In spite of scepticism about the success of common currencies for regional blocs, the African Development Bank (AfDB) has come out in support of a monetary union for the Common Market for Eastern & Southern Africa (Comesa).
The bank released proposals for the establishment of a union last week.
Regional integration has been identified as an important means of enhancing the competitiveness of African economies. It usually begins with the declaration of a free trade area and the creation of a customs union, which Comesa has already attained. The establishment of a common currency is the final step in the process.
Comesa's intention is to have a single currency, issued by a common central bank, by 2018. It consists of 23 countries, 15 of which are categorised as least developed countries by the UN. Its members range from large and dominant Egypt to smaller nations like Malawi and Burundi.
The AfDB report supports the idea that member countries' budget policies should largely be centrally governed, by the Comesa secretariat. It also dismisses criticism of a monetary union, which has gained prominence since the cracks in Europe's integration have emerged.
Members of the EU maintained fiscal sovereignty, but the European debt crisis changed things. Ireland, Greece and Portugal have received bailouts from the EU, with the consequence that the European Central Bank now holds some degree of influence over their budget policies.
The AfDB believes a level of fiscal convergence protects member countries from being exposed to possible contagion effects of macroeconomic instability in one or more countries, like those Europe experienced in 2012. It also ensures that members maintain their relative competitiveness within the union.
Last year, a Comesa Monetary Institute was established to fast-track the process. The institute's director, Ibrahim Abdullahi Zeidy, says countries already have to conform to a set of criteria, including:
An overall budget deficit/GDP ratio of not more than 5%;
Annual average inflation not exceeding 5%;
Reducing central bank financing of the budget to a target of 0%;
External foreign exchange reserves to the value of at least four months of imports;
A stable exchange rate and market-based interest rate;
Sustainable GDP growth of not less than 7%; and
Sustained debt reduction.
However, only half of Comesa's members have met the institute's fiscal criteria thus far, says Zeidy. The fiscal environment in the region is characterised by high debt levels and high costs of debt servicing. Revenue generation is low and budget deficits are high.
Zeidy says the commission has plans to improve compliance and that there are lessons to be learnt from Europe's experience. This includes regular country risk and monitoring analysis.
AfDB's manager for regional integration & trade, Moono Mupotola, says fiscal convergence leads to a larger, integrated economic unit with higher economic growth rates, greater productivity, competitiveness and integration with the global economy.
"Even if a monetary union may be a mirage for the foreseeable future, there are immediate advantages from promoting fiscal convergence and financial harmonisation." It enhances domestic and external stability and will have a positive impact on economic growth and poverty reduction. It will also enhance the global image of African countries, she says.
The AfDB's approach is that integration should encompass trade, monetary and fiscal policies. It should be implemented within a comprehensive and consistent macroeconomic framework.
There are also intentions to broaden co-operation. Last year, at the second meeting of the Comesa-EAC-SADC Tripartite, an umbrella organisation for Comesa, the East Africa Community and the Southern African Development Community, negotiations for the establishment of a free trade area were launched. The three trade blocs represent 26 countries and 525m people, and have an output of US$1trillion.
Source: http://www.fm.co.za/economy/2013/01/17/afdb---in-support-monetary-union
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