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CS/TCM/CFMA/CBG/XI/10
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A.
INTRODUCTION
1.
The Eleventh Meeting of the COMESA Committee of Governors of Central
Banks was held from 20 to 21 October, 2006 in Antananarivo, Madagascar.
B.
ATTENDANCE, OPENING OF THE MEETING, ELECTION OF THE
BUREAU AND ORGANISATION OF WORK
Attendance
2.
The meeting was attended by delegates from Burundi, Comoros,
Democratic Republic of Congo, Egypt, Kenya, Libya, Madagascar, Malawi,
Mauritius, Rwanda, Sudan, Swaziland, Uganda and Zambia. The following
COMESA institutions attended the meeting: Eastern and Southern African Trade
and Development Bank (PTA Bank), and the COMESA Clearing House. The
meeting was also attended by the African Union, the African Development, Bank,
the East African Community, the Association of African Central Banks (AACB) and
the Bank of Tanzania. The list of participants is at Annex IV of this report.
Opening of the Meeting (Agenda item 1)
3.
The Governor of the Central Bank of Madagascar, Mr. Gaston E.
Ravelojaona welcomed His Excellency Mr. Jacques Sylla, the Prime Minister and
Chief of Government of the Republic of Madagascar and COMESA Governors of
Central Banks. In his welcoming remarks he stated that Madagascar was honoured
to host the monetary cooperation meetings. He emphasised the importance of
regional integration to Madagascar. He expressed concern that African countries
are lagging behind in economic development and are sensitive to external shocks
which he observed could be minimised by broadening the market and deepening
economic integration which will result in companies attaining economies of scale
and competitiveness. In addition, regional economic cooperation and integration
increased the bargaining power of COMESA countries in the international fora. It
was against this background that he urged the meeting not to perceive the
COMESA single currency as a dream but as goal that is achievable. In concluding
his statement, he looked forward to working with his fellow Governors to take the
COMESA Monetary Cooperation Programme to greater heights
4.
The Assistant Secretary General for Programmes of COMESA, Mr. Sindiso
Ngwenya made a statement to the meeting on behalf of the Secretary General of
COMESA, Mr. Erastus J.O. Mwencha, MBS. Mr. Ngwenya expressed sincere and
eternal gratitude to His Excellency Jacques Sylla, Prime Minister of the Republic of
Madagascar for taking time of his busy schedule to come and officially open this
meeting. He thanked Governor Gaston RAVELOJOANA and his staff and the
people of Antananarivo for the memorable reception accorded to all delegation
since their arrival. He also saluted the Republic of Madagascar for being amongst
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the COMESA Member States that launched the COMESA Free Trade Area in 2000
and for taking the lead in the implementation of all COMESA programmes
5.
Mr. Ngwenya cited the World Bank study which demonstrated that the
elimination of subsidies by the European Union, United States of America and
Japan would open market opportunities for Africa in developed countries of more
than US$180 billion annually, a figure which is nine times more than the Official
Development Assistance. He therefore, stated that everything possible should be
done to resume the WTO negotiations and bring the Doha Development Round to
a successful conclusion. He also mentioned other developments at the global level
particularly of the phenomenal accumulation of foreign exchange reserves by some
developing and middle income countries. He requested the meeting to reflect on
the issue with a view to exploring ways and means of how these funds could
contribute to the realisation of the provisions of Article 82(2) of the COMESA
Treaty which enjoins “member States to undertake to co-operate in mobilisation of
foreign capital for financing national and regional projects”.
6.
Mr. Ngwenya further informed the meeting that it was expected that a total
number of fifteen member States would be part of COMESA FTA by the time the
COMESA Summit takes place in Djibouti in November 2006. He drew the attention
of the Governors to the COMESA target of increasing intra-COMESA trade from
the current levels of 8% to 25% of global trade by 2015. For this to happen a
necessary and sufficient condition, would be for COMESA member States to move
speedily to deeper integration through the COMESA Customs Union. Hence the
need for Central Bank Governors to enhance the implementation of the COMESA
Monetary cooperation programme so as to facilitate the realisation of a COMESA
single market for goods and services.
7.
In closing his statement, Mr. Ngwenya, reiterated COMESA Secretariat’s
commitment to working with the Governors. He expressed his profound gratitude to
the EU for their financial support to make the Regional Payment and Settlement
System (REPSS) a reality. He also thanked the African Union Commissioner for
Economic Affairs, Dr. Maxwell Mkwezalamba, for the support he continues to give
to the COMESA Economic Integration agenda. He Further thanked the African
Development Bank for its valuable support to COMESA integration agenda. He
also paid tribute to Mr. Bernard Konan, Executive Secretary of the Association of
African Central Banks for the excellent collaboration that exist between the
COMESA Secretariat and the Association of African Central Banks
8.
The Commissioner for Economic Affairs of the African Union, Dr. Maxwell
Mkwezalamba also made a statement to the meeting. He started by conveying
gratitude of the Chairperson of the African Union, Professor Alpha Oumar Konare
to the Secretary General of COMESA, Mr. Erastus J.O. Mwencha and Governors
of Central Banks for extending an invitation to the African Union to attend the
meeting.
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9.
In his statement he commended COMESA for her achievement in
enhancing regional monetary cooperation and in undertaking to fast track the
establishment of a monetary union for the COMESA region, which was in fulfilment
of the AU Constitutive Act. He observed that monetary cooperation within
COMESA region would have positive spill-over effects at the continental level.
10.
He further informed the meeting that African Union Commission has made
some progress on work leading to the establishment of the three financial
institutions, namely African Investment Bank, African Central Bank and African
Monetary Fund. The location of the three AU institutions had been decided as
follows: Nigeria would host the African Central Bank; whilst Libya would host the
African Investment Bank. Consultations were ongoing among the countries of the
Central African Economic Community of which country would host the African
Monetary Fund.
11.
To operationalise these institutions he informed the meeting of progress that
the African Union was making with respect to the establishment of three Technical
Steering Committees which would spearhead the establishment pursuant to the
article 19 of the AU Constitutive Act of the three financial institutions
12.
His Excellency, Mr. Jaques Sylla, Prime Minister and Head of Government
of the Republic of Madagascar officially opened the meeting. In his address, he
welcomed the Governors and delegates to Madagascar and wished them a
pleasant stay. He stated that the regional integration efforts of COMESA should be
a vehicle for competitiveness and attractiveness to investors. In this regard, he
pointed out that the implementation of the Free Trade Area and the establishment
of the Customs Union would have significant impact on foreign direct investment
inflows which requires large markets. He observed that one of the most important
critical factors for enhanced intra-regional trade and the establishment of a
dynamic common market was monetary integration.
13.
The Prime Minister underscored that for better performance of the COMESA
region, there was need to build more reliable economic institutions and adequate
infrastructure which were important for facilitating trade and investment which was
a precondition for sustainable economic growth and development necessary for the
eradication of poverty.
14.
His Excellency the Prime Minister concluded by highlighting the important
role played by macro-economic stability through sound monetary policy in national
and regional economic development integration. He further observed that,
whereas, the COMESA single currency appeared to be a dream it was achievable.
He reiterated the commitment of the Government of Madagascar to making
COMESA strong and competitive regional economic block.
15.
Mr. Jean-Marie Emungu Ehumba, Vice Governor of the Central Bank of
Democratic Republic of Congo moved a vote of thanks on behalf of all delegates
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to the meeting. He expressed appreciation of the delegates to the warm welcome
they were accorded by the Central Bank of Madagascar since their arrival to
Madagascar. He thanked the Prime Minister for coming to open the meeting and
the words of inspiration he had given to the meeting. He informed the Prime
Minister that the Governors would continue to discharge the mandate that the
Authority gave them towards the realisation of a Monetary Union in COMESA.
Election of the Bureau (Agenda item 2)
16.
The meeting elected the following to serve on the Bureau of the Committee
for one year.
Chairman:
1st Vice Chairman:
2nd Vice Chairman:
1st Rapporteur:
2nd Rapporteur:
Madagascar
Burundi
Libya
Uganda
Swaziland
Adoption of the Agenda and Organisation of Work (Agenda item 3)
17.
The meeting adopted the following agenda:
1.
Opening of the meeting;
2.
Election of the Bureau;
3.
Adoption of the Agenda and Organisation of Work;
4.
Report of the outgoing Chairman on the activities of the Bureau
5.
