, 5 miL ion-before a seasonal decline s e t i n.I n the general set t i ng of a reviving economy, and encouraged by i t scontinued strong position even throughout, t he year s when t he pace ofeconom c devel opment had slackened, t he Board decided on f'urther i ncr easesi n i ts f i duci ary issue-first i n December 1962 f or crop financing f rom E5m l l i on t o E10 m l l i on, and t hen i n May 1963 for gover nment s from E20million t o E25 m l l i on and again i n t he f a l l of 3964 t o E35 mil l ien,bringing t he moximrm l i m t f or the total f i duci ary . I s sue t o E45 m1W on.I f fill use wer e t o b e made of t he new powers, t he f i duc i ar y i ssue tmuldmmant t o over SO per cent of currency i n ci r cul at i on. I n fact, however,the to ta l fiduciary isme at t he end of December 1g64 amount ed t o E25.2million, or 36 per c e n t of t o t & currency i n circulation, wher eas sterlingasset s ( at nominal value) cover ed 81 per cent of t he currency i ssue.The Board' s l endi ng t o the gover nment s since the middle of 1962has shom f l uctuet i ona i n the gover nment s' need f or short-term financt!

(see Table 4). Long-term borrowiw di d not increase over Lhi s period,st andi ng at E9. 7 million on December 31, 1964. The Bard's hol di nss ofTreasury b i l l s ar e usual l y hi gher at the end of the year when t he commer ci albanks are less l iauid because t hei r f unds are empl oyed i n connect i on withmarketing of crops. Toward the m ddl e of t he year, the Bcmrd's Treasuryb i l l hol di ngs decl i ne, Far exampl e, Treasury b i l l s held by the narddeclined f r o m E7.4 million at t he end of 1963 t o C3. 8 m l l i on by the m ddl eof the year but then increased again t o El 2.3 m l l i on by December 31, 1964.The rlse was es peci al l y sharp I n t he second half of 1964 because ofl ar ge borrowings by the Gover nment s of Uganda and Tanganyika. The Govern-ment of Kenya had not found i t necessar y to issue Treasury bi l l s s i nceear l y 1962 because i t was able t o borrow from compani es and other S O w C e Sdirectly, a s i gn of 3 relative abundance of l iquid funds i n Nairobi.Tanganyi ka, on t he other httnd, had borrowed up t o the lhit by flueust 1964and t hus had t o approach t he Bomd f ur per m s s i on t o borrow beyond iksappor t i oned shar e. Af t er consultntion and car ef ul consi der at l on, theBoard permitted the Government of TaGzania t o exceed I ts all otment oi ' t hef i duci ar y issue t o gover nment s by appl y i ng t he omount above Tsnganyi ka' sshare againct the unused por t i ons 01' Kenya and Aden. However, t he r i s eI n the max i mum limt of the f l duc i ar y i s sue t o governments i n October 1964

f r Gm E25 million t o E35 mllhon br ought TanzaniH back w i t l u l *he per m s sl -b3.e limit and even l e f t i t wi t h an urlused margm.The Board cont i nued t o distribute yr of ~ts o t he gcverments i naccordance wt t h i t s f or mul a. The total mount dl s t r i but ed I n 1963/64was raised t o E2, 250, 000. I n additlion, t he Board decided t hat i t ~O U l c lcontribute t o t he str engl, l ~enl n~f the f i nonc i a1 sybt em i n East Africa byproviding t o t he East Af r i c an guvclrrn\er l ts t he f 1n~nt- ~alesou~ccsneededt o sub~cr ibe o the Bretton Woocls institutionc. On August 23, 1962


24/67

.. ' - 23 ..i t allocated for this purpose E l . l million to enable the Government ofTanganyika to discharge i ts obligations. Cn the same day, the Board setaside n a trust fund comparable amounts for the other governments sothat they would be able, n the future, to pay their subscriptions to theIMF', the I BRD, and i ts aff i l iates. WhenUganda and Kenyabecamemembersof the IMF and the IBRD i n September 1963and February 1964, respectively,the EACB, out of the trust fund established for this purpose, made avail-abl e to the governments E.1 million each for the payment of thei r sub-scriptions. A second trust fund was established t o provide for thesubscription8 by the Board's member governments to the African DevelopmentBank.

The Board further strengthened i ts relations with the commercialbanks in three main areas:theBoard'scrop inancing acilities,re-diccounts of Treasury b i ,Us for the banks, and the opr--&ions of clearingsettlement accounts.Crop financing ncreased and reached a peak i n January 1963. Dur i ngthe following crop season i n 1963/64 f unds made available by the EACBunder the crop financing scheme were scanewhat lower but more evenly spreadOver thecrop season (see Table 7). To faci l i tate such operationstheBoardwas now vi l l ing to accept promissory notes of the banks' custonlersas security for advances to the banksand, for discounts, the banks wereallowed to tender their own acceptance when custcmary b i l l s of exchangewere not available, The Board continued to urge the governments tostandardize exicting ad valorem stamp duties on ccmmercial bi l l s.The Board changed the rate it charged f or rediscounts and advancesi n connection wth crop financing i n November 1964 frcm 5 1/ 2 per cent to5 percent seeTable 8). I t i s signi ficant that the Board made thi sdecision at a time when rates weremoving i n the opposite direction i nLondon.The effect of higherrates i n London and lotrerrates i n Nairobiwere soon apparent. Lendin8 by the Board to banks for crop inancing rosefrom E0.6 mil l ion at the end of November 1964 to E3. 2 million a monthlater. Buteven t h i s amount; i s only a fraction of the E10 million whichthe Board i s authorized by i ts regulations to end i n connection with cropfinancing. The fact that no greater use has been made by the cmercialbanks of this facili ty is partly due to deliberate action by the Board toencourage short-term borrowing f r cmabroad during the main crop seusons.Treasury b i l l s rediscounted by the Doard for the commercial banksfiuctuated between E3OO, OoO and EGo0,OW pr?r annum dur i ng the period underreview. A l l these operations were under.tslten for the benefit of banksoperating i n Uganda. Relative to the total iduciary ssue, the mWtSof rediscounted Treasury b i l l s were rather small, but the Board at t achedconsiderable importance to i ts readiness and Elbility to act as l ender oflast resort i n this my. The rate at which the BOFIYJ.st ood rvady t o re-discount Treawry b i l l s rema,ined unchanged u t 1/ 2 per cent above thetender rates i n the constituent territories.


