SADC Monetary Union Presentation to PCOF 11September 2007

Introduction n The Theory of Monetary Integration n Definitions (2) : n 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.

n Corden(1992) n 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.

n 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 Bank This experience has been observed in the EU and The West African Monetary zone where Euro and ECB and the CFA and BCEAO exist.

Background n Organisation of African Union (OAU) adopted the Lagos Plan of Action which culminated in signing of the Abuja Treaty to promote closer economic relations n African Union (AU) was established to further advance to the objectives specified in the Abuja Treaty n Regional Economic Communities (RECs) were formed to become building blocks for continental integration n New Partnership for Africa's Development (NEPAD) designated RECs as implementing agencies for its programme

Regional Indicative Strategic Development Plan (RISDP) n Economic integration within SADC is driven by the RISDP which provides a clear direction for SADC policies and programmes n Implementing programmes on achieving: Free Trade Area SADC Customs Union SADC Common Market – 2015 SADC Monetary Union – 2016 (thus a SADC Central Bank)

RISDP Macroeconomic convergence targets Inflation rateSingle digit5%3% Ratio of budget deficit 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 of public & publicly guaranteed debt Less than 60% of GDP Less than 60% of GDP Less than 60% of GDP External reserves / import cover 3 monthsMore than 6 months Sustained Central Bank credit to Government Less than 10% of previous year’s tax revenue Less than 5% by 2015 Sustained

Macroeconomic convergence n Member States agreed to achieve and maintain macroeconomic stability n Member States should converge on stability- oriented economic policies which, among other, includes: Restricting inflation to low and stable levels n Memoranda of Understanding (MoUs) lays the foundation for the formation of a monetary union in the region

Committee of Central Bank Governors (CCBG) n CCBG established in August 1995 n Deals with the development of well ‑ managed financial institutions and markets, and co ‑ operation regarding international and regional financial relations n 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 n 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) n CMA is the only sub-regional formation using a single currency (Rand) n Study – CMA regional central bank n Rand remains a default currency in most SADC countries n CMA Governors meet 4x per year to discuss policy strategies and exchange current economic developments in their respective countries

Institutional Issues in Monetary Union n Macro Economic Convergence n - Basis for stable economies in SADC n - 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 n Speedy establishment of the Peer Review Mechanism is necessary n Guided by principles that ensures equality of participants n Including the protection of Central Bank independence n Acceptance of the special role Central banks play in the economy

Statistical Issues n While CCBG have made an effort to collect data and compile publications e.g. - Recent Economic Developments and the Integrated paper updated annually n There are still conflicting ideas about the accuracy of data among stakeholders n Timelines of data is a problem n Lack of cooperation in verifying or supplying data between stakeholders n Results: Gaps continue in Reports.

n More coordination and cooperation is required at national level by stakeholders n Statistics Agencies should be involved with the process of Regional Integration n SADC statistics office should be revived to oversee and initiate workshops to deal with statistics challenges

Other Institutional issues n Legal committee - Draft model bill has been concluded will be finalized by April 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 n 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. n Problem: some countries are slow in modernizing their systems – financial

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

Conclusions n Earnest discussions should begin on the road map towards the realization of a monetary union at summit level n Peer review mechanism could be the body that will decide conditions for entry into Monetary union and reporting into Summit n Consideration should be given of existing institutions e.g. CMA and SACU as building blocks

Conclusions n Thanks