{{Kenya records the lowest proportion of transactions conducted in dollars — technically referred to as dollarisation — among East African states.}}
The phenomenon of dollarisation implies that people tend to use the US dollar or other hard currency as units of account, medium of exchange and store of value undermining the usefulness of domestic currency.
The higher the dollarisation, the lower the ability of the central bank to transmit policy through manipulating the domestic currency supply and demand.
A report by the International Monetary Fund (IMF) shows that dollarisation in Kenya stands at 10.8 per cent against Tanzania’s 20.3%, Uganda’s 21.8% and Rwanda’s 20%.
The standard measure of dollarisation is foreign currency deposits as a proportion of money supply.
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The key differentiating factor is that Kenya has a relatively higher macroeconomic stability seen in better implementation of fiscal and monetary policies, the IMF notes in the staff working paper titled The Monetary Transmission Mechanism in the Tropics: A Narrative Approach.
The four countries have, however, made substantial progress in the past decade in terms of reducing dollarisation of their economies, which shows the extent to which they have confidence in the ability of domestic currencies to maintain their value.
On the whole, the IMF says that East African countries have higher levels of dollarisation than the average for emerging markets, indicating the level of confidence that users of the domestic currencies have in forex.
The IMF says that monetary authorities in East Africa intervene in foreign exchange not only to smooth fluctuations but also to stem an increase in dollarisation and inflation.
“The authorities generally state that interventions are aimed only at smoothing fluctuations and building up foreign currency buffers.
Other concerns may at times be involved, including that rapid nominal depreciation will cause inflation or increase dollarisation,” said the IMF report.
Pantaleo Kessy, an economist at the Monetary and Financial Affairs Department in the (Central) Bank of Tanzania, agrees dollarisation has been a point of concern due to the credibility questions it raises on the domestic currency.
NMG
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