25/67

Dur i ng 1962-64 the number of bank cust omer s of the Board increasedand t he operations of the banks' clearing settlement account s with thehard expanded. The Boar d had made i t known t hat no commercial bank withan of f i ce i n one of the capitals of t he three mainland territories w o u l dobtain any service fr m t he Board other than t hat available t o the generalpublic unl ess i t mai nt ai ned an account with t he Board. The EACB off icmlsthought that, for t he sake of mor e efficient banking oper at i ons, somecomnercial banks coul d have made mor e i nt ensi ve use of their accountswith the Board.The Board saw no need t o al t er i t s general comm ss i ons on foreign e x -change operatiom when a t empor ar y spurt i n out f l aw of funds occurred i nearly 1964 i n connection w i t h pol i t i cal incidents. Up unt i l November 1964t he char ges remained unchanged at 1/8 per cent for buylng sterling and at3/ 8 per cent f or sell ing sterling. Throughout the whol e period, t he Doard,at t i mes, dealt with the banks at smaller char ges with + he dual aim ofencouraging temporary sh o r t - t e rmborrowing by the banks f r c m abroad t o

f i nance crop movements, and of maki ng dealings I n t he unof f i c i al "campen-sation market" less attractive. By charging l ower rates to the banks oncertain operations, they, i n turn, were able t o reduce their char ges t ot hei r cust omer s for transactions amounting to E100, 000 or mor e. Thi sincreased the amaun of exchange t r ansac t i ons handled through t he bankingsystem and r educed "compensation arrangements". On November 25, 1964 theBoard increased i ts comm ssl on on sel l i ng sterling from 3/8 per cent to1/2 per cent. As t he buying commission r emai ned at l / 8 per cent, thespread between t he two r at es was further widened. The change was under -taken i n response t o t he raislng of the bank rate i n London, f r o m 5 percent t o 7 per cen t . The o f f i c i a l s of the Ebard f el t that there was needto reduce t he attracti on of higher rates i n London i n or der t o keep l i qui df unds I n East Af r i ca.

Over t he years t he Board has endeavored to improve I t s currencyservices through tne establishment of new currency subcentsrs I n var i ousparts of East Africa and on t he islands of 7anzibar and Pemba and thrr)uGhthe conc l us i on of new currency agency arrangements with cc mmer ci al banks.Under these ar r angement s the banks were authorized t o hold coins (notNotes) on behalf of the Board. These meas ur es eliminated unnecessar yshipments of corns t o tnd f rm Nalrobl and t hus hel d down some of t heBoar d' s costs.During 1g64 the Boar d used i ts i nf l uenc e to keep t he tender r a t e sf or Treasury b l l l s issued i n the East Af r i can capitals f r c m fallowmg t o oc l os el y t he r a t e s I n London. The Boar d' s a l m was t o allow day t o daychenges t o be r ehted t o those In the London mar ket , but i t di d not wi shany automatic l mk by whxh s ucces s i ve sharp r i s es i n the London r a t e sa s a r es ul t of changes i n t he bank rate were followed i n EHst Africa.Thi s pol i cy l ed t o parallel moves of t he r a t e s i n London and Ea st Af r i cabut s t an i nc r eas i ngl y wide spread. The maxlruum l oc al rate I n early1965 was 4.40 per cent .


26/67

Table 9 shows the composition of the Board' s a8se is While t hepraportjon of sterling assets out of total investments varied around84 per cent during the last f our yeam, the part kept i n ster l i ng Treasuvb i l l s and sterling securities matur i ng i n less than five years grew f r cn79 per cent in 1961 to 95 per cent in 1964. me maturities of most ofthe East African secur ities held by the Board stretch over 8 somewhatl onger period than the sterling investments, I t i s the Board's inten-t ion also t o i mprove the liquidity structure of i t s local investments.


27/67

Teble 9. UCB: Composition and Degree of Liquidity of Assets(In millions of pounds)

Cash, Secu ritie s Sec uri tie s Secur i t i esJune 30 R-easwy bi ll s, maturing i n maturing i n more maturing i n more To

crop finance, ' 5 years o r l es s then 5 years and than 10 yearsadvances up t o 10 years

Ster l ing asse t s(percentage)%st African assetsk r c e n t a g e )Total(percentage)

Ster l ing asse t s(percentege)East African esse ts(percentcge)Total(percentage)

Ster l ing asse t s(percentage)East African asse ts(percentage)

Total(percentage)

S t e r l i n g a s s e t s(percentage)Eest African a sse ts(percentage)

Total(perccntege)

Sources: Reports of th e Eas t Afr ican Currency Boe.rd.


28/67

. .

111. East Africa's Bal ance of Paymentsr!""- "1. "Lver-all balance of payments develaEents""" -

The pattern of t he East African balance of payment s has changed sub-stantially cver t he years since 1956 for whi ch of f i ci al balance of pay-ments eotimatea = available ( see Table 10). A l ar ge deficit during t hef i r s t of these years on the balance of goods and s er v i c es has graduallybeen reduced and for 1963 and 1964 was replaced by o. surplus, " hi s devel op-ment was l argel y account ed for by trade and took place i n spi te of t he factthat t he terms of trade for East Africa showed an unfavorable trend from1956 t o 1960 and even after some improvement i n recent years were s t i l l ,i n 1963, about 10 per cent bel ow t he 1956 level.Over the same period, Kenya has received increasing amounts of of f i ci algrants which fluctuated between E3 million and E7 mill ion i n 1956-60 and

then J umped to a l evel of El 2- 23 million for the f ol l ow ng years. On theother hand, recorded private capital inflow went down from E21 million i n1960 to only E4 million i n 1961 and r2 mil l ion i n 1962, and i t has, from1960 onward, been much more than offset by a net expenditure of exchangecaused by unidentified transactjons, whi ch are believed to rtflect mai nl youtflow of private individuals'capital.Officialcapital Inflow has beenvarying greatly f romyear t o yeur,but without showi ng any particular trend*The balance of the above-n~entioned t e m s together !see Gr oup F ofTable 10) shows large fluctuations from year to year between a max i mumdeficit of 1x6 million i n 1960, when the private capital outflow 'waspar t i cul ar l y l ar ge, and a maximum surplus af ~6 million i n t he f ol l owi ng