Consideration of the Report of 11th Meeting of the Committee of Central
Bank Experts on Finance and Monetary Affairs on the following:
(i)
(ii)
Consideration of the Report of the 27th Meeting of the Bureau of the
COMESA Committee of Governors of Central Banks on :
(a)
Status of Implementation of the Decisions of the Tenth Meeting
of the COMESA Committee of Governors of Central Banks;
(b)
Progress Report on the Implementation of the Regional
Payment and Settlement System (REPSS); and
(c)
Governance Structure of the COMESA Clearing House;
Report by member countries on the progress made towards
achieving macro-economic convergence in 2005
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(iii)
Strategy for Fast Tracking the Creation of African Financial
Institutions;
(iv)
Report of the Monetary and Exchange Rate Policies Sub-Committee
on:
(a)
The degree of diversity in macro-economic convergence in
COMESA member countries;
(b)
Fast tracking the COMESA Monetary Union;
(c)
Sensitisation Workshops on the implementation of currency
convertibility held in Bujumbura, Burundi and Kigali, Rwanda;
(d)
Work Plan of the Monetary and Exchange Rate Policies SubCommittee for 2007
(v)
Report of the Seminar on Experiences in Transmission Mechanism of
Monetary Policy;
(vi)
Progress Report on the Establishment of the COMESA Customs
Union;
(vii)
Report of the First COMESA Conference on Counter-Terrorism and
Anti-Money Laundering;
6.
Venue and Date of Next Meeting
7.
Any Other Business;
8.
Adoption of the Report and Closure of the Meeting.
Report of the outgoing Chairman (Agenda item 4)
18.
The outgoing Chairperson, Mr Gabriel Ntisezerana, Governor of the Banque
de la République du Burundi, presented his report on the activities undertaken by
the Bureau during 2005-06. The activities that he outlined were contained in the
report of the 27th Meeting of the Bureau of Committee of Governors of Central
Banks which was held in Bujumbura, Burundi from July 27-28, 2006.
The
highlights included the status of implementation of the decisions of the 10 th Meeting
of the COMESA Committee of Governors of Central Banks as follows;
(a)
Tender was advertised for the provision of Regional Payment and
Settlement System (REPSS) infrastructure.
Two bidders which met the
mandatory and other criteria as set out in Request for Proposal (RFP) were
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selected. Both vendors demonstrated the performance of the assistance through
the simulation exercise.
(b)
The future Govenance structure of the Clearing House was approved by
the Bureau:
(c)
The study on fast-tracking the COMESA Monetary Union was undertaken by
three consultants, namely Dr Polycarp Musinguzi of the Bank of Uganda, Mr
Christopher Kiptoo of the Central Bank of Kenya and Mr Chipili Jonathan Mpundu
of the Bank of Zambia.
(d)
The study on macroeconomic convergence was undertaken by Dr Noah
Mutoti of the Bank of Zambia and Dr David Kihangire of the Bank of Uganda.
19.
The Governor further informed the meeting that the studies which were
undertaken reviewed by the Third Meeting of the Monetary and Exchange Rate
Policies Sub-committee which was held from 25-26 September 2006 in Lusaka,
Zambia.
20.
In addition to the aforegoing activities the following workshops/seminars
were held.
(i) Sensitization workshops on the implementation of currency convertibility were
held in Bujumbura, Burundi, on July 31, 2006 and in Kigali, Rwanda, on August 3,
2006.
(ii) The Seminar on transmission mechanism of monetary policy was held in
Lusaka, Zambia from October 9-11, 2006.
21.
Governor Ntisenzerana thanked the fellow Governors for the cooperation
they had given him and his Bureau which contributed to the implementation of
most of the decisions of the Committee. He reiterated his support and that of the
outgoing Bureau to the incoming Bureau in the discharge of its mandate.
22.
The Governors in noting the report commended the outgoing Chairperson
and his Bureau for overseeing the implementation of the decisions of the
Committee.
C.
ACCOUNT OF PROCEEDINGS
CONSIDERATION OF THE REPORT OF THE 11TH MEETING OF THE
COMMITTEE OF
CENTRAL BANKS
EXPERTS ON FINANCE AND
MONETARY AFFAIRS ( Agenda item 5)
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23.
The Chairman of the Committee of Central Bank Experts on Finance and
Monetary Affairs presented the report of the 11 th Meeting of his Committee. The
Governors considered the report as follows:
(a)
Status of Implementation of the Decisions of the Tenth Meeting of the
COMESA Committee of Governors of Central Banks
24.
Under this agenda item, the Governors noted the following progress that
had been made in the implementation of the decisions of the Tenth Meeting of the
COMESA Committee of Governors of Central Banks:
Decision
25.
The need for setting up of the Committee of Fiscal Affairs should be brought
to the attention of the Secretary General of COMESA by the Chairperson of the
COMESA Committee of Governors of Central Banks for implementation.
Action Taken
26. The recommendation of the Governors on the creation of the Fiscal Affairs
Committee was approved by the 20th Meeting of the Council of Ministers held in
Lusaka, Zambia in November 2005. The first meeting of the Committee will be held
in early 2007 to adopt its Terms of Reference and Rules of Procedure.
Decision
27.
The Work programme of the Financial System Development and Stability
Sub-Committee approved.
Action Taken
28.
A questionnaire for undertaking a comparative study on financial system
development and stability in the COMESA region was prepared and circulated to
all member countries.
Ten countries, namely, Burundi, Egypt, Madagascar,
Malawi, Mauritius, Sudan, Seychelles, Uganda, Zambia and Zimbabwe responded
to the questionnaire. A reminder has been sent to member Central Banks that
have not responded, namely, Comoros, DR Congo, Djibouti, Ethiopia, Kenya,
Libya, Rwanda and Swaziland.
Bureau Decisions:
29.
(i)
COMESA Secretariat should follow up to get all member
countries to respond to the questionnaire. The Secretariat should
also request Central Banks to provide a contact person for supplying
all the necessary information requested by the Secretariat; and
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(ii)
Those member Central Banks which have not yet responded to the
questionnaire should do so before end of December 2006.
Action taken
30.
The Secretariat has written all Central Banks to submit the name of the
contact person and some Central Banks have already responded.
31.
In the discussions that ensued, the Governors agreed on the need to
commence work on Financial System Development and Stability, since 10
countries had already responded to the questionnaire. Regarding the other Central
Banks that have not responded to the questionnaire the Governors requested the
Secretariat to recirculate it to facilitate its completion by the Central Banks.
Decision
32.
(i)
Central Banks that have not submitted the name of their contact
person should do so by end December 2006; and
(ii)
On the basis of the 10 questionnaires that have been received from
Central Banks, the COMESA Secretariat should convene a meeting
of the Financial System Development and Stability Committee to
implement the approved work programme.
Decision
33.
Harmonise concepts and methodologies, as well as statistical frameworks,
for the COMESA Monetary Harmonization Programme.
Action Taken
34.
Dr. Caleb Fundanga during his chairmanship of the COMESA Committee of
Central Bank Governors wrote to African Economic Research Consortium (AERC)
seeking technical assistance for harmonising concepts and methodologies and
statistical framework for the COMESA Monetary Harmonisation Programme.
COMESA Secretariat participated in a continental workshop on this issue
organised by the Association of African Central Banks in April 2006.
Bureau Decisions
35.
(i)
The 2007 Work Plan of the COMESA Monetary and Exchange Rate
Policies Sub-Committee should include this task; and
(ii)
Bank of Zambia and COMESA Secretariat should follow-up with the
AERC to expedite the provision of technical assistance.
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Action Taken
36.
Dr. Fundanga wrote again to AERC in August 2006.
awaited.
Response is still
37.
The African Union drew the attention of the Governors to the work being
done by the AU in collaboration with AACB, ADB and UNECA which had set up a
joint Task Force on the harmonisation of concepts, methodologies and statistical
frameworks at the continental level.
38.
The Governors urged the AU to coordinate with the RECs in this work and
to create a forum for discussion and exchange of information for all concerned
parties.
Decision
39.
The Governors decided that:
(i)
the Monetary and Exchange Rate Policies Sub-Committee should
examine the extent to which the Nairobi AACB Seminar and the
Bamako African Union Seminar address the harmonisation of
concepts and methodologies and statistical framework for macroeconomic convergence and how to build on them.
(ii)
the Bureau should follow up with the AERC on the request made
by the Governor of the Bank of Zambia.
Study on Fast Tracking the COMESA Monetary Union
Decisions
40.
The Terms of Reference for the study should be reviewed by the COMESA
Secretariat in consultation with member States and the COMESA Secretariat
should be responsible for initiating and coordinating the study and the result
thereof should be submitted to various COMESA Committees and Policy Organs.
41.
The results of the study should be presented to different fora for discussion
and agreement and later presented to the next meeting of the Committee of
Central Bank Governors.
42.
The first draft of the study, which will be circulated to all members of the
Monetary and Exchange Rates Policies Sub-Committee, should be ready within 3
months after commencement of the study. The final study report should be ready
by June 2006.
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43.
Due to the importance of the study the COMESA Secretariat should ensure
that there is adequate funding for the study.
Action Taken
44.
