Download Monetary and Economic Integration in Africa

MONETARY AND ECONOMIC
INTEGRATION IN AFRICA:
CHALLENGES AND
PROSPECTS
BY
DR. J. D. ROGERS
GOVERNOR
BANK OF SIERRA LEONE
1
1.
Introduction
Over the past two decades or so, the drive
has been towards monetary integration
across the globe. In Europe, the European
Monetary Union with the Euro as its
common
Currency
came
into
effect
in
January, 1999. In Africa wide ranging
initiative
have been put
in place
for
monetary integration at sub-regional and
regional levels.
2.
The Concept of Monetary Integration
Although
subjected
perspectives,
to
Monetary
a
variety
of
Integration
is
generally conceived as a process whereby a
group of countries form a monetary union
characterised by the establishment of one
central monetary authority which takesover
2
the formulation of the Union’s monetary and
financial policies, the issuance of a single
currency for use in the member states or the
existence
of
several
currencies
fully
convertible at immutably fixed exchange
rates; and
a single exchange rate policy
effectively implying the pooling of the
foreign exchange reserves of the member
states.
The process of monetary integration could be
classified into two categories: ‘Exchange
Rate Union’, that is, an area within which
exchange rates bear a permanently fixed
relationship to each other even though the
rates may, in unison, vary relative to nonunion
currencies’;
and
‘Convertibility’
referring to the permanent absence of all
3
exchange controls, whether for current or
capital transactions, within the area.
A
monetary union is thus an epitome of full (or
nearly
complete)
monetary
integration,
referring to a zone or an area within which
the monetary policy and exchange rates of
the countries that constitute the union is
managed in such a way as to achieve
common economic objectives.
3.
Benefits
and
costs
of
Monetary
Integration
3.1
Benefits
The benefits of monetary integration are
enormous as evidenced by the steady stride
towards integration in most regions of the
world.
Research theoretical and empirical
studies validating these benefits abound,
4
though this is not to imply that integration
is devoid of costs.
The most important benefit of monetary
integration is economy of scale in production
and trade resulting from specialisation
which ultimately leads to increased trade
among the member countries (intra-regional
trade). This culminates in an increase in per
capita
incomes
of
member
subsequently GDP growth.
states
and
Transactions
costs will also be minimised.
These costs
include exchange loss due to currency
fluctuations, commissions paid to banks,
foreign exchange bureaux.
will
also
convertibility.
benefit
Member states
from
currency
A fixed exchange rate
within the union guarantees exchange rate
5
certainty to business operators and reduces
risk. The absence of competitive exchange
rate adjustment leads to increased trade and
investment flow within the region. Capital
flight will be reduced and foreign investors
attracted to member states.
Furthermore,
considerable
benefits
will
accrue from the use of 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.
Members’
external
positions are not likely to be in deficit at the
same time, so that the pooling of reserves
will economise reserve usage.
The single
currency, backed by the productivity and
foreign exchange reserves of all member
6
countries,
will
be
strong
and
stable.
Exchange rate stability not only fosters
trade, but also leads to stable consumer
prices
and
interest
rates,
boosting
investment, as the cost of capital will be
lower thus stimulating economic growth.
Centralisation
of
monetary
policy
management at the regional level insulates
policy formulation from the influences of
populist national politics. Indeed, it should
be difficult for one country to unduly
influence the monetary policy of the common
central bank.
The independence of the
regional central bank could foster low
inflation, and as national banks will be illdisposed to finance government budget
7
deficits, thereby providing the platform for
macroeconomic stability.
Other benefits include seignorage gains from
the issuance of a common currency and the
free movement of factors of production
across the zone.
3.2
Costs
Notwithstanding the myriad of benefits
outlined above, monetary integration is
fraught with a number of costs.
These
include loss of national monetary and
exchange rate policy or lack of freedom to
pursue independent national stabilization
policies, revenue loss emanating from the
application of a common external tariff
system for countries that depend heavily on
8
customs
duties,
loss
of
revenue
from
inflation tax, and the asymmetry of shocks
due in large part to differences in commodity
exports of member states and the fact that
world prices of the various commodities do
not move together.