year, vher: the caFital out f l ow had declined and, at the same time, % s tAfrica received substantial amounts of of f i ci al grants, For t he wholeperiod 1956-64, however, deficits exceeded sur pl uscs by E25 nullion. Thestrain af t hi s net outflow of foreign exchange i s token entirely by t hecomiercial banks, whose balances with banks abroad (i.e., l argel y thetrhead offices i n London) chenged from net claims of E17 million Q t the endof' 1955 t o net debts of E9 million at the end of 1964. The foreign re-serves hel d by t he East Af r i can Cur r ency Board have, i n reality, servedonly t o a negl i gi bl e extent t o ewe the monetary strain on the economy:t he amount of the reserves allocable t o these three count r i es W 0 6 E55 m i l -l i o n a t the end of 1955 and E52 m l l i on at t he end of 1964.The l evel of of f i ci al reb:rves was mai ntai ned i n spite of t he meas ur es

which the Board has t aken, beginnine, i n 1955, to al l ow f or issuing currenc:,on the security of Treasury bi l ls dnd other secur ities Issued by t he melnberGovernments, as wel l o s on the traditional basis of foreign exchange aSSet S-The three countries' shares of these fiduciery lending powers ha-Je graduallyitlcreased rom the or i gi nal amount of E8-9 mill ion i n 1955 t o t ne presentE30 mil l ion , and the outGtandinG mounts of drawings have risen almost con-tinuously from year to yew und wer e, at the end of '364, E21 ndllion."-~-fnti i is-section-the .term East &ica i s uied to cover Kenya,Tanganyika, and Ugandab - -"" "_ -" I-""


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Table 10, Zas t Africa: Balance of Payment s Surtrwry, 1956-63-/( I n m l l i ons of pounds)

B Transf er Payrcents-Pr i vat e transfersOf f i c i a l grat.taC, Private IIonmonetary capital -1, 5 -5. 6 8.2 8.2 21. 0 4.4 2.3 16. 9- - - -

Long- t ermcapital 21, 6 14,8 8. 1 94 3 20.5 3. 9 1 8 5 15. 6Short - t erm capital - 0. 1 0.8 1. 1 -1. 1 0.5 OD 5 0.8 1.3D. Unidentified Transacti onsE. Of f i ci al ITomonetary Capital -6. 8 11. 3 12.5 17.6 14, 4 19, 1 10. 1

Long- t er m capi t alShort - tcrm cbpltal 3 6 8 -2.9 8.0 -3.9 1.1 - 0. 3 5 0 9 -2.8- -13. 0 14. 2 4.5 3.9- -16. 5 -14.7 13. 2 12.9- -

F. Total (A t hrough E)

Souzce : Estimates by t he East; Afrlcm St ati st l cal Depar t ment , t o some cxtcnt adjucted and suppl emented by t he110 sign i ndi cat es credit ( decr ease i n a s s e t ~ tor increase I n l iabil i l lea); m nus s i gn i ndi cat es deblt ( i nc rTrade statistics data adJusted f or valuation and coverage#n a88 e ta or decrease i n l.~abI li ti es),


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e At the same time, the commercial banks had drawn E3 mill ion under thecropfinancin6, scheme, which t he Currency Board introduced i n 1961. Thepractical ly unchanged level of reserves reflects, however , the fact thatthis f i duci ary lending of E24 m l l i m has l i t t l e mor e than equaled theconcurrent substantial ncrease n the currency circulation, which wouldotherwise have required a corresponding accumulation of statutory coverI n t he form of foreign assets. The total amount of currencycirculatedby the Board increased f r omE60 million AS of J une 30, 1955 to E80 milliona t the end of 1964, of which, on the bas i s of' the distribution mplied i.1the profit-shsring formula, E51- million aK;d E67 million, respectively,can be estimated to have been ci rculating in the three countries.

Of the total amount of E52 m l l i on, which i s estimated as of the endof 1964 t o be the three countries' share of the Currency Boar d' s foreignassets, E9 mill ion represents the unutil ized part of the Government's draw-ing rights under the Board's fiduciary powers. These unutilized dr awi ngrights, of which E6 m l l i on belonss to K enya, E2 mil l ion to Tangunyika, andEl millLon to Uganda, may be considered close to the equivalent of 8 fdrei~11exchange reserve at the free disposal of t he three individual Governments.Ther e is a further amount of E7 mil l ion n the form of the unutilized partof the E10 million which can be used by the Currency Board f or cropf inancinc through he commercial. banks. I n addition to these amounts ofavailable exchange reserves, there remains E36 million of foreign assetsi n t he Currency Boar d, of whlch the maJor part serves a s statutory coverf or t he currencycirculption;vhilethese belong t o the three Gover nment si n common, they can be mobi l i zed to provide exchcnge reserves or, moregenerally, as an instrument of monetary policy only throush a new policydecision by the Currency Board.2. Details on the balance of payments"""""" ""a. Merchandise trmmactions

The East Al'rLcan balance of t rade shoved subetantiul deficits i n 1936and 1957, was also the caGe i n previous years;but t hi s was changedabr upt l y into a state of approximate equilibrium or minor surpluses I n t hefollowmg f i v e years,and i n 1963 uncl 1964 there were mrpluses of E22 m l -lion and 35 rnilliorl,respectively. These r emar kabl e developments on thetrade balance, whi ch are closely interrelated with concurrent developmentsf or other foreign transactions ( i n par t i cul ar capital f l ows) and for thedomest i c economy, have resulted from an increase n export valtes fromEl l 8 million i n 1956 to E187 million i n 1964, or by neurly GO per cent,and a much smallar rise i n import values, namely, f r o m E134 million i n13>6 t o E152 m l l i on i n 1964 (13 per cent). The quantity of expor t s hue,been i nc~ees i ngalmostcontinuously from jear to year, nterrupted onlyby a decline i n 1961. due to the droughtand flood disaster, und was , for1363, almost 50 percent hidux than for 1956 ( s e e Table 11). A t thesame time, however , export prices showed an unf'a-doruble trend up to 1362,after which a suustanti al improvetncnt took place. These trends for exportquantities ond prices reflect, to u great extent, developments for thcfour major exports, coffee, cotton, sisal, and t ea, which dccounted i n1963 for about 70 per cent of total, domestic export s (see Tabl e 12)

