SADC Monetary SADC Monetary UnionUnion

Presentation to Presentation to PCOF PCOF

11September 11September 20072007

Introduction

The Theory of Monetary Integration Definitions (2) : Nana-Sink-am (1978) Monetary integration

is the monetary unification of participating countries in an economic union which involves the adoption of:

- common currency

- harmonised fiscal and monetary policies

- co-ordinated exchange rate policies.

Corden(1992) Monetary integration is process that can be

envisaged during the final stages of economic integration and it involves :

(1) An Exchange Rate Union – an area within which exchange rates bear a permanently fixed relationship to each other. Even though the rates may in unison vary relative to other non union currencies

(2) Convertibility - The permanent absence of all exchange controls, whether for current or capital transactions within the area.

Monetary union eventually entails: - Adoption of fixed exchange rate margins

among the members - Common Currency - Pooling of Foreign Exchange Reserves - Harmonised Fiscal and Monetary policies - Factor Mobility e.g. labour and capital - Common Central BankThis experience has been observed in the EU

and The West African Monetary zone where Euro and ECB and the CFA and BCEAO exist.

Background

1980 - Organisation of African Union (OAU) adopted the Lagos Plan of Action which culminated in signing of the Abuja Treaty to promote closer economic relations

1999 - African Union (AU) was established to

further advance to the objectives specified in the Abuja Treaty

Regional Economic Communities (RECs) were formed to become building blocks for continental integration

New Partnership for Africa's Development (NEPAD) designated RECs as implementing agencies for its programme

Regional Indicative Strategic Development Plan (RISDP)

Economic integration within SADC is driven by the RISDP which provides a clear direction for SADC policies and programmes

Implementing programmes on achieving:• Free Trade Area - 2008• SADC Customs Union - 2010• SADC Common Market – 2015• SADC Monetary Union – 2016 (thus a

SADC Central Bank)

RISDP Macroeconomic convergence targets

2008 2012 2018

Inflation rate Single digit 5% 3%

Ratio of budgetdeficit to GDP

Not exceeding

5%

3% as an

anchor within a

band of 1%

3% as an

anchor within a

band of 1%

Nominal Value ofpublic & publiclyguaranteed debt

Less than

60% of GDP

Less than

60% of GDP

Less than

60% of GDP

External reserves /import cover

3 months More than 6

months

Sustained

Central Bankcredit toGovernment

Less than 10%of previousyear’s tax

revenue

Less than 5%

by 2015

Sustained

Macroeconomic convergence

Member States agreed to achieve and maintain macroeconomic stability

Member States should converge on stability-oriented economic policies which, among other, includes:

• Restricting inflation to low and stable levels

Memoranda of Understanding (MoUs) lays the foundation for the formation of a monetary union in the region

Committee of Central Bank Governors (CCBG)

CCBG established in August 1995

Deals with the development of well‑managed financial institutions and markets, and co‑operation regarding international and regional financial relations

Various projects, among others: �̶Development of national payment, clearing and settlement systems for SADC countries�̶ Legal and operational frameworks of SADC central banks – preparation of draft Model Central Bank legislation (to be finalised 2006)

Annexes

ANNEXES include:• Co-operation in the Area of Information and

Communication Technology • Payment, Clearing and Settlement Systems• Co-operation and Co-ordination of Exchange

Control Policies • Co-operation among Member Stock Exchanges• Harmonisation of Legal and Operational

Frameworks of SADC Central Banks

• Banking Regulation and Supervision (in progress)

• Co-operation among member banking associations (in progress)

Common Monetary Area (CMA)

CMA is the only sub-regional formation using a single currency (Rand)

Study – CMA regional central bank Rand remains a default currency in most

SADC countries CMA Governors meet 4x per year to

discuss policy strategies and exchange current economic developments in their respective countries

Institutional Issues in Monetary Union

Macro Economic Convergence - Basis for stable economies in SADC - Progress in achieving convergence - MEC Reports have been completed Problem: - Institutional mechanism overseeing reports,

assessing and monitoring progress is unavailable.

- Process of establishing mechanism is slow - Lack of commitment from member states - Cooperation among stake-holders

Institutional Issues in Monetary Union

Speedy establishment of the Peer Review Mechanism is necessary

Guided by principles that ensures equality of participants

Including the protection of Central Bank independence

Acceptance of the special role Central banks play in the economy

Statistical Issues

While CCBG have made an effort to collect data and compile publications e.g.

- Recent Economic Developments and the Integrated paper updated annually

There are still conflicting ideas about the accuracy of data among stakeholders

Timelines of data is a problem Lack of cooperation in verifying or supplying

data between stakeholders Results: Gaps continue in Reports.

More coordination and cooperation is required at national level by stakeholders

Statistics Agencies should be involved with the process of Regional Integration

SADC statistics office should be revived to oversee and initiate workshops to deal with statistics challenges

Other Institutional issues

Legal committee - Draft model bill has been concluded will be finalized by

April 2008- It set out the environment under which a regional

central bank will operate- - Next is the development of a road map towards

Monetary union - - In which a decision on whether other institutions will

be identified which will undertake further work towards a monetary union

- These could include the establishment of a SADC Monetary Institute which will carry on with the preparatory work

-

Payment, clearing and settlement committee

There are 10 countries on RTGS and hopefully the rest will adopt the system which could eventually be linked into a regional systems which can allow for cross border payments.

Problem: some countries are slow in modernizing their systems – financial

Banking Supervision

Discussions still have to happen on whether this function will remain with central banks or an independent regional body will be established.

Conclusions

Earnest discussions should begin on the road map towards the realization of a monetary union at summit level

Peer review mechanism could be the body that will decide conditions for entry into Monetary union and reporting into Summit

Consideration should be given of existing institutions e.g. CMA and SACU as building blocks

Conclusions

Thanks