It is however worth emphasising that the
benefits to be derived from full-fledge
monetary integration far surpass the ills
associated with the process.
4.
Monetary Integration
Sub-Regional Experiences
Economic and Monetary integration in West
Africa dates back to the colonial days. The
Anglophone countries – The Gambia, Ghana,
Nigeria and Sierra Leone operated under a
9
common Currency Brand – The West African
Currency Board, managed by the British,
the legal tender being the Pounds Sterling.
The
Francophone
countries
–
Benin,
Burkina Faso (Upper Volta), Cote d’ivoire,
Guinea, Mali, Niger, Senegal and Togo –
also had similar arrangement with France,
using the CFA Franc.
The Anglophone
arrangement was dissolved in the early
1960s,
while
the
Francophone
model
continued and was developed into a full
fledge Monetary Union in 1962 after the
withdrawal of Guinea.
As a result of
renewed political commitment by member
Governments, the Union was strengthened
and expanded leading to the creation of the
West African Economic and Monetary Union
10
(UEMOA), in 1964.
The Union currently
has a lusophone country, Guinea Bissau.
To
advance
the
process
of
economic
integration in Anglophone West African the
Economic Community of West African States
(ECOWAS was established in 1975 with the
primary objective of promoting cooperation
leading to the creation of an economic and
monetary union in West Africa. Apart from
the motivation of achieving closer economic
and political ties and collective self-reliance,
it was anticipated that the enhanced level of
co-operation would help raise the living
standards of the people through accelerated
growth and development of trade within the
sub-region.
For this purpose, the Treaty
establishing ECOWAS outlined a number of
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policy
measures
Liberalization,
the
that
included
establishment
Trade
of
a
Customs Union and the creation of a
Common Market by January, 1990.
The idea of creating an ECOWAS Monetary
Zone was given further impetus by the
commissioning of a study on the subject in
May 1983, by the Authority of Heads of
State and Government. This was driven by
the notion that Monetary Integration was an
essential first step for ECOWAS integration
in view of the multiplicity of non-convertible
currencies, the low level of trade among
member
countries,
an
under-developed
financial system characterised by macroeconomic instability, low investor confidence,
weak cross-border payments system, diverse
12
fiscal and monetary policies and banking
practices. Following a number of studies the
ECOWAS
Monetary
Cooperation
Programme (EMCP) was adopted in July
1987,
with
the
ultimate
objective
of
establishing a single currency and a common
issuing institution. The target set for a
single monetary zone was 2000, but this was
later shifted to 2002 and then 2005.
Another issue addressed is Macro-economic
Convergence.
required
Member
to
benchmarks
comply
in
Countries
with
addressing
are
prescribed
their
fiscal,
monetary and exchange rate imbalances to
achieve the objective of successful monetary
integration.
The
convergence
criteria
(classified into primary and secondary) focus
13
on price stability, sound fiscal policies,
reduced
budget
maintenance
of
deficit
financing
adequate
gross
and
foreign
reserves.
5.
Role of Central Banks in Monetary
Integration
The role of central banks within the
framework of monetary integration is, by all
estimations,
pivotal.
It
ranges
from
designing the architecture of the common
central
bank,
macroeconomic
monitoring
convergence
of
the
criteria,
statistical harmonisation and convergence,
monitoring of the exchange rate mechanism,
development
of
an
payments
systems,
institutions
created
efficient
to
regional
supervision
of
fast-track
the
14
monetary integration process, to instituting
and monitoring of sensitisation programmes
in respect of the integration.
-
Desiging
the
Architecture
of
the
common central bank
In
a
monetary
union,
the
common
monetary authority (or central bank)
performs the strategic responsibility of
formulating and coordinating monetary
and exchange rate policies among its
member states. The central banks of the
constituent member states not only play a
cardinal
role
in
developing
this
architecture, they ensure its viability and
sustainability. Their contribution in this
respect is distinct in the following areas:
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Statute Formulation
The
member
central
banks
make
substantial input into the formulation of
the Statute that governs the operations of
the common monetary authority.
