1 ASSESSING REGIONAL INTEGRATION IN AFRICA (ARIA III): Towards Monetary & Financial Integration in Africa

2 1. Introduction

3 The importance of Regional Integration in Africa Creating a common market for the 53 individual African should lead to economies of scale to make countries competitive Wider trading and investment environment, inducing backward and forward linkages A framework for African countries to cooperate in developing common public goods: e.g. infrastructure; peace & security. Regional Integration - Vision of African leaders since early years of independence. Several reasons:

4  Assessment of Africa’s regional integration agenda on a regular basis to draw lessons for improving its implementation  ARIA I was the first coherent and comprehensive analyses on this integration process  Subsequent ARIA focused on thematic challenges (ARIA II- Rationalization of RECs; ARIA III – Macro- economic policy convergence, monetary and financial integration )  ARIA IV, now in progress is focusing on the important issue of enhancing intra-African trade.  Assessment of Africa’s regional integration agenda on a regular basis to draw lessons for improving its implementation  ARIA I was the first coherent and comprehensive analyses on this integration process  Subsequent ARIA focused on thematic challenges (ARIA II- Rationalization of RECs; ARIA III – Macro- economic policy convergence, monetary and financial integration )  ARIA IV, now in progress is focusing on the important issue of enhancing intra-African trade. Rationale for ARIA Rationale for ARIA

5 Rationale for Macro-economic policy convergence, monetary and financial integration in Africa

6  The success of the integration process will require economies of the constituent members that are strong and stable  Macroeconomic stability implies lesser fluctuations in output and employment, better overall price stability, very low inflation on average, and low variability  It also implies cultivating a fiscal discipline in terms of government expenditure in relation to efficiency in taxation to avoid excessive budget deficits  The success of the integration process will require economies of the constituent members that are strong and stable  Macroeconomic stability implies lesser fluctuations in output and employment, better overall price stability, very low inflation on average, and low variability  It also implies cultivating a fiscal discipline in terms of government expenditure in relation to efficiency in taxation to avoid excessive budget deficits Rationale for Macro-economic policy convergence, monetary and financial integration in Africa (contd)

7  Financial integration in terms of harmonisation of money and capital markets would ease payment systems and provide a primary source for medium to long-term securities, which are essential for investments  Monetary integration, especially in terms of monetary union, would remove exchange uncertainty and transaction costs, and deepen the integration process.

8 ARIA III HIGHLIGHTS ARIA III HIGHLIGHTS

9  The report shows that RECs did better at controlling inflation and budget deficits than they did at reducing external debt ratios. Debt relief helped some countries in improving on external debt targets  Budget deficits generally remain an area of difficulty due to pressures on government spending (e.g on social development)  Economic growth rates as an important convergence variable are also generally encouraging across Africa  The report shows that RECs did better at controlling inflation and budget deficits than they did at reducing external debt ratios. Debt relief helped some countries in improving on external debt targets  Budget deficits generally remain an area of difficulty due to pressures on government spending (e.g on social development)  Economic growth rates as an important convergence variable are also generally encouraging across Africa A. Implementation of macro-economic convergence criteria

10 Implementation of macro-economic convergence criteria (contd)  Monetary unions tend to do better on meeting macroeconomic policy convergence targets as they tend to have more effective surveillance mechanisms (e.g UEMOA).  Though REC members are making tremendous efforts towards sound macro-economic policy convergence, challenges still remain on the path towards the ideal situation  We see little evidence in convergence of per capita incomes. This is where support to poor economies in catching up with richer economies in per capita incomes will be necessary.

11 B. Financial integration  The environment for financial integration remains precarious. There is general lack of financial depth as money and capital markets are relatively underdeveloped, coupled with a limited array of financial instruments  On the positive side, cross-border direct and portfolio investments are on the upward trend, particularly in SADC area as many stock exchanges are being established and harmonisation of listing requirements and trading procedures is taking place.  There is however only one Regional Stock exchange: Bourse de Valeur Immobiliere (BRVM) serving UEMOA countries  The environment for financial integration remains precarious. There is general lack of financial depth as money and capital markets are relatively underdeveloped, coupled with a limited array of financial instruments  On the positive side, cross-border direct and portfolio investments are on the upward trend, particularly in SADC area as many stock exchanges are being established and harmonisation of listing requirements and trading procedures is taking place.  There is however only one Regional Stock exchange: Bourse de Valeur Immobiliere (BRVM) serving UEMOA countries

12 Financial integration (contd)  Community financial institutions have been established in some RECs (e.g. BEAC & BDEAC in CEMAC; PTA Bank & PTA Re- insurance Company in COMESA; EADB in EAC; ECOWAS Fund and Ecobank in ECOWAS; BCEAO & BOAD in UEMOA; Maghreb Bank for Investment and External Trade in UMA.

13 C. Monetary Integration  CEMAC and UEMOA are already monetary unions in terms of having a single currency. This has been part of their structure from the outset.  The rest of the RECs have plans to become monetary unions within a span of 5-10 years.  Monetary union cannot be achieved overnight. As it implies deeper level of integration, greater efforts are required towards achieving a single market in each REC.  CEMAC and UEMOA are already monetary unions in terms of having a single currency. This has been part of their structure from the outset.  The rest of the RECs have plans to become monetary unions within a span of 5-10 years.  Monetary union cannot be achieved overnight. As it implies deeper level of integration, greater efforts are required towards achieving a single market in each REC.

14  That implies a fully integrated market with total free mobility of people, labour, goods, services and capital.  The monetary union with a single currency would thereby reinforce the single market. One market needs one money.  In the context of the African Union, there are plans to establish in the not too distant future, the African Central Bank, the African Monetary Fund and the African Investment Bank. Monetary Integration (contd) Monetary Integration (contd)

15 D. Conclusions  The empirical analysis shows strong evidence of the convergence of macroeconomic stability indicators for SADC, COMESA, ECOWAS, CEMAC and UEMOA  The income convergence analysis however indicates very little evidence that the countries in the various RECs are converging their capita incomes, except those in UEMOA  The integration policies would have to address the lack or slow pace of convergence in per capita incomes. Unless there is a major structural shift, it will take decades for most RECs economies to converge and thus attain the expected outcomes of regional integration initiatives in Africa.

16 Conclusions (contd)  An important stepping-stone to monetary unification is monetary harmonization. But two factors make this process difficult 1.Africa has a host of local currencies, most of which are non-convertible within and across RECs. And different countries have different exchange rate regimes.The only exceptions are UEMOA and CEMAC, which form a single currency zone (CFA), and to some extent the CMA, where the rand is used side by side with domestic currencies 2.RECs need to redouble their efforts towards a single currency. COMESA, for example, could build on the experience of the EAC, where the Kenyan, Tanzanian, and Ugandan shillings are now mutually convertible, paving the way for a common currency in the near future.

17 Thank you