"""""""Icl

a


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- 30 -Table 11. East Af r i ca: 'hade I ndi ces

( 1954 = 100)1954 1956 1957 1958 1959 1960 1961 1962 19.-

Exports f r o m East Af r i caQuantityPr i ceValue

I mpor t s t o E86t Af r i caQuant i t yPriceValue

Ter ms of Trade-1/East Af r i ca

Of whi ch:KenyaTanpnyikaUganda

1CO1001co

100100100

100

100100100". " "_ " "

14881

120

103101104

80

DO8580

" _ "Source: East African St at i s t i cal Department, Econom c and : tat.i st~rl Revlcw.Sept ember 1964. ""-/ The expor t price i ndex as a percentage of the mport prxe index,


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Table 12. East Africa: Domest i c Exports of Pr i nci pal Commodi t i es( I n mil l ions of pO~t1d8)

Cof f ee, not roastedCotton, r awSisal fiber and r awTeaDiamondsMeat and mat preparationsHides and skins, etc.Copper and alloya, unwou&tOi l seeds, nut s and kernelsAnimal f eedi ng stuffsPyrethrum extractPyrethrum flowersCashew nut sSodium carbonateGol dWattle bzrk ext r actBeans, peas and pulsesWood and t i mberButter, including &eeA11 ot her commodi t i es0 Total domest i c expor t 8

34.624. 620. 17. 04.63.84.7' * 14.52. 72.01. 02.41 8 31.31. 11. 10 .90.79 . 1

131.6-

45.025.530.29.34.94.63.94.04.42.03. 10.52.31.21. 41. 02. L0. 50 .812. 2

150. /-

Sou r ces : East Afrxan Sl at i s t i cal Department, Econom c and St at i s t i c al Reviewand EACSO, Trade and Revenue ReJort f Gr Kenya, Tanrr,anyika and Uganda.""""""""""-"I"- "-


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The developments for these commodi t i es f r m 1963 t o 1964 were, on t heaverage, favorable with respect to both quantity and pr i ces , The vol umeindicea for cof f ee and cotton were hi gher bd 11 per cent and 64 per cent,respectively, whi l e t ea ehowed an increase of 8 per cen t and s i s al waspractically unchanged.Average export prices for coffee ro6e by morethan 50 per cent bet ween t he two years, whi l e there was a decline f ors i s al of 3 per cent end f or t ea of 5 per cent, and co t ton prices wereR b n 0 6 t unchanged. Thi s seems to I ndi c at e that t he over=al l exportindices for 1964, whi ch ar e not yet available, wi l l show substantial in-creases both for quantity and pr i ces , and that the price iadex w i l lprobably exceed t he 1956 l evel ,

After an I ncr ease of 5- 6 per cent over 1356, thequantity of I mpor t sreached a high i n 1957, 16 per cent above t he 1954 l evel , but droppedal most back t o t hat l evel f ar the f ol l owi ng t w o years, &ad a f t e r a sub-sequent increase t he quantity has s t i l l , for t he year s 1961-63, been onlyabout t he same as I n 1957. Import prices over most of t he period haveshown r at her moderate f l uct uat i ons around the 1956 level, but a subotantiolrise took pl ace i n 1963.

The developments i n expor t and import prices brought the terms of tradedown t o a l ow i n 1960, 14 per cent under 1956, and e\en after come rccovcr, ,they wer e st i l l , i n t he year s 1961-63, 9- 10per cent lower than i n 1956.After t he f avor abl e developments i n export pr ices f r o m 1963 t o 1964, t heterms of trade have probably i npr oved somewhat, despite some r i s e i naverage impart pr i ces .Besides coffee, cot t on, sisal, and t ea, a great var i et y of othercommodities are exported, among which the most important ar e diurnonds,meat , hides and ski ns, oilseeds and nuts, copper , and al l oys as specified

i n Table 12. A substantial par t of imports ( s e e TaoEe 13) c ons i s t s oftrausport equi pment (13 per cent), mnchlnery and appl i unccs ( 14 per cent),petroleum products ( 3 per cent), cotton f abr l cs ( 6 per cent), and ironand steel manuf act ur es ( 5 per cent). The relnalnder i s spread over d mdevariety of m nor i t ems.The direction of Enst Af r i cs ' s i'orelzn trade has chanCed subs t ant i al l ybetween 1956 and 1963, as shown i n Table 14. The share of ex.rJortn goingto t he sterling ar e8 hds decreased from 49 to 11.3 per cent, and that to t heEEC countr ies from 25 to 20 per cent, whlle there hac been an incrcuse f'olt he Uni t edS t a t e s and Canada from 12 t o 1 5 per cent, and f or " other coun-tries" i nc l udi ng Mal nl and China, from 13. to 18 per cent of t o t a l expor t s.With regard t o imports, the share r ec ei v ed f r o m t he sterlinc dr ea has alsoshown a large decl ine, namely, fro11161 per cent iy 1956 t o 145 per cent i n1963, while t he shore provided by al l t he other' scl e~ted reas hos i nc rcdt ec - ,par t i cul ar l y for " other count r i c s " , from 11 to 23 per cent, larcely cluet o a rise i n i mport s from J apan dnd I ran.


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. . - 33 -Table 13. East Africa: Principal Import8

( I n millions of pounds)

Passenger vehicle6 and chassisBuses, truclte,orries, etc . [Railway r ol l i n8 stock 2. 2)Aircraft (0. 1)Ot her ( 5 . 2 )Transport equipment

Machinery other thanlectric 14.7Tractors,ncludinggricultural (1. 1)Agriculturalmachinery, etc, ( 1. 2)Other (12.4)

Petroleum productsCas, diesel and other fuel O i l 6Motor spiritOther 4.3)Cottonabricspiece goods) 7- 5Iron and steel manufactures 095Electric machinery, apparatus, etc. 5.3Paper,aperboard and manufactures 2.4Clothing, except f ur clothing 2.2Rubber tires and tubes 2.1Medicinal and pharmaceuticalproducts 1 4Radio and television sets 0.4Scientific,medical,tc.,nstruments 0.7J ute bags and sacks 1.1Blankets and travelling ruas 1. 3Printedatter 0.BHand tools of metal 1.2Milk and cream tinned 0.7Sugpr, refined 2. 8Textile yarn and thread 0.4Insecticides,ungicides, etc. 0.7Fertilizers, man' factured 0.eChemicalf3, inorgardc and organic 0.6Tea "Petroleum,rude and partlyeflned "Alcohohc beverages 1.0Sanitary, plumblw, c t c . , materials 1.2Paints,arnishes, dyestuffs, c t c , 0. 9Other 41.0