This
statute spells out, amongst other things,
the
objectives
and
functions
of
the
institution, its legal status, capital base,
organisation and operational procedures.
In addition to making sure that these
provisions
are
consistent
with
the
international best practices, the central
banks,
contribute
to
ensuring
compatibility of the Statute with existing
acts of the central bank and related
national legislations with a view to
facilitating a smooth integration process.
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Monetary Policy Framework
Against
the
backdrop
of
being
the
principal agency in the formulation and
implementation of monetary policy in
their national economies. Central banks
provide
technical
support
in
the
development of the common framework
for the conduct of a single monetary
policy. This framework encompasses the
instruments of monetary control, the
specified operational, intermediate and
final targets, and the possible channels of
monetary policy transmission.
Banking Supervision Framework
The
Banking
Supervision
framework
forms an important component of the
architecture of any monetary union. At
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the national level, especially within the
context
of
developing
economies,
supervision of financial institutions is
often the preoccupation of the central
bank.
Under such circumstances, it is
imperative on the constituent central
banks to make sure that the single
framework is both consistent with current
procedures,
and
more
importantly,
international standards like the Basel
Core Principles. Even in the event where
an independent regional agency is to
assume this supervisory responsibility,
the national central banks ensure that
the
principles
compatible
with
and
practices
existing
are
national
procedures.
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Monitoring
the
macroeconomic
convergence performance of member
states
The success of a monetary integration
process is largely dependent on the degree
of macroeconomic convergence of member
states.
multilateral
This
requires
surveillance
a
robust
process that
monitors individual country performance
in relation to stipulated primary and
secondary
convergence
criteria,
or
nominal and real criteria in the case of
the European Monetary Union (EMC).
The central banks occupy a strategic
position in the organs that constitute the
surveillance mechanism, and in certain
instances,
the
national
technical
19
secretariat is provided by and located at
the central bank.
Statistical
harmonisation
and
Convergence
Harmonisation of statistical concepts and
frame works of member states is germane
to the establishment of a monetary union.
Compilation and computation of zonal
aggregate data and indicators provide the
basis
for
meaningful
policy-oriented
research at the union level and thus
foster
efficient
economic
policy
formulation and implementation.
central
banks
ensure
that
The
uniform
standards are obtained in respect of
statistical manuals for the compilation
and
computation
of
Monetary
and
20
Balance of Payments statistics, both of
which are within their purview. In some
instances, the central banks contributes
to the drafting of a Minimum Statistical
programme for member states with a
view
to
achieving
comparability
aggregate
of
among
more
effective
macro-economic
these
member
countries.
Monitoring of the Exchange Rate
Mechansm (ERM)
Maintenance of monetary stability is
generally
considered
a
necessary
condition for countries aspiring to adopt a
common currency and harmonise their
monetary and fiscal policies.
Stable
exchange rates are expected to encourage
21
trade within a monetary union and with
external partners, and support the antiinflationary policies of the member states.
Monitoring
of
the
exchange
rate
mechanism, the system used to examine
fluctuations in the exchange rates of
national
currencies,
is
a
paramount
responsibility of the constituent central
banks.
The banks ensure that the
exchange
prescribed
appropriate
rate
remains
bands
policy
by
within
the
instituting
actions mainly
in
respect of the level of foreign reserves and
the budget and current account deficits.
Payments System Development
The development of an efficient, and
secure modern payments, clearing and
22
settlement systems in a monetary union
is essential to eliminating risks from
payments and facilitating the exchange
and settlement of funds and securities.
This improves the common central bank’s
monetary management capabilities by
reducing float and enhancing the supply
of timely and accurate information n flow
of funds. The central banks, usually in
collaboration with a consultant, play a
vital
role
framework
in
articulating
for
the
a
unified
integration
and
interfacing of the existing systems in
member countries. Furthermore, during
the
initial
stages
of
the
monetary
integration process, the central banks
usually
institute
measure
aimed
at
encouraging use of regional Travellers’
23
cheques
to
facilitate
movement
of
economic agents and the settlement of
minor transactions in the region.