Dr. Polycarp Musinguzi of Bank of Uganda, Mr. Christopher Kiptoo of
Central Bank of Kenya and Mr. Chipili Jonathan Mpundu of Bank of Zambia were
engaged to undertake the study. The study was reviewed by the Third Meeting of
the Monetary and Exchange Rate Policies Sub-Committee, which was held in
Lusaka, Zambia, from September 25 to 26, 2006. The study was also presented to
the Eleventh Meeting of the Committee on Finance and Monetary Affairs.
COMESA Fund
Decision
45.
Member States which have not yet signed or ratified the Protocol for the
establishment of the COMESA Fund should do so without any further delay.
Action Taken
46.
Fourteen member countries have signed the protocol, namely, Burundi,
Djibouti, Egypt, Ethiopia, Madagascar, Kenya, Malawi, Mauritius, Rwanda, Sudan,
Swaziland, Uganda, Zambia and Zimbabwe. Ethiopia, Kenya, Malawi, Mauritius,
Rwanda and Sudan have so far ratified the Protocol. Zimbabwe is in the process
of ratification. The Fund will be operational after one additional ratification is
obtained
Decision
47.
The remaining member countries that have either not signed or signed but
not ratified should be urged to expedite the process.
Action Taken
48.
Secretariat is undertaking missions to member States to urge them to
expedite the facilitation of the COMESA Fund.
49.
The Assistant Secretary General (Programmes) provided an up-date to the
Governors on the status of the COMESA Fund. He confirmed that it was expected
that the COMESA Fund which was established pursuant to Article 150 of the
COMESA Treaty would come into force upon the deposit of the ratification
instrument by one additional member State to the six that have already ratified the
Protocol.
50.
He further informed the Governors that the President of the African
Development Bank, Dr. Donald Kaberika in February 2006 had during
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consultations with the Chair person of the COMESA Council of Ministers affirmed
the support of the Bank to the COMESA Fund. During that meeting it was also
agreed that the ADB would convene a meeting of Ministers of Finance on the
margins of the ADB Annual meetings. This meeting was indeed held in
Ouagadougou, Burkina Faso where the COMESA Ministers of Finance in
attendance expressed appreciation to the AfDB President for the support the Bank
was willing to give to the COMESA Fund once it is ratified. The Governors were
also informed that the AfDB in addition to the lines of credit it was giving to the PTA
Bank had agreed to assist the PTA Bank to establish an infrastructure unit.
51.
The Governors further took note that the ADB had been assigned a lead
role by the AU-NEPAD programme on: infrastructure development; Banking and
Financial Standards and the African Peer Review Mechanism (APM). The
Governors noted that COMESA member countries were beneficiaries of funding
from AfDB with respect to infrastructure projects, that include the COMESA TeleCommunication Inter-Connectivity Project (COMTEL). The Governors noted that
the COMESA Secretariat and the AfDB were in the process of finalising a
COMESA Medium Term Action Plan that would enable the AfDB to support
COMESA integration programmes in a holistic manner as opposed to the current
arrangement which is ad-hoc by individual projects. It was against this
background that the work being done by the AfDB on harmonised Banking and
Financial standard control be included in the envisaged Action Plan.
52.
The Governors attention was also drawn to the fact that the European Union
(EU) had under EDF9 committed Euro 78 million to the COMESA Fund Adjustment
Facility window. Under a Contribution Agreement to the COMESA and EAC
Secretariats, the COMESA Financial Rules and Regulations would be used instead
of EDF procedures. The Governors also noted with appreciation that REPSS was
funded by the EU to the tune of Euro1.3 million through the COMESA contribution
Agreement.
The Governors decided:
(i)
to request the COMESA Secretariat to convey gratitude to the African
Development Bank for supporting the PTA Bank, regional infrastructure
projects etc; and
(ii)
that a programme on the harmonization of Banking and Financial standards
be included in the COMESA Medium Term Action Plan to be submitted to
the AfDB by the COMESA Secretariat before the end of 2006.
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COMESA Export Led Initiative
Decision
53.
The COMESA Secretariat should continue updating the Bureau on the
implementation of the Export Led Initiative as some of the projects have the
potential of saving foreign exchange and enhancing export earnings.
Action Taken
54.
Action is ongoing and the Bureau will be updated, whenever, there are
projects which need to be brought to the attention of Central Banks.
African Commerce Exchange (ACE)
Decision
55.
Ongoing collaboration between the Clearing House and ACE in setting up
the “Regional Payment and Settlement System - REPSS” be further strengthened.
Action Taken
56.
A test platform for REPSS had been established at ACE for the testing of
the two short-listed vendors proposals.
Study on Macroeconomic Convergence
Decision
57.
Commission study on behalf of the Monetary and Exchange Rate Policies
Sub-Committee, to examine the degree of diversity in monetary and exchange rate
policies and quantification of adjustments needed to attain convergence. Study
would be completed by 15 December, 2005 and presented to the Sub-Committee
and Bureau Meeting.
Action Taken
58.
Two consultants, namely Dr Noah Mutoti of the Bank of Zambia and Dr
David Kihangire of the Bank of Uganda, were engaged to undertake the study and
they submitted their report. The study was reviewed by the Third Meeting of the
Monetary and Exchange Rate Policies Sub-Committee in Lusaka, Zambia, from
September 25 to 26, 2006. The report was also presented to the Eleventh Meeting
of Committee on Finance and Monetary Affairs.
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Decision
59.
Approved Action Plan for implementation of currency convertibility in the
Eastern and Central African Sub-group and Northern Sub-group
Action Taken
60.
Sensitisation Workshops on the Implementation of Currency Convertibility
was held in Burundi and Rwanda on July 31st and August 3, 2006, respectively.
Workshops will also be held in Libya, Egypt and Sudan in 2007.
Decision
61.
COMESA Secretariat should seek technical assistance to build capacity in
member States of the Northern and Eastern Sub-group of COMESA member
countries in computing, analysing, and monitoring developments in real effective
exchange rates.
Action Taken
62.
IMF has been requested by COMESA Secretariat to provide technical
assistance. IMF agreed to hold the seminar in early 2007 in Lusaka, Zambia.
Monetary Policy Seminar
Decision
63.
The topic for the next seminar in 2006 on monetary policy should be on
sharing experiences among member states on the channels of transmission
mechanism of monetary policy.
Action Taken
64.
The seminar was held from October 9 to 11, 2006, in Lusaka, Zambia. The
report of the seminar was presented to the Eleventh Meeting of the Committee on
Finance and Monetary Affairs.
Country Reports on Progress made Towards Macro-economic Convergence
in 2005
Decision
65.
Country presentations on progress made towards achievement of macroeconomic convergence need to be more analytical with emphasis on how targets
had been met and if missed reasons for inability to achieve them and type of
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corrective actions taken. In addition, escape clauses for situations where countries
are unable to fulfil convergence criteria as a result of exogenous shocks should be
formulated.
Action Taken
66.
The COMESA Secretariat had requested member countries to report
progress made towards macroeconomic convergence based on the outline sent to
member countries by the COMESA Secretariat. Escape clauses, needed to
address exogenous shocks would be formulated by consultants who are
undertaking a study on fast tracking the monetary union in COMESA.
67.
The Secretariat sent reminder to all member countries to submit the report.
Burundi, Congo (D.R.), Egypt, Kenya, Libya, Madagascar, Malawi, Mauritius,
Rwanda, Sudan, Swaziland, Uganda and Zambia have submitted their reports.
(b)
Progress Report on the Implementation of the Regional Payment and
Settlement System (REPSS)
68.
The Governors were informed that tenders were advertised for the provision
of the REPSS infrastructure and two bidders which met the mandatory and other
criteria as set out in the RFP were selected by the Technical Evaluation Committee
(TEC) which comprised COMESA Secretariat Staff and Senior Payments Experts
from the Central Banks of Burundi, Kenya and Zambia, Central Bank of
Madagascar, Reserve Bank of Malawi, and Bank of Sudan. COMESA Secretariat
and the members of the TEC undertook evaluation, comprising the testing of
technical and functional workings of proposed system which has been submitted to
the COMESA Secretariat for consideration by the Contracts Committee that will
make the final award.
69.
Test platforms were set up to allow the two short listed vendors to
demonstrate that their proposed system meets all the requirements of REPSS as
specified in the RFP. Both vendors demonstrated the performance of their
systems through the simulation exercise, at the FIN-X/ACE SWIFT platform in
Johannesburg from October 1 to 8, 2006.
70.
In the discussions that followed, it was pointed out that a proactive approach
needed to be adopted with the involvement of key stakeholders in the
implementation of REPSS. Governors also noted that once the vendor for REPSS
has been selected, presentation of the system, in a simulated environment, would
be made to national working groups prior to its going live. The Governors further
noted that REPSS provided for an inter-face with existing national Real Time Gross
Settlement System (RTGS) SWIFT based systems and that for countries without
RTGS Systems the request for proposals (RFP) required that that there be an
inter-face between REPSS and existing national payments systems.