Total lmports 133.8SoUrC&: East African Statistical Depar t ment , Economic and St at i s t i calRevlew, and Luarterly Economic and Statistical Bulret in."-" ""-""""""" " -


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Table 14. East AfY ics Compoaition of Exportdand Importsby Belectad Arsu mnd C O U i t r i O 8( m t e n millions of pounds)

Sterling areaUnited KingdomAuetr al i aBahr ei n I slandeHoug KongIndiaRhodesia and Nyrsdand&uth AftlcaZanzibarOther

hllar areaCe~adaand Newf oundl andUnrted States

EEC countriesBel gi um Luxembour gFrBJ lceGermany, Federal Republic ofItalyli etherlmds

EFTA countries cxcluding Unitcd K iudom)Denmar kOtherSwcden

Other co unt r i e sCongo (L eopoldville)Rwanda and DurundiSudanJ a pa nMai nl and Chi naI r a nOther

UnallocatedTotal

Source: East AfricanStatistical Depar t ment , Ecorlomic m d Statistical Review.Including re-exports.

46. 91.32.02-76 . 90. e0.22.9397726 .70 . 525.12.24.59.94 54.04 80.01.62.4-0 60.1

1900. 59 24.2

"

Q145 0


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- 35 -b. ~mact i onsn servicesThe balance of foreign transactions n services, of which detailn for60me selected years are shown I n Table 15, has been f l uct uat i ng over theperiod under review between deficits of E l l mllllon and E10 million.A mjor part of the deficits i e accounted for by the excess of i nvest menti ncome paymente t o nonreslbnts over thoee recej-d from abroad, for 1963amount i ng t o El 9 m l l i on BB compar ed with E6 d Aon i n 1956. The generaltrend in thi s account over the period was roughry constant receipts butrising payment s, t he l atter 8 8 a natural result of the increase i n f orei gndebts and foreign I nvest ment s i n East Africa.Receipts from H.M. Forcess t o o d at 3- 6m l l i on i n 1956, but weremore than offset by payment s ofE7 million to the Wa Department and others i n connection with t he cver[l;ency*The U K. Gover nment undertook to bear t he whole of the recurrent cost oft he East African Land Forces from m d- 1960, and as a result, this componentshowed net credits for 1962 and 1.963 of Eg - l o m l l i on. For both Insurance

and miscellaneous oer vl ces, there have been Increasing net payments abroad,whi l e payments and receipts on travel and transportation accounts havel argel y been I n equilibrium, The credit for nomonetary gol d of El -2 m i l -l ion i s most l y t he result or' production I n Tanganyika.c. Transfer payment s""-----d"Private transfer payments include fundo r ecei ved by m ss i ons andchurches f romoverseas, personal remittances of East Afrlcun residents,and the value of money and personal belongings brought into, or taken outof the area by migrants. The Lolance of t hi s account wae slightly

yeare, amounting to E7 in i l l ion i n 1963, yresumably resultina mai nl y f r o ma rise in emipants' transfers.pos i t i ve f r o m 1947- 61, but has showed au Increasing def i ci t i n recent

Of f i ci al grants from abroad, f or whlcn detnilo arc shown i n Table 16,were fluctuating i n the yeom l 956- 60 bctwecn E3 rui l l ion and 3'million,but rose t o a level of El 2- 23 m l l i on for t he years 1361- 63. The grant6have cone largely from the U. K. Government i n one fora or another. A nopprsciable part of t he grants i n lecent yeuro wos a result of the OverseasService Aid Scheme (OSAS), under which the U . K . Government contributes tothe salaries of expatriate officers serving i n the Bast African countries.d. Privatenornonetag cacitalThe recorded net inf'lov of capital to t he prlvdte sector has fluctuatedbetween 323 million and E22 million a year apart from t he years 1961 and 1362,when i t amounted to only a few million pounds. Tn 1-956, East African corn-paniee received larye f or ei gn l oans and i t w&s mai nl y due to t he reducedvolume of new loans i n 1957 and 1958 t hat there was a decline i n t he netcapital i nf l ow i n t hose years, aGsisted i n l95d by t he f ac t that, East Africancompanies a1)preciably increased thei r holdings of foreign secur i t i es Rndother overseas lond-term a s s e t s , I n 1959 new loants t o compunies continuedto fal l , but this was more t han oil'set by t hc sale of f ore i gn securities

""" ""-@ and other a s s e t s by the Statu to1y Boards.


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- 36Table15 East A f r i c a : Forei gn Tranmctims i n Se r d o e e

(I n millions .of pounds)

"-.-."" ".-""""Sources: East African Statietical Department, The Balance of Paymenta Of1/ Consists of central. governments, t he various EACSO departments, the E,A2/ I ncl udi ng local aut hori t i es, St t rt ut ory Boar ds and commer ci al banks.

East Africa) and data provided d i r e c t l y by the %st African Statistical Dopartment.Cukency Board, and the Post Office Sav ings Benks.


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Table 16. East Af r i ca: Of f i ci al Foreign Gracte( I n m l l i ons of pounds)

Kenya Gover nmentQnergency""Wnnerton Plan"U. K. Exchequer (O.S.A.S.)Colonial Devel opment m d llelfa r efnternat i onal Cooperation Admin-istration

Tanganyi ka Gover nmentCol oni al Devel opment and llelfareU .K . Exchequer (O.S.A.S. )

Uganda Gover nmentColonial Devel opment and IJ elf a r eU. K. Exchequer (O S. A. S. )

0 mcso ( M C )Direct gr ant s (U. K. )Col oni al Devel opment and llelfareU . K . Exchequer (O S. A. S. )

TotalSources: East Af r i can Statistical Depart ment , The Bal ance of Payment s ofEast Af r i ca; and data pr ovi ded di r ect l y by t he E.A . Stat i s t i cal Depar t ment .