Monitoring of Institutes established
to fast-track integration
A transitional monetary institution, with
the primary objective of fast-tracking the
drive towards integration, has come to
constitute
an
integral
part
of
the
monetary integration process. In Europe,
there
was
the
European
Monetary
Institute (EMI), in ECOWAS there is the
West African Monetary Agency (WAMA);
an in the Second Monetary Zone in West
Africa
the
West
African
Monetary
Institute (WAMI). These institutions are
often, at the conclusion of the integration
24
process, transformed into the common
monetary authority.
The central banks
are influential in the setting up of these
institutions and closely supervise their
programmes
and
activities
towards
regional integration at various committee
levels
–
Convergence
Committee,
Committee of Central Bank Governors
and
the
Technical
Committee.
Experienced professional staff of the
central
banks
often
constitute
the
directorate of these institutions.
Instituting
and
Monitoring
of
Sensitisation Programmes
Sensitisation of the populace of member
states
implementing
a
monetary
integration process on the benefits of
25
membership
of
a
monetary
union,
especially the introduction of a common
currency, is crucial to the success of the
integration
process
as
it
guarantees
general acceptability, an inherent quality
of
money.
programmes,
These
though
sensitisation
a
national
endeavour, are often spearheaded by the
central
banks.
In fact,
in certain
instances, as obtains in Sierra Leone,
senior management level official performs
the role of national coordinator of the
sensitisation programme.
Budgetary Allocations
The central banks, in agreement with the
Ministry of Finance or the appropriate
central government agency, determine
26
the budgetary allocations for all aspects of
the integration process including the
operational
cost
of
the
transitional
monetary institute.
The performance of countries regarding
the primary criteria has been mixed as
shown below. Generally, there has been
some improvement in macro-economic
performance
and
progress
towards
convergence by member countries:
Macro-economic Performance
Note: Mixed Performance
1.
Inflation (10%)
June 2002 June 2003
(Percent)
Dec. 2003
(Percent)
27
2.
Nigeria
12.2
8.7
Ghana
15.2
29.6
Sierra Leone
2.9
6.5
The Gambia
6.7
18.4
Guinea
2.6
16.1
Liberia
NA
NA
14.2
Budget Deficit as Percentage of
GDP (Percent)
Note: The WAMZ annual target (is 4. %)
June 2002
June 2003
Nigeria
6.1
4.3
Ghana
3.3
2.4
Sierra Leone
16.8
19.6
The Gambia
10.5
1.4
Guinea
8.2
4.2
Liberia
NA
NA
28
29
3.
Central Bank Financing of the Budget
Deficit as a Percentage of Previous Year’s
Tax Revenue (%)
Note:
Countries
Performance
on
this
criteria was encouraging all the countries
complied with this criteria
June 2002
June 2003
Nigeria
0.0
0.3
Ghana
12.1
0.0
Sierra Leone
0.3
0.0
The Gambia
23.9
3.4
Guinea
23.9
3.4
Liberia
NA
NA
30
4.
Gross Reserves/Months of
Import Cover
Note:
The
Overall
(Months)
Performance remained unchanged from
the level in 2002
June 2002
June 2003
Nigeria
9.9
8.8
Ghana
2.3
2.7
Sierra Leone
3.0
3.0
The Gambia
7.5
4.0
Guinea
2.0
1.9
Liberia
Performance in the Secondary criteria was
mixed, largely reflecting the trend in the
primary criteria specifically, performance in
the areas of tax receipts/GDP and wage
31
bill/tax receipts ratios were less satisfactory
due to low level of fiscal revenue in most
countries in the region. Low tax revenues
led
to
weak
performance
in
public
investment financed from internal resources.
Most
countries
recorded
positive
real
interest rates.
2.
Central Africa
In this sub-region sixteen countries are
members of the Central Africa Economic and
Monetary Community (CAEMC), ADOPTED
IN April 2001. CAEMC has also established
convergence
criteria
for
achieving
full
monetary union by 2004.
The four primary criteria are:-
32
 Primary fiscal balance (excluding grants)
> 0.
 Annual average inflation rate < 3%.
 Domestic and external Public debt/GDP
ratio < 70%
 Non-accumulation of new domestic and
external arrears.