The
Governors were informed that following the technical evaluation including the pilot
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test of the REPSS system by the two vendors; the COMESA Contracts Committee
was scheduled to meet to award the contract to the successful bidder.
Decisions
71.
The Governors approved the Revised Work Programme and Schedule of
Activities for getting REPSS to operational stage contained in Annex I.
(c)
Future Governance Structure of the Clearing House
72.
The Governors noted that, at their Tenth Meeting held in Bujumbura,
Burundi, on 19 November 2005, approved the recommendations of the Bureau, as
contained in the reports of their 25th and 26th meetings with regards to the need for
an appropriate governing structure for the COMESA Clearing House that would
take into account the generation of revenue by the Institution, with the
implementation of the Regional Payment and Settlement System (REPSS) facility.
73.
The Governors noted that it was considered appropriate that a revised
structure be put in place and be implemented along with the coming into operations
of REPSS. The new structure, whilst taking into account the medium to long term
self-sustaining objective of the Clearing House, would at the same time operate
under the COMESA Treaty provisions and the Charter of the Institution.
74.
The Governors further noted that the approved future governing structure of
the Clearing House shall, inter-alia, comprise a Board of Directors of five members
selected from five geographical clusters in the COMESA region and Board
members shall be appointed on a rotational basis following the alphabetical order
of the names of the countries in the clusters.
75.
The Governors noted that with the selection process for the preferred
vendor for REPSS expected to be completed by October 2006 and the system
going live within a period of 9 months (as indicated by the short-listed vendors)
after award of contract by COMESA’s Contract Committee, there was need to start
up the process of setting up the five geographical clusters in the COMESA region,
which would then facilitate the appointment of Board members on a rotational basis
following the alphabetical order of the names of the countries in the clusters.
Decisions
76.
The Governors approved the following:
(i)
five clusters of Central Banks for the Board of Directors of the
COMESA Clearing House, based on geographical proximity:
CLUSTER 1: Egypt, Ethiopia, Libya and Sudan
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CLUSTER 2: Djibouti, Eritrea, Kenya and Uganda
CLUSTER 3: Burundi, Congo D. R., Rwanda and Tanzania
CLUSTER 4: Malawi, Swaziland, Zambia and Zimbabwe
CLUSTER 5: Comoros, Madagascar, Mauritius and Seychelles
(ii)
the rotation period for membership of the Board be reduced from 3 to
2 years.
(ii)
REPORT BY MEMBER COUNTRIES ON THE PROGRESS MADE
TOWARDS ACHIEVING MACRO-ECONOMIC CONVERGENCE IN 2005
77.
The Governors noted the progress made by member countries in achieving
the agreed upon macro-economic convergence as follows:
(i)
In 2005, average fiscal deficit excluding grants to GDP ratio for the
COMESA region was 4.3% as compared to 5.2% in 2004. The fiscal
criterion was however, missed by 15 countries.
(ii)
Average inflation in COMESA decreased from 27.7% in 2004 to
23.3% in 2005. 14 countries experienced single digit inflation rates.
This can be attributed to prudent monetary policies and generally
favourable weather conditions.
(iii)
The average level of reserves in COMESA member countries was
sufficient to cover 3.0 months of imports of goods and services in
2005 as compared to 2.8 months of imports of goods and services in
2004;
(iv)
All countries use indirect monetary policy instruments.
(v)
Interest rates are liberalized in most countries. Some countries have
exceptionally high real lending rates and a wide margin between
lending and deposit rates. This is a reflection of relative inefficiency of
their banking system;
(vi)
Most countries have made significant progress in moving towards
market-determined exchange rates and thereby reducing
overvaluation of their currencies which characterised the 1980s and
early 1990s.
(vii)
Many countries accepted Article VIII of IMF Agreement and thus fully
removed restrictions on their current account;
CS/TCM/CFMA/CBG/XI/10
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(viii)
The average growth in the COMESA region was 5.8% in 2005 as
compared to a growth rate of 6.2% in 2004. This is despite the impact
of higher oil prices and came as a result of higher demand for
commodities at higher prices; a significant increase in official
development assistance, driven largely by debt relief and emergency
assistance, improved macro-economic stability and recovery in
agricultural production in some countries;
(ix)
The average savings as percent of GDP for COMESA in 2005 was
13.0% as compared to 12.7% in 2004;
(x)
The investment performance in COMESA improved from 17.1% of
GDP in 2004 to 18.2% in 2005; and
(xi)
The average external debt to GDP ratio of the COMESA member
countries decreased from 65.9% in 2004 to 53.9% in 2005.This came
as a result of reaching HIPC decision and completion point by a
number of countries
78.
Member States presented their reports on the progress they had made
towards macro-economic convergence as contained in Annex II.
79.
In the discussions, that followed the Governors noted that the Fiscal Affairs
Committee would commence its work early 2007 which would allow coordination
with the work of the Finance and Monetary Affairs Committee on macroeconomic
convergence.
Decisions
80.
The Governors decided that member countries should submit their reports
to the Secretariat at the latest by June every year to enable the Secretariat to
produce a synthesized report. This would allow the Committee to devote more time
for discussing challenges and exchanging experiences. The Secretariat should
send reminders to Central Banks early enough to meet the June deadline for the
submission of country reports to the Secretariat.
(iii)
Fast Tracking the Creation of African Financial Institutions
81.
The Governors were briefed on the AU strategy for fast tracking the creation
of Pan-African financial institutions by Dr. Maxwell Mkwezalamba, AU
Commissioner for Economic Affairs. In this regard, the Governors were informed
that in order to establish the African Central Bank (ACB), the African Investment
Bank (AIB), and the African Monetary Fund (AMF) in line with the request made by
African Heads of State and Government in Article 19 of the Constitutive Act of the
African Union (AU), the Commission of the AU is proposing a new strategy. That
strategy considers the three institutions as being mutually supportive and
CS/TCM/CFMA/CBG/XI/10
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complementary. Therefore they must be created simultaneously. The AIB will
finance the development of regional and continental infrastructure projects which
will facilitate the interconnectivity of the continent, thereby contributing to its
integration. The AMF will promote intra-African trade leading to the creation of a
single market in Africa. The ACB is to improve the conduct of monetary policy in
Africa, the main objective being to ease access to bank credit in Africa.
82.
The AU Commissioner explained that there were numbers of compelling
reasons that justify the creation of the African Central Bank and other pan-African
financial institutions without further delay. First, the creation of a common central
bank among countries is a political decision that is based on the recognition of
geographical interdependence, the need for solidarity among African countries and
the undeniable commonality of political destiny. Second, in a new world
environment characterized by the free movement of capital, the conduct of an
independent monetary policy by small open economies, like those in Africa, has
become in most cases impossible. Third, there are clear indications that in Africa
the transmission mechanism between monetary policy decisions by the African
central banks and the commercial banks is almost inexistent.
83.
The European example teaches us that full labour mobility is not necessary
for the introduction of a single currency among politically independent countries.
This mobility has not yet been achieved 7 years after the introduction of the Euro
as a single currency in Europe. Regarding the adoption of “convergence criteria” as
a condition for the creation of an African Central Bank as advocated by the
Association of African Central Banks, it is important to recall that such criteria were
introduced in Europe primarily to satisfy Germany, which wanted the future
European common currency to be as “strong” as the Deutsche Mark (DM).
84.
To contribute effectively to the development of the countries, the functions of
the ACB will evolve after some time. The objective of its operations will be (i) to
maintain internal and external stability of the African currencies; (ii) to diversify and
increase the level of national production activity in each country; and (iii) to create
jobs in order to reduce in lasting manner poverty. But initially, the ACB will not
exert all the functions that one generally attributes to a Central Bank. During a
period of approximately seven years, its principal function would be the supervision
of the national and multinational central banks of the Member States. In addition, it
will be responsible for the management of the multilateral external debt of the
Member States. That implies that all the other functions would remain, temporarily
the exclusive responsibility of the national and multilateral central banks or another
continental institution such as the AMF.
85.
The Commissioner informed the Governors that issuance of a single African
currency (to be called AFRI) by the ACB would then take place. At the same time,
however, the ACB will continue to share certain functions with national and
multinational central Banks in a System of African Central Banks (SACB).
CS/TCM/CFMA/CBG/XI/10
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86.
In conclusion the AU Commissioner pointed out that this strategy did not
require regional groupings to give up their efforts to achieve macroeconomic
convergence or to establish their own regional central banks in Africa. Since the
AU Commission intends to launch the process through the establishment of a
technical committee during the weeks ahead, it would welcome all suggestions
from the RECs and African Governors of Central Banks which would be held in the
formulation of the terms of reference for the work of the technical committee.
87.
The Executive Secretary of the Association of African Central Banks
informed the meeting that in the context of the establishment of the three financial
institutions enshrined in Article 19 of the Constitutive Act of the AU, consultations
had commenced between the African Union and the AACB, as requested by the
Assembly of Governors of the AACB.