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- 30 -The bi g rise i n overseas i nvest ment i n East Africa i n 1960 was 19rgelydue to a net purchase by nonr esi dent s of E4 million worth of local equitycapital and to loans t o local companies of nearly CG m l l i on. I n 1961,however , there was a radical change, presumably related largely t o polit icaluncertainty and net i nvest ment f e l l f r o m the E21 million of 1960 to E4-5million i n 1961 and E2 million i n 1962. This reflected a decyease i n netloans t o East African compani es, i n investment by br anches and insurancecompanies, and i n t he value of undi s t r i but ed profits. I n 1963, the netcapi t al inflow rose again sharply to El 7 m l l i on.Outstanding amounts of the private s ec t or ' s foreign l iab i l i t ies andasse t s ar e shown i n Tabl e 17. At the end of 1961, total l i abi l i ti es amountedt o E134 million and total asse t s t o E35 million, resulting i n net l iab i l i t iee

Of E99 million. These data, however, do not cover private ndividuals'foreign l iabi l i t ies and assets. I t should further be noted that the changesf r o m year to year i c the outstanding amounts differ widely from the corres- 'ponding balance of payments entr ies, presumably due to valuation and cover-age adJ ustments .e. Unidentified transactions"The l abel "unidentifiedtranoactlons" i s here used for t he bal anci ngi t em whictA represents a net pf a l l errors and om ss i ons i n the estimatesof specified account s. I n t he years 1956-59, this i t em fluctuated bet ween8 debi t of E15 m l l i on and a credit of El m l l i on, but i n 1960 it shot upto 8 debit of E48 million, and i t was of an extraordinary n~ugnltudealsoi n t hc following years. I t seems most l i k e l y t hat t he very larGe net e r r o r sand om s s i ons i n t he East Afrlcan balance of payment s from 1960 onwardreflect mai nl y an unrecorded outflow of pr i vat e individuals' capital.f . Of f i c ia l nonmonetary c3Eital""" """" "-The public sector ' s long-term capi tal transcctions of which somedetails ar e Gxven i n Table 18 hovc shown a net inflow fluctuatang i n 1356and 1957 and I n 1960- 63 between E13 million and E16 n~i l l i on,but with adrop t o about E4 million i n each of the years 1958 and 1953. The inflowi n the f irst two years included large amount s of loans raised on t he Londonmarket and, especially i n 1956, the hi c h l evel of sulcs of 15overrunent-ownedsecur ities on the London murket, particulurly by Uganda. T he low l nf l owi n the two Sol l ow n; ; years was due largely t o t he clbsence of any new loans,while sales of secur ities continued. The major sel l er w as s t i l l the U/;andaGover nment whi ch, from 3.956 t o 1759 inclusive, reduced the value of s ec ur i -

t i es held on t he London murlcet by more than Sl.0m l l i cn. The l ar ge inflowi n 1960 and 1961 was the reLu1-L of' Exchequer Loans from t he U. K. Governn~ent( E12 m l l i on i n 1960 and E18 million i n 1961) and l oans from thc I BRD ( E2m l l i on i n 1961). No details ar e avai l abl e f or the most recent years.


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. - 39 -e Tabl e 17. East Af r i ca: Pr i vat e Sector' s Forei Li abi l i t i esand A s s e t s Out ot mdl ng, 1.959-63-?A8 at end of 1959 1960 1961 1962L iabil itiesSt ock8 held by nonr esi dent s 50. 2 50. 0 53.5 54. 2- - - -

Loan capi t al ( i ncl udi ng debent ur esand over dr hf t s)Publ i c compani es 20.7 20. 5 18. 2 16. 3Private Compani es 22. 2 26.7 28. 3 2j . 1Br anches 35- 34.9 32. 2 28. 9Local aut hor i t i es K enya onl y) " " 0. 1. 0St at ut or y boar ds ( i ncl udi ngEB) 0.5 0.6 1.9 2.5

Asset s _.7.8 34. 9 -5. 2 -- ..Long- t er m asset s ( sccur i t es, etc, ) -4. 1 -1. 8 -2. 2 -.Publ i c compani esPr i vat e compani esBr anchesLocal aut hor i t l esStatutory boards

2.0 1. 'i 1. 9 ...6 *5 6,2 6.0 . I .2. 8 1. 2 1* 4 . . I2.4 2.5 2.7 ...20.4 20. 2 19.4 ...Short- term assetscach, etc. ) 3 7 3- 3- 0 I . .- - - - -

Public compani esPr i vat e compani esBr anchesLocal aut hor i t i esStatutory boards

- " """ources: East Af r i can St at l s t i cal Depar Lment , The Balance of Payments ofEast Af r i ca; and data provided dl r ect l y bdp t he East Af r i can St at l et l cal Da-partment .ass&.1/ The table does not cover pr i vat e i ndi vi dual s ' f or ei gni abi l i t i es and


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Table 18. East Africa: Long- t er mFor ei gn Capital Transact i ons of Publ i c Sector&/( I Gmil l ions of pounds)

oans ral sea on London mar ketCent r al GovermentsEACSO ( EAHC) 2.2 10. 0 -- -0. 1 0. 1 - on1 -0.3 -- 6 . .l o an sCent r al Gover nment sEACSO ( EAHC)

liabilitiesKenya Gover nmentTanganyika Gover nmentUganda Gove r nmentEACSO (EAHC)et i ncrease ( - ) or decrease i n a s s e t s(securitxes hel d on London market)

t al ssset sKenya Gover nmentTanganyt ka Gover nmentUganda GovernmentEACSO ( EAHC)Post Of f i c e Savings BanksUnallocated ( n e t )

ncr ease or decrease ( - ) i n net l labil iticsKenya Gover nmentTangauyika Gover nmentUganda GovernmentPost Of f i c e SaviRgs BanksUnal l ocatedEACSO (mc)

1.0 -0.1 -0.5 -0.5 -0.5 767 4 . b - 0. 2 I . .

No s i gn i nai csteo credit; m nus si@ indlcates debi t .


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.Outstanding amounts of the public sector ' s long-term foreign liabilitleoandaseetaare shown i n Table 19. A t the end of 1963, net l iabi l it iesamounted to E l 0 3 m l l i on , reflectin6 gross l iabilities of E178 million and

@OB 6 a s s e t a Of E75 million. There were net l iabilities for E A 0 of 39million, Cor Kenya of E45 million, for Tanganylka of E12 million, and forUganda of E7 million.

