Lomoro, G.M.

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EDEP No. 74 
U ^ r ^ . ,/ . G ,M. Lomoro 
13.5.65 
THE E.A. BALANCE OE PAYMENTS AND 
FOREIGN EXCHANGE REQUIREMENT 
1. Introduction 
1. This paper sets out to suggest tho level of foreign 
exchange which would "be needed to meet future East African 
balance of payments requirements. The point of departure 
is based on the fact that the required level of foreign 
exchange reserves is a function of the balance of payments 
position of any country or group of countries 
2. The problem of foreign reserves is of great con-
cern' in most jf the developing nations. In varying de-
gree, those nations suffer from foreign exchange shortages? 
and to remedy this shortage, both exchange control and 
import substitution policies are often enforced. It is 
no wonder that the promotion of import substituting in-
dustries has become and outstanding policy in most deve-
loping economies. The spread of import substituting in-
dustries is seen as a means cf releasing foreign exchange 
so badly needed to import capital equipment and raw-
materials. The delemma of tho underdeveloped nations is 
how to achieve economic progress and at the same time to 
avoid the paralysing effects of the "balance of payments 
difficulties. 
3. The foreign exchange situation in East Africa is 
rather different. Unlike most developing economies which 
suffer foreign exchange shortages, East Africa has plenty 
of it. Unfortunately, however, the nature of the currency 
board system is such as to restrict tho utilisation of 
these reserves for the import of capital goods. In coun-
tries where the monetary system is based on a central 
bank, the foreign exchange reserves are held officially 
by the central bank which is the authority responsible 
for their adequacy to offset any balance of payments 
deficit; thus averting any exchange crisis. In East 
Africa, the foreign reserves are owned by a variety of 
bodies: viz., the Currency Board, uhe commerci 1 banks' 
the territorial governments (both central and local), 
marketing boards and other business institutions. 
4. We may now proceed to examine tho East African 
balance of payments of the past years with the objective 
of suggesting a level of foreign exchange holdings that 
would be necessary to offset future adverse "balance of 
payments of the region. Three methods are used in esti-
mating the future East African foreign exchange require-
ments: a) analysis of past adverse changes in the basic 
balance of payments; b) analysis of past adverse changes 
in. the trade balance and lastly, an analysis of changes 
in the levels of the East African sterling reserves. 
II. The East African Balance of Payments -
5. Prior to 1956, no official estimates of the East 
African balance of payments exist. This is understandable 
in a currency board system, because the task of finding 
foreign exchange required for an adverse balance of pay-
ments of the region does not fall upon the monetary autho-
rity but rather on the commercial banks. For this reason, 
most likely, the public authorities were not interested in 
recording the "balance of payments figures. 
6. In 1955, when the World Bank lent 124 million to the 
E.A..R.&H. Administration, it stipulated that a record of East 
African residents transactions with the rest of the world "be compiled 
(l) East Africa, in this content, encompasses only the mainland; 
and the residency is defined to include: the three governments, the 
inter-territorial common services, companies, business trusts and 
societies registered under the laws of Kenya, Uganda and Tanganyika 
Also included in the defenition are foreign incorporated "bodies 
that operate in East Africa on their own account not as agencies of 
their head offices. "rith the exception of diplomatic personel, the 
definition embraces individual foreigners who have resided or intend 
to reside for at least 18 months in T^ ast Africa (2) 
7. Earlv attempts to compile ^ast African "balance of -payments 
figures were made "by two individuals. Mr. Peter Browning (3) recorded 
what he rightly termed" skeleton "balance of payments account" This 
consisted of tr^de "balance, public capital transactions, grants and 
changes in the Currency Board's and commercial banks assets for 
the period 1946/53. He thus excluded the "balance of services 
interest and private capital flows. "^ his exclusion was unfortunate 
because the figures of these two balances as shown in the «nnendix 
Table 1, are ouite large, on the other hand, Mr. Ord (4) simply 
improved Browning's data by adding figures of investments by the 
Colonial Development Qorporation. Eund^metally, therefore, no great 
modification of V-v. Browning's figures tool pl^ce. Because of this 
defect, I have contented myself with the available official estimates 
as whowm in the appendix table 1. I have however modified the official 
arrangment in order to high-light attention on the Basic Balance of 
Payments. 
111. East African Basic Balance of Payments. 
8. The basic balance of payments as shown in appendix table 1, is the 
sum total of the balance of current account, capital account and errors 
and ommissions. The external reserves of the E.A. monetary system 
are set separately as these constitute the means of payments, constitute 
the means of payments, for any imbalance in the basix balance of 
payments. The changes in the external reserves of the East .African 
monetary system are tabulated below appendix table 1. (appendix tablelb) 
9. Looking at the basic balance of payments figures, appendix taable 
1, the fallowing observations are evident. Using the- entire period 
1956/63— the basic balance of payment indicate a cumulative deficit 
of about £1.7. million. The biggest deficit in this same basic 
balance is that of the two consccutive. 
"(l) The E.A. Statistical Department; The Balnce of Payments 
of East Africa 1958.1959 and 1960; September. 1962. 
(3) P. Browning: A Note on the Balance of Payments of Enst Africa 
1946-53 E.A. Economics Review, Vol. 3, July 1955. 
(4) H.,rr. Ord. An Outline of East Africa's B^l^nce of Payments. 
1953-55: E.A. Economics Review. Vol. 3. July 1956. 