88.
In the discussions that followed, Governors underlined the importance of
designing a roadmap to the African Monetary Union driven by economic rather
than political considerations. In this regard, the Governors urged the AU to involve
key stakeholders in the development of the roadmap towards the African Monetary
Union. The AU undertook to consult all RECs and Governors on the way forward.
(iv)
REPORT OF THE THIRD MEETING OF THE MONETARY AND
EXCHANGE RATE POLICIES SUB-COMMITTEE
89.
The Governors noted that the Third Meeting of the Monetary and Exchange
Rates Policies Sub-Committee was held from September 25 to 26, 2006. The SubCommittee reviewed the following:
(i)
Study on the Degree of Diversity in Macroeconomic Convergence in
COMESA member countries;
(ii)
Study on Fast Tracking the COMESA Monetary Union;
(iii)
Sensitisation Workshops on the Implementation of Currency
Convertibility held in Bujumbura, Burundi and Kigali, Rwanda; and
(iv)
Work Plan for the year 2007.
(a)
The Degree of Diversity in Macro-economic Convergence in COMESA
member countries
90.
Governors noted the study undertaken by Dr. Noah Mutoti of Bank of
Zambia and Dr. David Kihangire of Bank of Uganda whose main highlights were
the following:
(i)
The study explores the historical trends of the variables, for the period
1995 to 2004, which form the convergence criteria for COMESA,
CS/TCM/CFMA/CBG/XI/10
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divided into primary and secondary criteria. Second, an econometric
analysis, within a heterogeneous panel unit root framework, is
undertaken. Discerning policy recommendations are complemented by
two econometric studies on inflation in Zambia and Uganda. A sectoral
analysis further provides guidance on policy options in individual
countries to accelerate economic growth.
(ii)
Though some countries are still struggling to meet the inflation target
(5 % or less), a broad disinflation process has taken place is the
general emerging picture.
(iii)
According to the data that was available to the study, few countries
(Uganda, Ethiopia, Mauritius and Comoros) have managed to build
external reserves above the COMESA target of 4 months of import
cover.
(iv)
Recent trends suggest economic growth varying markedly, with
countries like Congo DR (DRC), Burundi, Zambia and Djibouti growing
faster (relative to initial period), evidence of great potential. In terms of
real GDP growth target (7 %), this was only achieved by Angola.
(v)
About 40% of COMESA members have witnessed fiscal
improvements. However, only DRC, Djibouti, Kenya, Sudan and
Swaziland have met the prescribed COMESA target (2005-2010) of
5% or less. Empirically, significant fiscal-policy convergence only
recorded in Angola, Comoros, Djibouti and Sudan. Overall, fiscal policy
divergence is validated.
(vi)
Credited to monetary tightening, especially in Malawi, Uganda, Kenya,
Rwanda, Sudan, Eritrea, Seychelles and Swaziland, COMESA money
growth has been cut by more than half. Also, money growth has almost
remained steady in a number of countries The econometric test,
however, supports lack of monetary policy convergence
(vii)
Positive lending rates have been maintained in most countries since
1997 whereas deposit rates have been above inflation in few countries
this suggests disincentives to save in many countries, a discouraging
picture for regional savings mobilization.
(viii)
COMESA current account deficit standing at about 11 % recently may
be considered impressive, mainly attributable to improvements in
external positions in a number of nations. Though significant current
account convergence is recorded in few, group convergence is not yet
in sight.
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(ix)
External debt as a ratio of GDP has been falling in some countries and
increasing in others. The study observed unsustainable debt in
countries with external debt to GDP ratio exceeding 100 %. External
debt to GDP has been rising in fixed exchange regimes, a possible
scenario since such countries have to borrow abroad to support the
regime in the face of low exports. Though, due to data limitations, it is
difficult to assess the extent of domestic debt in COMESA, domestic
debt as a percentage of GDP is noted to be rising in Burundi, Kenya,
Mauritius and Uganda. However, there are strong signs of prudent
domestic debt management in Rwanda. The study was unable to
assess progress towards convergence in central bank financing of the
deficit and real exchanges rate due to data constraints.
91.
The Governors commended the consultants for an excellent study and
noted the following observations made by the Committee of Experts:
(i)
The study did not analyse progress towards convergence in central
bank financing of the deficit and real exchanges rate. It was indicated
that the information is available in Article IV consultation reports of IMF.
In case of absence of such information from IMF publications, the
COMESA Secretariat should have requested member countries to
provide the information. In response, it was stated that the information
on central bank financing of the budget deficit and real effective
exchange rates for all member countries is not readily available in IMF
publications. There is also lack of capacity in some member countries to
compute and publish real effective exchange rates. The meeting was
informed that COMESA, in collaboration with the IMF, would hold a
workshop on the computation and monitoring of real effective exchange
rates in early 2007, with a major emphasis on choice of trade weights.
(ii)
Analysis of developments in interest rates were conducted using
information from IMF publications. It was stated that the information from
IMF publications is not based on weighted rates and thus record very
wide spreads between lending and deposit rates. It was indicated that
information on weighted lending and deposit rates, which is more
realistic for assessing developments in interest rates could have been
obtained from member central banks. In response, the authors
explained that the data reported to IMF by individual member countries
is considered most credible. The results of the study needed to be
interpreted in that context, given the limited resources to undertake
specific surveys in member countries.
(iii)
The study lacks sufficient analysis on macro-economic convergence
about Libya. It was stated that macro-economic data for Libya are
available in Economic Bulletins of the Central Bank and IMF
publications. In response, it was pointed out that the experts found it
CS/TCM/CFMA/CBG/XI/10
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difficult to obtain sufficient time series data of macro-economic
convergence indicators in Libya. Where this was available, it was
included accordingly.
Decisions
92.
The Governors decided that:
(i)
For COMESA inflation to converge to lower rates particularly requires
combating high inflation in some countries. Inflationary pressures in
these countries seem to be induced by high money growth, thus
requiring the tightening of monetary policy.
(ii)
Output converging to lower growth rates contradicts COMESA’s
aspirations. As a number of economies are agro-based and
agriculture performance (in such countries) unpredictable, partly due
to unforeseen circumstances, such as drought, realizing the
COMESA growth target of 7% calls for the adoption of drought
resistant technologies alongside increased investment in irrigation.
Such a policy direction will not only boost output but also help in the
fight against inflation, through increased supply. Accelerated growth
could also be propagated by increased domestic investment in other
sectors of the economy.
(iii)
Regional fiscal-policy convergence and thereby fiscal harmonization
has not yet been in sight. As this may be partially on account of
higher expenditures required under the PRGF, in an effort to reduce
poverty, increased revenue efforts is the major way forward. While
revenue consolidation is advocated in performing economies,
immense efforts are needed to diversify and broaden the tax base.
(iv)
Strengthen the Unit in COMESA which is responsible for compiling
economic data that is obtained from member countries. This unit
should develop time series database, for the concepts of key
variables which could be used for undertaking analytical work. The
unit should also harmonise concepts and methodologies of computing
economic data in member countries.
(v)
Further research should be undertaken on the following:
a.
Sources of inflation in COMESA member countries;
b.
Econometric analysis of sources of growth in COMESA; and
c.
The impact of real effective exchange rates on exports,
output and current account.
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(b)
Fast-Tracking the COMESA Monetary Union
93.
Governors noted that the study on Fast Tracking COMESA Monetary Union
was undertaken by Dr. Polycarp Musinguzi of Bank of Uganda, Mr. Christopher
Kiptoo of the Central Bank of Kenya and Mr. Jonathan Mpundu Chipili of the Bank
of Zambia.
94.
The study pointed out that the COMESA Monetary and Fiscal Policy
Harmonisation (MHP) was established in 1992 by the Authority of Heads of State
and Government in accordance with Article 4 (4) of the COMESA Treaty signed at
Kampala, Uganda. Under this programme, Member States committed themselves
to a gradual, four-stage process whereby countries would implement policy
measures aimed at achieving macroeconomic convergence and introduction of
currency convertibility before finally adopting a single currency issued by a single
central bank by 2025. The four stages of the programme were as follows:




Stage One (1992 – 1996): consolidation of existing instruments of
monetary co-operation and implementation of policy measures aimed at
achieving macroeconomic convergence;
Stage Two (1997 – 2000): introduction of limited currency convertibility
and informal exchange rate union;
Stage Three (2001 – 2024): formal exchange rate union and coordination of economic policies by a common monetary institution; and
Stage Four (2025): full Monetary Union involving the use of one common
currency issued by a common Central Bank.
95.
