Which is stronger: Kenyan or Ugandan shilling?

 By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

24 October 2010

Mwero Mataza asks a seemingly simple question: “What determines the strength of a country’s currency? If we formed one currency for the East African Community (EAC), would it be stronger than, say, the Kenyan Shilling?”

Many Kenyans think that our shilling is “stronger” than those the Uganda and Tanzania. This opinion is based on the fact that one Kenyan shilling exchanges for many units of the neighbouring countries’ currencies.

For example, the Kenyan shilling is equal to about USh28 at present. But that fact alone is not enough to decide that Kenya’s currency is stronger than Uganda’s.

The price of a standard loaf of bread in Kenya is KSh38. The same costs about USh1,000 in Uganda. If we convert USh1,000 to Kenyan money at current rates, we get KSh35.70. Thus, in terms of buying bread, the Kenyan shilling is slightly weaker to the Ugandan one!

We can also compare the two currencies in terms of buying foreign exchange. In Kenya, one American dollar costs about KSh81. In Uganda, the same dollar goes for USh2,250. If we convert USh2,250 to Kenyan money, we get Sh80.35. Again we find that the Ugandan shilling is still slightly stronger than the Kenyan one.

Clearly then, the fact that one Kenyan shilling buys USh28 in not proof that our currency is stronger. This simply means that our shilling is numerically larger than that of Uganda; nothing more!

So; when the time for a common East African Currency Unit (EACU) comes (2012), how will the member states arrive at its value? A good starting point will be to fix an arbitrary exchange rate against a certain foreign currency, say the US dollar. Thus they might decide that one EACU will be equivalent to US$10.

Using the present exchange rates, one EACU would be equal to KSh810. This is because one dollar is equal to KSh81 and one EACU is US$10. In the same way, one EACU would be equivalent to USh22,250; TSh14,800; RF5,910 (Rwandan Francs), and FBu12,270 (Burundian Francs).

That seems quite easy enough, but there is a hidden problem. In line with international practice, the currency unit will be subdivided into 100 subunits. Therefore, one subunit would be equivalent to about KSh8 at the current exchange rate. Thus, the smallest coin value available would be equivalent to about KSh8. How is that a problem?

There are many products in the market packed in small quantities costing KSh5 or less. If we introduced the common currency at US$10, the prices of all these packages would suddenly shoot up to the equivalent of KSh8.  For this reason, the arbitrary value of the new currency must be chosen with care to avoid such increases of prices.

But to answer Mwero’s question, the common currency is most likely going to be numerically larger than the Kenyan shilling. That is, it will be worth more than one shilling.