The short-term capital transactions of the publi c sect or covergovern-ment accounts with t he J oi nt Consolidated and J oi nt Miscellaneous Funds i nLondon, with the Crown Abents and other government agents with overseascommercial banks. The movements have for moat of the years been fluctuatingbetween net credits and net debits of E3- 4 million. The large credit item,E6 million, i n 1958 was due to an increase of nearly E3 m l l i on i n shor >-term l oam by TanGanyika and a reduction of E4 mill ion in sterling a s s e t sby Uganda. A t the end of 1963, total short-term iabil i ties amounted toE5 million and short-term assets to L7 million ( s ee Tdble 20). The changesfrom year to year i n outstanding amount s shown i n this Table and I n Table 16differ widely from t he corresponding entries in the balance of payments(Table 91, presumably due t o coverage and valuation adjustments.

&. Monetary_movements"The l ar ge fluctuations over the last nine years i n receipts and pay-ments related to forelgn transactions ia goods, services, grants, and capitalhave periodically put a severe monetary et rai n on the East African economy,which has been eaeed to some extent by drawings on t he monetary insti tutions'foreignbalances. This was the case n 1957, when a sharp deterioration i nthe terms of trade and a drop i n the volume of cotton exports caused a sub-stantial ncrease n the trade defi ci t, and to a still higher degree i n 1960

and 1964, when the strai n 8ee1mto have been closely related to an unrecordedoutflow of private capital. There have been years i n between wi t h someimprovement i n the exchange posi tion, but f or t he nine years together therehas been Q net deterioration of E25 million. This amount i s entirely uc-count ed for by the commercial banks, whose balances with banks abroad ( i e . ,largely their head of f i ces i n London) changed f rom net clailus of E17 millionat the end of 1955 t o net debts of 9 million et the end of 1964, I n con-trast with t hi s E26 million reduction n the commercial banks' share oftotal f orei gn net monetary assets, the three countries' estimated commonshare of t he East African Currency Boar d' s sterling a s s e t s declined only byE3 m l l i on r om E55 million at thc end of 1955 t o E52 m l l i on at the endof 1964, and t hi s slight reduction was more t han offset by the three COW-tries' payment s, i n 1962- 64, of their gol d subscriptions to the I nt er nat i onalMonetary Fund.

The currency issued by t he Board i s clrculoting not onl y i n the threeEast African countrieo but also i n Aden and Zanzi bar , and the Boar d' s totalwosa assets--includin~ ocaL o s well 8 6 overseas assets--belonp, t o thesef ive territories I n common. However, because of the ree f l o w of thiscurrencyover al l f i v e terri tori es, there are no poasibilities of makingcurrent estimates of the distribution of t he currency ci rculation and,therefore,balance of pnymente entriea for the f i v e territories, a8 wella6 their shares of outotandiw amount e of assets, can only be calculatedas very r ough approxirnntlons,


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.I42 -Table 19. East Africa: Public Sector s Long- t er mLi abi l i t i es and A s s e t s Out st andAng

( In millions of pounds)

As at end ofLong- t er m l iabillt les

J une1959 1960 1961 1962 lgGg 1964Publ i cl y Issued st ocks hel d on t heLondon RegisterKenya GovernmentTangarlyika Gover nmentUganda Gover nmentEACEIO (Em)

over dr af t s)Kenya GovernmentTanaanyika Gover nmentUganda Gover nmentmcso ( M C )Total l ong- t er m l iabil itaes

Long- t er m assets (securities, e t c , )K e n p Gover nmentTanganyi ka GovernmextUganda GovernmentPost Of f i ce Savi ngs BanksEACSO (mc)KenyaTanganyi kaUganda

Total l ong- t er m asse tsNet l ong- t er m a s s e t s and l labilitles (-)Kenya GovernmentTanganyika GovernmentUganda Goverment

L-

EACSO ( w c )

0. 5 1. 9 4.8 7.5 10.0 11.2 6. 0 8. 0 12. 2 14. 4 18. 410. 0 9.5 17. 3 17. 4 17. 3 18. 3121. 4 135. 6 154.3 165. 5 178. 4 191. 1

13. 7 14.89.3 9.523.9 25. 1(4.2) ( 3. 8)21. 0 20. 36.5 6.0

( 1. 2) (1. 2)( 1. 1) ( 1. 0)74.4 75.7

Sour cea: East Af r i can Statistical Department, The 3alance of Payment s of EastAf r i ca. and data provlded directly by the E . A . St at zst l cal Depart ment .


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e. - 43 "Table 2 h East Africa: Pllblic Sector' s Short-+,crmForeign L iabil it ies and . i s s e t s Outstanding

( I n m l l i o n s of pounds)

A s at end of 1959 1960 1961 1962 1963Short-termLiabilities 2.5 3 .5 3.2 6.7 5 . 2""-

K enya GovernmentTanganyika GovernmentUganda Gover nmentShort- termAssets

Kenya GovernmentTanganyi ka GovernmentUganda Government%CSO (EAHC)Post Of f l ce Savings BanksI k t Short-tam Assets orL iabll ltles ( - )

Kenya Gover nmentTanganylka GovernmentUaanda GovernmentPost Of f l ce Savi ngs Banksmcso ( m c )

4.3 1. 4 7. 2 6.6 6.6

1. 8 -2.1 4.0 -0. 1 1.4-0.2 - 0 . 9 -0.2 1. 2 1. 3-2. , 0 -1 .3 -2.0 - 3 . 1 -1.40.2 -1 .3 1. 8 - 0. 0 -0.43 6 1.4 3.2 2.5 L O0. 2 " " 0. 1 0. 1

Sources: East Afrlcan Stati mi cal Department, The Balance of Paymcnls-f EdSt Africa, and data provided directly by t he E A , Gt,atlstical Depart-men .1/ I ncludes trust funds s e t as i de by t he E .A . Culrency Board t o he usedfor-bUbSCrlptiOnS LO i nt er nat i onal financial nstitutxons.