The implementation of the Monetary and Fiscal Policy Harmonisation,
however, produced mixed results. In recognition of this mixed performance and in
view of the recent initiatives at the continental level to fast-track African Monetary
Union, the Seventh Meeting of the Ministers of Finance, held in Lusaka, Zambia on
18th November 2004, and which was preceded by the Ninth Meeting of the
Committee of Governors of COMESA Central Banks held on 14 th –18th November
2004, adopted a new Monetary Cooperation Programme. The new programme,
envisaged the establishment of a monetary union in COMESA by 2018, seven
years earlier than the date stipulated in the old program. It also had a revised set of
convergence criteria classified into primary and secondary criteria with the former
being the preconditions for convergence, while the latter would reinforce the
former.
96.
The Committee of Governors of Central Banks of the COMESA, during their
tenth meeting held on 19th –20th, November 2005 at the Hotel Source Du Nil in
Bujumbura, Burundi, decided that a study be undertaken to look at the possibility of
fast tracking the achievement of a single monetary zone in COMESA with a single
currency, and a common central bank so that the benefits associated with a
monetary union may be reaped earlier than 2018. In this respect, the Governors
reviewed and approved the Terms of Reference (TOR) of a Study on Fast-Tracking
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Monetary Union in COMESA. The study would recommend a well-timed,
sequenced and coordinated process leading to a monetary union, namely: a single
monetary zone with a single currency; a common monetary and exchange rate
policy, and a common central bank, within the shortest time possible.
97.
The study outlined the policies and programmes implemented as well as
activities undertaken by the authorities to achieve economic and monetary
integration in COMESA. It also reviewed the theoretical and empirical literature on
monetary integration, in particular those related to the Optimum Currency Area
(OCA) theory, and other preconditions for a monetary union. In addition, the
benefits and costs of having a Monetary Union are outlined. The OCA criteria and
other preconditions for a monetary union were summarised as:








Real trade integration;
Financial market integration;
Macroeconomic convergence;
Openness and size of economy;
Free capital and labour mobility;
Economic diversification;
Political will; and
Five famous economic tests by Chancellor Gordon Brown of the United
Kingdom (UK).
98.
The study concluded that if these preconditions for a monetary union are
met, members of the union would not need to rely on exchange rate changes when
subject to external shocks. In this case, there will be a reduced need for
implementing “expenditure switching policies,” and the benefits of a currency union
– in terms of enhanced credibility, lower transaction costs, and lower and relatively
stable inflation – would exceed the potential costs arising from giving up the
exchange rate as a policy tool. In particular, the following benefits of entering into a
monetary union were highlighted by the study:
i.
ii.
iii.
iv.
v.
vi.
vii.
The monetary and fiscal policy discipline built in a monetary union
anchors inflation and its expectation and hence entrenches
macroeconomic stability;
A single currency becomes ‘the language of trade’;
Significant reduction in transaction costs;
Significant reduction of exchange rate volatility and associated risks
within the region;
Exchange rate stability is assured and this leads to lower interest
rates overall (because no need for “risk premiums”);
Easy cross-border comparison of prices of goods and services. This
benefits consumers and business alike, sharpening competition and
boosting trade within the single market;
Enhanced Political solidarity –a monetary union solidifies political
bonds within member countries of the union;
CS/TCM/CFMA/CBG/XI/10
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viii.
ix.
x.
xi.
xii.
xiii.
Gains from trade creation between partners;
Deeper and broader financial markets within the union than inside
each member;
Saving in foreign exchange reserves. With a common currency and a
common pool of foreign exchange reserves, the demand for reserves
by member states may be reduced;
Wider access to markets as industries with economies of scale may
be able to produce at efficiently high levels. A monetary union also
increases potential competition inside member countries;
Possibility of earning seigniorage; and
Might stimulate (intra-union and ever broader) factor movements
99.
The Study highlighted the costs that would be faced when a monetary union
is adopted which included:
i.
ii.
iii.
iv.
v.
vi.
Loss of sovereignty over monetary policy by member central banks to
a supra-national central bank and thus lack of freedom to pursue
independent national stabilization;
Loss of exchange rate as a shock absorber with the negative
consequences for output and employment;
Loss of lender of last resort function;
Danger of speculative attacks and crashes;
Revenue loss emanating from the application of a common external
tariff system for countries that depend heavily on customs duties; and
Adaptation process could be very expensive
100. The study reviewed some empirical work that has attempted to assess the
extent to which COMESA constitutes an Optimum Currency Area. It also some of
the studies reviewed included: Harvey et. al (2001); Carmignani (2005) and
Kihangire and Mutoti (2006). The evidence from these studies revealed that, by
and large, notable progress towards macroeconomic convergence in COMESA
over the years has been made. However, significant effort is still required in some
areas to achieve and consolidate the gains made so far in order to build the
necessary institutions and capacity to support the realisation of the regional
economic objective. The study also examined the extent of asymmetry of shocks
among the member countries. This was achieved by investigating the correlation of
real supply and demand shocks using real output, inflation, terms of trade, money
supply, real exchange rates among the COMESA. In general, the cross-country
correlation coefficients for the macroeconomic variables investigated are weak,
suggesting that that countries in COMESA are subject to different shocks due to
differences in their export and production structures.
101. The study reviewed the current convergence criteria in the COMESA
monetary harmonization programme with a view to determining its adequacy for
moving the region into a monetary union. The study found the current criteria
adequate as variables that serve to express the degree of homogeneity of the
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economies belonging to a regional integration arrangement. The study stated that
the current criteria are still characterised by the following: lack of standard
computations and definitions of the criteria; possibility of inconsistency of some
criteria in financial programming context; lack of enforcement criteria (i.e. penalties
for default) and lack of a clear roadmap (milestones) to the single currency, namely
the work plan and timeframe for the Monetary Union (action plan). In view of the
above limitations, the study critically looked at each criterion and made the
necessary recommendations that would lead to the attainment of a high degree of
‘sustained convergence’ in COMESA. The study also presented the lessons drawn
made by the authors from the study visits to the following institutions: the Central
Bank of Swaziland to study about Common Monetary Area (CMA), The East
African Community (EAC) Secretariat in Arusha, Tanzania to study about EAC
integration, La Banque Central de la Etats de l’Afrique del’Ouest (BCEAO) to study
about the West Africa Economic and Monetary Union (WAEMU/UEMOA) and the
African Monetary Cooperation Programme (AMCP) of the Association of African
Central Banks AACB), the West Africa Monetary Agency (WAMA) and the Central
Bank of Sierra Leone to study the Economic Community of West African states
(ECOWAS), the West African Monetary Institute (WAMI) to study about the West
African Monetary Zone (WAMZ), the African Union (AU) and the United Nations
Economic Commission for Africa (UNECA) to study progress of economic,
monetary and political integration at the continental level. The following are the key
lessons drawn by the study from these visits:
i.
Meeting OCA criteria is a necessary but not a sufficient condition for
Monetary Union;
ii.
Commitment of the Central Bank Governors and the staff undertaking
the project is required;
iii.
Ownership of the Monetary Union project by key stakeholders including
the political class, the public, the private sector, the Central Bank
Governors and staff working on the project, right from the design stage
to completion, is critical;
iv.
A highly skilled team with a strong team spirit to deliver the Monetary
Union;
v.
Strong political will is key to the success of the Monetary Union, itself a
political project.
vi.
Laying a firm foundation and doing well-timed, sequenced and
coordinated technical and institutional homework along the lines of the
EMI model;
vii.
The need for adequate financial and human resources to deliver
Monetary Union;
viii.
The need to start early to do the best technical homework, building a
sound institutional framework and working towards a higher degree of
macroeconomic convergence first underlines the rationale for fast-
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tracking the process towards Monetary Union, from 2018 to 2015 in the
case of COMESA;
ix.
The entrenchment of fiscal and monetary policy discipline is key for
sustained convergence;
x.
A critical mass of core and credible performing member economies is
essential ;
xi.
Central Bank Independence (CBI) of the future common central bank
and of the National Central Banks must not only be enshrined in the
banks Statutes but also in the Constitutions of the Member Countries.
CBI must not be subordinated to fiscal dominance. CBI must be
respected; and
xii.
Structural rigidities, poor governance and accountability problems need
to be resolved, and a clear and direct reporting mechanism by the EMItype institution, the COMESA Monetary Institute (CMI) to the Authority of
Heads of State in the case of COMESA needs to be enshrined in the
surveillance structure; but once the CCB has taken over from the CMI,
the decisions of the COMESA Central Bank (CCB) will be final. The
partial independence of the CMI and the full independence of the future
CCB must be respected as the CCB must remain an arm of restraint on
possible future fiscal policy slippages.