In addition to the above, three categories of
macro-economic indicators for multilateral
surveillance
were
selected
for
a
more
complete diagnosis of the economic and
financial performance of member countries.
These include the real GDP growth rate,
gross foreign assets/short term holding ratio
(>
20%),
current
account
balance
as
percentage of GDP, and reserves/imports
ratio
(in
months
of
imports).
Other
33
performance indicators considered covered
public and private investment/GDP ratio,
wage
bill/total
(excluding
external
domestic
grants)
ratio,
fiscal
monitoring
competitiveness:
exchange
rate,
monitoring
of
effective
production
external
receipts
unit
of
real
cost,
competitiveness:
exports goods and non-factor services/GDP,
imports goods and non-factor services/GDP.
In addition, the following economic policy
indicators are also considered: monitoring of
fiscal policy: primary balance/total receipts
ratio, primary balance/GDP ratio; overall
fiscal
balance/GDP
ratio;
outstanding
external debt/exports goods and non-factor
services,
ratio;
monitoring of monetary
34
policy: change in money supply, Central
Bank credit to the economy and government.
The first multilateral surveillance report
(December, 2002) indicated performance
with two countries out of the six comprising
the zone complying with two criteria, while
two other countries met only one and the
remaining two, none of the criteria.
Over the recent period, Central Banks of the
sub-region have intensified consultations
and meetings, to exchange. Views/ideas on
their respective experiences in monetary
policy, in order to strengthen and accelerate
economic and monetary cooperation in the
zone. In addition, banking acts have been
elaborated
and
are
already
in
force,
35
exchange arrangements harmonised and
various integration projects initiated on
harmonisation of regulations on microfinance institutions, business laws and the
regional stock market.
South Africa
Member States of the Southern African
Development Community (SADC) like other
economic
groupings
implement
have
implemented wide ranging economic reforms
aimed at achieving macroeconomic stability
and sustainable development.
A trade
protocol was ratified and implemented in
2000 SADC envisages a Free Trade Area by
2008 whereby 85% of the region’s goods will
move across country boundaries duty free.
The remaining .5% made up of sensitive
36
products is expected to be zero rated by
20012.
Significant progress has been made by
SADC member states in the areas of
macroeconomic convergence, harmonisation
and modernisation of national payments
system
and
strengthening
of
bank
supervision. In the area of macroeconomic
convergence, SADC member states agreed to
focus on a single indicator – inflation, as a
more appropriate and realistic convergence
target.
Other broad-based macroeconomic
criteria would be targeted over time.
Eastern Africa
This sub-region has a long history of
economic and monetary integration dating
37
back to the formation of the East African
Community the 1960s.
The
process
of
monetary
policy
harmonisation under the EAC is coordinated
through the Monetary Affairs Committee
(MAC) comprising Central Bank Governors.
Harmonisation
of
monetary
and
fiscal
policies entails the attainment of a set of
macroeconomic criteria, among which are
low and stable inflation rate (< 5%) high and
sustainable growth rate of GDP (> 7%), low
current account/GDP ratio, reduction of
budget deficit (excluding grants)/GDP ratio
(< 5%), raising of national savings/GDP ratio
(<
20%)
in
the
medium
term,
gross
reserves/months of import (> 6 months) in
the medium term, maintenance of low
38
market determined interest rates, stable
market
determined
exchange
rates,
reduction of the debt stock (foreign and
domestic) and maintenance of prudential
norms
of
banking
regulation,
strict
supervision, improved corporate governance
and
transparency
of
all
financial
transactions. Significant progress has been
made in all these areas.
Notwithstanding the progress achieved, the
EAC
Authorities
are
aware
that
the
harmonisation of monetary policy is a
dynamic
challenges.
process
fraught
with
many
The Authority has initiated
various measures to achieve the objective of
efficient monetary policy management.
39
Northern Africa
This sub-region is yet to embark on an
integration programme.
The Committee of Governors of Central
Banks from the sub-region have initiated
dialogue
on
cooperation.
economic
and
monetary
Consultations are ongoing
among Central Banks in the sub-region.
March, 2004
40