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-44-The out st andi ng amount s of t he t h re e East African shares of t heCurrency Boar d' s f or e i gn reserves, shown i n Table 20, are c al c ul at ed onthe basin of t he aseumpt i on t hat currency i n c i r cul at 5on and shares ofownership have f or al l the year s under review been distributed betweenthe f i v e territorles I n the pr opor t i ons i ndi cat ed by t he pr esent profit-sharing formula, i.e., 3.5 per c e n t t o Zanzi bar , 12.0 per cent to Aden,and appr oxi mat el y 28. 2 per cent t o each of t he three East RErican count r i es .Any error13 i n t hi s pr ocedur e trill show UP al ong with a11 other error8 andom ssi ons under " uni dent i f i ed t r ansact i ons" , bot h i n the balance of PeY -m a t s of East Africa a8 a whol e and i n t hose of the three i nd iv ihd . coun-tries.I n the cal cul at i ons for Table 21, spec i al consideration had to begi ven t o t he f i duc i ar y l endi ng, whi ch represents, at the same time, Part

O. t he gross asse t s t o be shared and debts f r o m t he associated t er r i t or i es 'Governments or commer ci al banks t o t he Board. The Boar d' s power s forfiduciary l endi ng t o t he associated Gover nment s started i n 1955 vith al i m t Of 320 million, whi ch has since t hen been increased s t e p b y Step t ot he present E35 million. I n 1961, t he Board introduced powers f or l endi ngto the comercial banks i n connect i on with cr op f i nanc i ng; t h originalcei l i ng of E5 million was increased, i n 1962, t o E10 m l l i on. 4 Whilethe fiduciary lending power s are allocated amng t he Governments on thebasis of t hc above-mentioned pr of l t - s har i ng formula, no cor r espondi ngallocation by countries i s macle for the lending powers under the cropf i ns nc i ng acheme. Si nce such lending normally takes place vi a t he Nairobiof f i ce of the bank i n question, t he lending under t hi s Bchenle i s allocatedt o Kenya i n t he calculations i n Table 20.

A s i l l us t r at ed i n the Tabl e, t he t h re e East fi-frlcatl Gover nment s haveincreased t he out st andi ng amount s of drawings under t he fiduciary power salmost cont i nuous l y from year t o year , and a t t h e end of 1964 t hey haddrawn ~ 2 0 . 6million out of their total fiduciary ullocation of ' C29.7 mil-Ifon. The remaining amount of 9.1 million. of whi ch CG. 3 million belonGGt o t he Kenya Gover nment , 21.0 million t o t he Tenganylkco Gover nment , andE1. 0 million to the Uganda Government, repreoente that part of the Cur -rency Boar d' s a s s e t s that i s most f r eel y a t the disposal of the individual&3OVerrIInentS Q Y l iquidity and as exchange reserves.The c r o p financing scheme was used very l i t t l e clurln,: t he f'il-sk ycarsof i t s existence, but t h i s chansed substantially i n 1964 when, at t he endof t he ycar, the commcrclal banlc5 had borrowed E3,% mill ion out of ' t he

scheduled maxlmm om~untof E10 mllli cn. The unutilized amount of C6.8m L l i o n may, Coo, be considered Q di sposa l reserve b y me a m of' whl ch t heCurrency Board can, on spec-lfied c ondi t i ons and within certain limits,ease a monetory strain and, thus, conduct monet ar y policy functions normalt o a central lmnk pr oper .- - - "-i For mor e details, see section-13 of' th is paper.- " - - --""""""-


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a- 5 -T al e 21. East Africa: Er t ims tee of Kenys' s, ~~~tgany i ka'and Uganda' a Sharer of -reign Reeer vee held byt he EMt African CurrencyBod

(I n mil li ons of pounds)

s at end of:enyaGover nment s unutilizcdf l duc i ar y allocctionTotal fiduclexy allocationDr amngsOt her assets

Covernnent ' s unut l l l zedf iauciary o.llocatronT o t d f l duc i a r y dlocetlonDramngsOt her a s s e t s

Govcrkment' s unut l l l z edf 1duci C3y alloce;"1onTot cl l lduclmy allocationDr amnC;sOt her z s s e t s

1 East Af r l c aGovern-ncncs' unut l l l z cdflcluclwy L l l oc at l oncT otal f i auc iw uecation

DrebWipeSCo mc r c l r l btmlL s' unut l l l z euf lducl - Jy al l oc at i onTotal fiduclury allocationD rm l n pOt her J SsctnLourcec: Prcparco by t he Fund s t a f f on thc basls oE dat u provldca b~ the East Af'rlcanCurrency Board and thc Cast, ALfr lcat at l s t l c j L Depar bnent .


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The remaining amount of the Currency Board's assets i s largely tieda8 statutory cover for the currency ssue, and i ts mobilization as aninstrument f or monetary policy w i l l r equi r e a new policy decision by t heCurrency Board.The establishment of fiduciary lending powers and t he act ual lendingunder these powers of E24 million repreeent, i n a certain sense, a mobili-zat i on of reserves, without whi ch the East African economy woul d, pre-sumably, have come under a st i l l t i ght er monet ar y strain. The fact thatthe est i mat ed East African share of t he Currency Boar d' s assets i s onl yE3 million l ower a t the end of 1964 than at t he end of 1955 r eflects,however , , that the easi Kg of t he monetary strain through fiduciary lendinghas l i t t le wor e than compensated f or the concurrent increase i n currencyci rcul at i on, whi ch under the Cur r ency Board system i n operation up t o 1955would have required accumul at i on of an equal amount of sterling nsee te .The total amount of currency circulated by the Board i ncr eased from 60

million at mid-year 1955 t o ~ 8 0 illion at the end of 1964, of which, onthe bash of the allocation implied i n the profit-oharing formula, C51 m l -lion and E67 million, respectively, can be estimated t o have been circulat-i ng i n t he t h r e e Eest African count r i es.The drawings on commer ci al banks' belances with overseas banks havelargely been channeled through t he Kenya banks, whi ch had ovcrseB8 netclaims of E10 m l l i on at the end of 1955 and net debts of E15 million atthe end of 1964 (see Table 22). During the 881138 period, t he Uganda banks'overseas net claims went down f r o m E3 million to El million, w h i l e thoseof the Tanganyika banks increased f r o m E4 million t o E6 million. Thedevelopment i n the banks' balance

all analysis at once

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