102. Borrowing from the study visits made, the study proposed that the process
of decision-making in the COMESA System of Central Banks (CSCB) should be
centralised through the decision-making bodies of the CCB, namely; the Governing
Council and the Executive Board. During the transition period toward the
establishment of a monetary union in COMESA, this study proposes that a
Transitional Monetary Institute should be set up to handle quasi-central bank
functions for the region until the common central bank begins operations. As the
forerunner to the COMESA Central Bank, the tasks for the CMI will be twofold: To
strengthen cooperation between the national central banks and the coordination of
Member States' monetary policies and to carry out the necessary preparatory
technical and institutional work for establishment of the CSCB, whose role will be
to conduct the single monetary policy from the beginning of the third stage, and for
introduction of the single currency, including the preparation of banknotes. The
study examined alternative approaches that can be considered in forming a
Monetary Union and found that there is a compelling case of embracing a
gradualist but fast tracked approach in the process towards establishment of a
monetary union in COMESA. The study proposed a new timetable for Fast
Tracking COMESA Monetary Union consisting of the following three stages whose
details are provided in the action plan attached as Annex III:
 First (1st ) Stage: 1st July, 2007 - 31st December, 2009
 Second (2nd) Stage: 1st January, 2010- 31st December, 2014
 Third (3rd) Stage: 1st January, 2015- 31st December, 2015
CS/TCM/CFMA/CBG/XI/10
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103. Based on the literature review as well as the study visits, the study made the
following recommendations:
i
A transitional Monetary Institute be created not only to do well
sequenced, timed and coordinated detailed technical and institutional
preparations for a Monetary Union, but also to monitor progress made by
Member States in meeting the primary and secondary convergence
criteria of the COMESA Monetary Harmonization Programme;
ii
A “Gradualist” Approach to a Monetary Union be fast-tracked from Year
2018 to Year 2015, and the three Stages revised further as above be
adopted conditional on recommendation (i) above;
iii
Since not all Member States will have achieved a sufficient degree of
economic convergence by the time the COMESA Monetary Union (CMU)
starts, the regulations of the COMESA Treaty should be formulated to
implement Article 4(4) of the COMESA Treaty and allow for different
rates of integration (variable geometry) as long as a critical mass of the
COMESA Member States has upheld the Convergence criteria, in line
with the provision in the AACB African Monetary Cooperation Program
(AMCP). The countries which do not meet the criteria from the outset
may participate in all the activities of COMESA, even if they are not yet
members of the CMU, as they improve their preparedness to join the
CMU;
iv
Granting independence to national central banks and to a future CMI, in
terms of instrument and operational independence to achieve the
primary objective of low and stable inflation through prudent monetary
policy. In preparation for a monetary union, the authorities would need to
make a firm commitment to avoiding excessive money creation,
including the elimination of the financing of fiscal deficits. A precondition
for this commitment to work would be a high degree of operational and
instrument independence of central banks during the move toward
monetary union, and for the common central bank thereafter. At the
coming into force of the CMU, national central banks and member states
constitutions should have provided for central\bank independence. The
challenge for each central bank would therefore be to endeavour to
achieve efficiency in monetary management and hence improve the
transmission mechanism for monetary policy actions, by among others;
designing of an appropriate mix of instruments, which minimizes
volatilities in interest rates and exchange rates, developing risk hedging
instruments, deepening and broadening the financial markets and
improving the efficiency and effectiveness of the payment systems;
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v
Develop a regional structural macroeconometric-financial programming
model estimated, simulated and tested for forecasting capability and
determination of short-run and long-run effects of policy and shocks. In
addition, empirical analysis of the equilibrium level of the real exchange
rates before the Exchange Rate Mechanism for COMESA should be
undertaken;
vi
Establishing Programme of Sensitisation of COMESA Citizens to Fast
Track COMESA Monetary Union - A programme of wide sensitisation
and mobilization of the COMESA people on the policies, programmes,
activities, achievements, and benefits of monetary union should be
launched immediately; and
vii National consultations involving key stakeholders should be made in
order to ensure adequate ownership and success of a future COMESA
Monetary Union. This should go hand in hand with the sensitisation of
the populace of member states on the benefits of membership of a
monetary union, especially the introduction of a common currency so as
to enhance general acceptability, an inherent quality of money.
104. The Governors noted the following observations of the Monetary and
Exchange Rate Policies Sub-Committee made at its meeting held in Lusaka,
Zambia, from 25 to 26 September, 2006:
(i)
It is not easy to move to inflation targeting within a short period,
because of exogenous shocks that ignite inflation in most member
countries, such as among other things, high oil prices and erosion of
preferences in the international commodity markets;
(ii)
There is high degree of divergence in policies and there is limited
evidence that COMESA is an Optimum Currency Area. In such a
situation, fast tracking Monetary Union will be difficult;
(iii)
There is no sufficient degree of technical and institutional
preparedness, hence the recommendation for the establishment of a
COMESA Monetary Institute to do early detailed preparatory
technical and institutional work, like the West African Monetary
Institute (WAMI) is already doing;
(iv)
Central Bank independence is difficult to achieve in COMESA
member countries. In response to this observation, the meeting was
informed that central bank independence already exists in few
Central Bank statutes; and
(v)
That the study did not indicate how the proposed monetary institute
would be financed.
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105. In the discussions that ensued, Governors commended the consultants for
an excellent study. It was pointed out that although the study was titled fast
tracking, the main focus was doing early preparatory work that would lead to the
attainment of the monetary union which should be implemented in line with the
COMESA vision and the continental program as championed by the AACB and the
AU.
106. Governors agreed, in principle, on the establishment of an autonomous
monetary institution with a clear mission and mandate. However, they felt that
there need to undertake a cost-benefit analysis of an autonomous versus the
transformation of an existing structure of COMESA. The Assistant Secretary
General (Programmes) offered to mobilise funding for the implementation of
specific activities to be undertaken in 2007 whilst the cost benefit of an
autonomous Monetary Institute was being worked out.
107. The Governors noted with appreciation the offer by the COMESA
Secretariat to facilitate the implementation of the approved 2007 Work Programme.
Decision
108.
The Governors decided that:
(i)
Approved the 2007 Work Programme in Annex 3 whose
implementation will be facilitated by the Secretariat in collaboration
with the Bureau of the COMESA Committee of Central Bank
Governors; and
(ii)
The Secretariat should undertake a cost-benefit analysis of an
autonomous monetary institution versus using an existing structure to
be submitted to the Bureau for consideration.
(c)
Sensitisation Workshops on Implementation of Currency Convertibility
which was held in Bujumbura, Burundi, and Kigali, Rwanda
109. The Governors were informed that a Sensitisation Workshop on the
Implementation of Currency Convertibility were held in Bujumbura, Burundi on July
31st, 2006 and on 3rd August, 2006, in Kigali, Rwanda, pursuant to the decision of
the Tenth Meeting of the COMESA Committee of Governors of Central Banks.
110. The Governors noted that the workshops were attended by delegates from
the Central Banks, Ministry of Trade and Industry, Private Sector Federation,
Commercial Banks, other financial institutions, and Forex Bureaux.
111. The Governors further noted that the workshops participants agreed on the
following benefits of implementing currency convertibility:
CS/TCM/CFMA/CBG/XI/10
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(i)
An initial step to gradual elimination of exchange risk;
(ii)
Crucial step in lowering cost of cross border business;
(iii)
Individuals benefit from knowledge of existing exchange rate and that
their currency will not be rejected when travelling in the region;
(iv)
Business benefits from the transparency associated with transferring
funds in the region;
(v)
Easier cross border comparison of prices of goods and services
should lead to increased trade;
(vi)
Critical step in improving the payment system for goods and services;
(vii)
Reduction of transaction costs encourages competition; and
(viii)
Currency convertibility is a first step to overcoming obstacles created
by relatively small individual domestic markets.
112. The workshop participants were also considered on the operational
modalities of currency convertibility which included the following:
(i)
All authorized foreign exchange dealers, commercial banks and
foreign exchange bureaux, quote on a daily basis, the currencies of
member States along side other foreign currencies;
(ii)
Commercial banks to open and maintain in their books member
countries currency accounts for their own accounts and for their
customer;
(iii)
Commercial banks to establish correspondent relationships with
member countries commercial banks;
(iv)
Commercial banks to be responsible for the repatriation of surplus
partner currencies to their correspondent banks for the credit of their
accounts;
(v)
A booklet that gives summary guidelines or modalities for
implementing currency convertibility, needed to be prepared. This
booklet should give the distinguishing security features in the current
generation of notes in the member states to minimize the risks of
counterfeit. The booklet should be disseminated among member
states and be quickly updated as new generation of currency notes
are introduced; and
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(vi)
The central banks of member countries should agree on the above
operational framework for currency convertibility in order to give
confidence to the arrangement.