- 4 -
curr^ncies, negotiable securities of which interest end 
principal are payable in foreign currency. Also, certain 
kinds of sterling are treated as if they were foreign 
reserves; those includes Bank of England's notes and British 
coins held by foreigner^ (including foreign owned balances' 
in the London banks), sterling bills held by non-residents, 
sterling credits opened in favour of non-residents and 
sterling securities held by non- British residents. Such 
a definition is very comprehensive and is of vital im-
portance to those charged with tho administration of Ex-
change control. 
14. As was said previously, the foreign reserves of 
East Africa are held by a good number of bodies. In the 
absence of a -ontralizing monetary authority, i.e. a cen-
tral bank, such a situation is bound to occur. Although 
my contention that East Afaica has too much foreign rer-
sorves remains valid, yet it is difficult statistically to 
show the exact volumn of these reserves from the fact that 
other than the Currency Board, the commercial banks the 
Post Office savings banks and the three central governments, 
sterling data of other oodies cannot be easily obtainable. 
(Due to such secrecy,) I have contented myself with those 
sterling figures as are published (available). 
15. Appendix Table Via records the sterling assets of 
the East African monetary system, i.e. sterling assets of 
the E.A. Currency Board credited to Kenya, Uganda and Tan-
ganyika; net overseas balances of the East African com-
mercial banks and P.O.S. banks. The assets of the Currency 
Board compose of securities at market, British treasury 
bills and cash balances in the London banks. All the 
figures are of 30th. June. 
16. Appendix Table Vlll shows E.A. governments' assets 
at 30th June of each year. These consist of investments, 
i.e. securities quoted on the London money market, sterling 
investment of the sinking funds and the liquid balances; 
comprising cash on deposit with ti' Joint Consolidated 
Fund and cash balances held with tho Crown Agents and the 
United Kingdom banks. Tho investment figures are rather 
constant, the minoi cause of variability being market 
changes, i.e. appreciation and deppreciation. On the 
average, governments' assets total £ 27 million per annum. 
Finally, appendix table IX shows the grand total of the 
East African sterling assets. 
17. A third way of estimating the past minimum reserves 
can be obtained from variabilities in the reserve figures 
of the East African sterling holdings. Although these 
figures are not exactly comparable to the basie balance, 
being June figures, they can provide good guidance. From 
June 30th 1958 to June 30th 1960, the assets of the Currency 
Board and commercial banks fell by -£ 20 million; whereas, 
for the same period, to'al E.A. assets declinea by - £ 1 2 
million. Again from June 30+h 1954 to June 30th 1956, the 
reserves of the Board and commercial banks fell by about 
-£ 1? million; while total reserves dropped by -£ 24 million. 
18. To summarize our analysis, wo have the following 
indications? 1) the basic balance of payments indicated a 
maximum two-year (59-60) deficit of -£ 20.1 million; 2) 
the E.A. balance of trade showed -£ 50 million which because 
of abnormal circumstances we adjusted to -£30; and I'-.stly, 
- 5 -
changes in sterling reserves indicated a maximum decline 
of £ 24- million. Fr m all these, we can reasonably assume 
that in the past, up to £ 30 million worth of foreign 
reserves was tho minimum required to handle fluctuations 
in the balance of payments. Providing an additional 
cushion for risk and psychological effects, £ 50 million 
would have been a maximum necessary level of foreign 
reserves. 
VI. Minimum Predent Reserves in the Future 
19. If it were assumed that future .East African inter-
national trade wor"d follow its past pattern, then we 
could with eafcd say that the £ 50 million past level of. 
foreign reserves would suffice to handle future needs. 
But as it is, the future is fraught with so many unpre-
dictable factors that our assumption would be purely 
arbitrary. We must therefore indicate some ways by which 
the future trend may likely differ from the past. Such 
indications wr11 help in making adjustments for future 
re qui: ements. 
20. The present-day rapid development efforts will 
most likely increase presure on the blance cf payments; 
depending however, on the rapidity cf export promotion, 
the scope of import substitution and. the volume of develop-
ment capital inflow. Although in the 1960-63 period 
public capital inflow indicated an increase, this was 
nearly completely offset by tho outflow of private capital 
(see appendix table l). Another important factor to con-
sider is the balance of invisibles. As shown in appendix 
table 1, East Africa has always been in deficit because 
of her heavy dependence on the rest of the world for ship-
ment, insurance and her outside payments of interest and 
dividends. Her gains from the tourist industry are more 
than offset by her payment to expatriate personnel going 
on leave. However, with the growing importance of the 
East African Airways (and perhaps of the mercantile 
flotilla), the reduction of expatriate personnel and the 
expansion of the tourist industry, the balance of invisibles 
will show an improvement in the long-run. Apparently, 
only movements in the future capital account remain 
uncertain, particularly the private capital account. With 
the likely improvement in the balance of invisibles, I 
am led to maintain that a maximum of £ 50 million worth 
of foreign reserves 7ould be adequate to handle fluctuations 
in the E.A. balance of payments. Moreover, in the event 
of a serious imbalance, the E.A. monetary authority could 
easily draw on their quotas with the International Monetary 
Fund and the African Development Bank. 
Vll. A Note on Territorial Balance of Trade 
21. East African exports consist of: domestic products, 
re-exports and non-monetary gold (6). Taking each country 
separately, Kenya (Table 11) never had a surplus: Uganda 
(Table 111) never had a deficit.; and Tanganyika (Table iV) 
had a deficit only in 1955. Taking the region as a 
whole, there where bad consecutive deficits from 1953-57. 
Three factors were responsible for these deficits, viz. 
the decline in the world import demand of primary pro-
duets which resulted in the dcjerioration of their export 
(6) sea definitions in the foot-note on appendix tables 
11 - IV. 










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The E.A. balance of payments and foreign exchange requirements

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The E.A. balance of payments and foreign exchange requirements

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