East Africa’s weakening currencies don’t improve trade balances, defying economic theories

The depreciation of all domestic currencies in the East African region over the past year has not led — in a defiance of conventional economic theory and expectations of regional economists — to the improvement in trade balances, putting more pressure on foreign exchange rates.
The depreciation of a country’s currency is supposed to make its exports cheaper and thus more competitive in foreign markets, and in turn narrow its trade deficit — not so in the East African case. All East African economies are running on an export-led strategy, says Ugandan economist Bernard Musekese, which is to “export as much as possible so that revenues from exports can offset the import bill.” But the relentless devaluation of all domestic currencies at different rates has defied expectations, as the trade deficit in nearly all the countries has continued to widen — signaling increased importation or a drop in exports.

In both Tanzania and Uganda, for example, although their national currencies have depreciated — by 0.5% and 5% respectively — both countries have seen a rise in their trade deficit — by whooping 50% and 12% respectively. It is only in Kenya and Burundi, where the international trade balances have adjusted to reflect the change in currency value over the last year, but it is also their currencies that have depreciated the most in that period — by 19% and 13% respectively.

However, economists point out that the falling value of East African currencies, in itself, may not be sufficient to deliver a meaningful improvement in the countries’ trade balances. As Musekese argues, the demand for imports, which is curbed by the depreciating value of the currencies, should be complemented by the deliberate efforts by the governments towards export promotion to reduce the trade deficit.