113. The Governors further noted that, the workshops agreed on the importance
of the following for addressing the challenges that can be faced, when
implementing currency convertibility:
(i)
Achieving macroeconomic convergence in order to have stability in
the macro-economy;
(ii)
Pursue policies to strengthen member countries capacity to absorb
shocks;
(iii)
Strength institutions to ensure the adoption and coordinated
implementation of appropriate monetary and exchange rate policies;
(iv)
Pursue policies to achieve market determined exchange rates;
(v)
Implement measures to facilitate trade and capital movements within
the region;
(vi)
Development, harmonization and integration of financial systems;
(vii)
Strengthening the institutional and operational arrangements to
achieve greater convertibility and to minimize risks of convertibility;
(viii)
Guard against currency counterfeiting by publishing security features
for currencies of each member State;
(ix)
Modernize the payment and settlement system;
(x)
Hold sensitization workshops in member countries on the new design
of REPSS; and
(xi)
Raise the level of public awareness on the advantages of currency
convertibility among member countries.
114.
The Governors noted the report.
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(d)
Work Plan for the Monetary and Exchange Rate Policies
Committee for the year 2007
Sub-
115. The Governors noted that the Sub-Committee had recommended the
following work programme and timetable of the Sub-Committee for the year 2007 :
TASK
Workshop on the computation
and
monitoring
of
real
effective exchange rates
Empirical analysis of the
departures of actual Real
Effective
Exchange Rate
paths from their Equilibrium
Real Effective Exchange Rate
paths
Sources of inflation in each
COMESA member countries
Programme of Sensitisation
National
consultations
involving key stakeholders
1.
2.
3.
4.
5.
RESPONSIBILITY START
DATE
COMPLETION
DATE
COMESA and IMF
February 2007
COMESA
March 2007
September 2007
COMESA
March 2007
September 2007
COMESA
COMESA
Immediate
Immediate
Decision
116.
The Governors approved the work plan of the Sub-Committee.
(V)
REPORT ON THE SEMINAR ON EXPERIENCES IN TRANSMISSION
MECHANISM OF MONETARY POLICY
117. The Governors noted that a seminar on Transmission Mechanism of
Monetary Policy was held from October 9 to 11, 2006 in Lusaka, Zambia.
Presentations were made by the Central Banks of Kenya, Egypt; Zambia,
Mauritius, Malawi and Madagascar on their experiences. A presentation was also
,made on the case of emerging economies.
118. The Governors further noted that the seminar had observed that the
transmission mechanism through the channels of interest rate; asset price effect
money and credit and expectation are not clear in developing countries, among
other things, due to the following:
(i)
A low level of monetization of the economy, which is associated with the
existence of parallel credit and foreign exchange markets. Thus,
modelling the transmission mechanism in the traditional way would only
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produce spurious results. It is therefore necessary to incorporate these
parallel structures in the transmission mechanism model;
(ii)
Domestic demand is insensitive to interest rate changes in some
countries;
(iii)
The lag in timing and magnitude of the impact of the policies on the
economy.; and
(iv) The exogenous shocks namely, fiscal shocks, developments in global
economy, commodity prices, and weather complicate the transmission
mechanism of monetary policy: Changes in an economy, say through
economic liberalization, financial sector reforms; have had implications for
the transmission of monetary policy. This calls for continuous study of
how monetary shocks are transmitted into prices. However, precise
impact of monetary policy on expectations is difficult to ascertain and
probably varies from time to time.
119. The Governors also noted the following challenges for Transmission
Mechanism of Monetary Policy in developing economies:
(i)
The effectiveness of monetary policy guided by quantitative targets
depends not only on the stability of the demand for money function, but
also on the closeness of the relationship between monetary aggregates
and ultimate target of inflation; and
(ii)
In a rapidly changing environment it is indeed very difficult to identify with
precision the channels through which monetary policy affects the
economy. The remarkable development of the financial system in recent
years has provided the business community with a much wider array of
financing alternatives. Business community in, any countries are now
able to avail themselves of a great diversity of products offered by finance
companies and other non-bank financial institutions which have
experienced very rapid growth in recent years: The growing trend of
securitization has also led to a greater marketability and liquidity of every
type of economic activity or transaction.
Decisions
120.
The Governors decided:
(a)
that a comparative study on transmission mechanism of monetary
policy in member States should be undertaken by the COMESA
Secretariat. The study should identify weaknesses, differences and
commonalities on the transmission process and make
recommendations on how to achieve efficient transmission of
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monetary policy given the target of price stability in each member
country, and
(b)
that the seminar papers on monetary policy be published.
(VI) PROGRESS REPORT ON THE ESTABLISHMENT OF THE COMESA
CUSTOMS UNION
121. The Governors observed that a Customs Union was a merger of two or
more customs territories into a single customs territory. The Governors took note
of the elements that comprise a customs union, COMESA had completed work on
a common tariff nomenclature (CTN), a common valuation system, programme on
the elimination of non-tariff barriers to intra-regional trade and a customs
management act. In addition, member States had agreed on a Common External
Tariff (CET) rate of zero for raw materials and capital goods. Member States were
yet to agree on CET rates for intermediate products and finished goods.
122. On the collection of Revenue under the envisaged COMESA Customs
Union the Governors noted that the Council of Ministers had decided that every
member State would collect its own customs revenue. The Governors agreed with
the observations of the Committee of Experts that such an arrangement would
require he use of a transit system and Rules of Origin and would, therefore, not
enable the member States to derive maximum benefits from the union.
123. The Assistant Secretary General informed the Governors that the recent
meeting of Committee on Trade and Customs that was held in Swaziland had
considered the concerns raised by the Committee of Central Banks Experts and
agreed to recommend to COMESA Policy Organs that the COMESA Customs
Union when fully operational should be based on the principle of free circulation
which, among others eliminates rules of origin and requires a common system of
revenue collection and distribution. The Committee was further informed that the
Committee on Trade and Customs was also recommending the operationalisation
of Article 168 of the COMESA Treaty on the Common Market Levy.
124. The representative of the African Development Bank informed Governors
that the Bank under its new structure places special emphasis on the promotion of
regional integration, including enhancing physical infrastructure and deeper
integration through structural reforms. The Bank welcomes the opportunity to work
with COMESA and other RECs in these endeavours. With regard to the
implementation of the COMESA Customs Union agenda, the Bank offered to
collaborate with COMESA.
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(VII) REPORT OF THE FIRST COMESA CONFERENCE ON COUNTERTERRORISM AND ANTI-MONEY LAUNDERING
125. The Governors noted that a Training Workshop for COMESA Member
States on International Cooperation in the Fight against Terrorism and Its
Financing, held in Djibouti, from 14 to 16 March 2006, and came up with the
following Djibouti Plan of Action as regards financing terrorism:
(i)
COMESA Member States implement the binding provisions of Security
Council Resolutions 1267 and 1373 that relate to the financing of
terrorism, as well as the FATF 40 recommendations on money
laundering and the nine special recommendations on terrorist financing;
and
(ii)
COMESA Member States should establish and develop Financial
Intelligence Units in order to strengthen sub-regional and national efforts
to prevent and suppress terrorist financing;
126. In the ensuing discussions, the Governors observed that there was need to
find ways and means of harnomising the operations of different units in
Governments and Central Banks that deal with money laundering to share
information and good practices in relation to the detection and prevention of
terrorism financing.
The Governors further agreed on the need for the
development of a common COMESA Legal Framework and standards on money
laundering.
Decisions
127.
The Governors decided that
(i)
(ii)
the Central Banks should share information and good practices in
relation to the detection and prevention of terrorist financing; and
COMESA should develop a legal framework to deal with money
laundering.
VENUE AND DATE OF THE NEXT MEETING (Agenda Item 6)
128. The Governors welcomed the offer by Libya to host the meetings in 2007 on
a date to be determined between the Chairperson and the Central Bank of Libya in
consultation with the COMESA Secretariat.
ANY OTHER BUSINESS ( Agenda item 7)
129. Dr Caleb Fundanga, Governor of the Bank of Zambia, requested the
COMESA Secretariat to submit a Financial Statement to Governors meetings on
the PTA Travellers Cheque Fund Account at Citibank Lusaka. He also requested
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the Secretariat to make arrangements for the change of signatories to the account
with the change of chairmanship. The Secretariat undertook to prepare the
financial statement which will be forwarded to Governors through the Chairperson
of COMESA Committee of Central Bank Governors.
ADOPTION OF THE REPORT AND CLOSURE OF THE MEETING ( Agenda
Item 8)
130.
The meeting adopted the report of its meeting with amendments.
131. The representative of the Central Bank of Egypt in moving the vote of
thanks on behalf of Governors expressed appreciation to the Government and the
people of Madagascar for the warm hospitality accorded to all delegates since their
arrival. He further paid tribute to the host Governor and staff of the Central Bank of
Madagascar and COMESA Secretariat for efficiently facilitating the work of Experts
and Governors. He then informed the Governors that Egypt was ready to host the
meeting of COMESA Governors of Central Banks in 2008. The meeting accepted
the offer by Egypt by acclamation.
132. The Chairperson of the COMESA Committee of Governors of Central Banks
in closing the meeting undertook to work with fellow Governors to ensure that all
decisions were implemented. In conclusion he wished all delegates a safe
passage to their home countries.