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CS/TCM/CCBFM/XIV/5
October, 2009
Original: ENGLISH
COMMON MARKET FOR EASTERN
AND SOUTHERN AFRICA
Fourteenth Meeting of the Committee of Experts from
Central Banks on Finance and Monetary Affairs
Mauritius
October 26-28, 2009
PROGRESS MADE TOWARDS ACHIEVING MACRO-ECONOMIC CONVERGENCE
IN THE COMESA REGION IN THE YEAR 2008
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PROGRESS MADE TOWARDS ACHIEVING MACRO-ECONOMIC
CONVERGENCE IN THE COMESA REGION IN THE YEAR 2008
I.
Introduction
1.
The Thirteenth Meeting of the Council of Ministers, which was held in Addis Ababa, Ethiopia, from 20-21 May 2002 decided as follows:
(i)
member countries continue implementing economic reform policies with a view to attaining greater macro-economic
convergence;
(ii)
An analysis of whether macro-economic convergence is being attained in the region should be presented in future monetary
cooperation meetings.
2.
This paper is prepared based on the above decisions. The paper assesses the progress made by COMESA member countries in
moving towards macro-economic convergence in the year 2008 based on the revised primary and secondary convergence criteria. The paper
then makes conclusions and recommendations.
Primary Criteria
Fiscal Deficit excluding grants to GDP ratio
3.
Developments in the overall fiscal balance excluding grants for most COMESA member countries in 2008 mirror the challenges and
opportunities that arose for the region as a result of changes in the world economy. The fiscal position of most countries came under pressure
due to skyrocketing oil prices. High food and fuel prices also put pressure on net oil importers.
4.
The poor fiscal performance in majority of countries can also be attributed to the non-existence of deep financial markets to finance large
budget deficits. In addition, few countries have sufficiently high savings ratios to allow the financing of a deficit of that size without crowding out
the private sector
5.
In 2008, the fiscal deficit excluding grants to GDP ratio for most COMESA member countries was more than 5%. The counties which
experienced less than 5% are Mauritius (-3.5%), Seychelles (-1.1%); Swaziland (-2.1 %); Uganda (-4.8%).
6.
Despite the deficit position of the majority of countries, fiscal management has been sound in most countries. While many governments
raised revenues by widening the tax base and improving tax collection, public expenditure also increased at higher rates owing to high food and
energy prices and the need to mitigate their impact, especially on the poor. To contain mounting fiscal deficits, some countries have reduced
expenditures on public services and development projects. In the context of the global economic down turn, such measures will have significant
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negative social effects, highlighting the need for increased external support including aid and debt relief as well as concessional lending by
international financial institutions.
7.
.It is also worthwhile to note that the sources of fiscal adjustment are just as important as the size of the cut in the deficit, in terms of both
reducing distortions (which may stem from the tax structure and expenditure policy), and of sustaining the measures utilised. A reduction in the
fiscal deficit, achieved through cuts in investments for productive infrastructure or in expenditure in operations and maintenance may not be
sustainable over time and indeed may be counterproductive, if such cuts lead, for example, to deterioration of infrastructure. On the other hand,
expenditure savings can be affected by reducing “non-productive” outlays such as prestige projects, etc.
8.
The outlook for 2009 indicates that most COMESA member countries will experience deterioration in fiscal stance. In countries where
growth and exports are falling, revenues as a share of GDP are declining rapidly. . The fiscal stance will normally loosen to the extent that
countries consider fiscal expansion. Grants are expected to plateau through 2010 reflecting uncertaintities on the scaling up of aid and about
how the global slowdown will affect donor commitments.
(b)
Inflation Rate
9.
Average inflation in COMESA marginally increased from 11.4% in 2007 to 14.3% in 2008. The member countries that recorded single
digit inflation rates are Mauritius (9.7 %), Madagascar (9.2), Djibouti (5.5%), and Malawi (8.7%), the recent inflation in the region has been
mostly imported in the form of high energy and food prices. Despite the decline in commodity prices, energy and food prices are expected to
remain above their historical levels. In some countries depreciating exchange rates are putting upward pressure on prices.
10.
The inflationary pressures that many countries in the region experienced complicated public expenditure and macroeconomic
management in 2008. Many countries have adopted targeted domestic policies such as reduction of import tariffs and domestic taxes on food
and cash transfers in order to mitigate the economic and social impact of high energy and food prices.
(c)
Reserve Accumulation
11.
The average level of reserves in COMESA member countries was sufficient almost for 4.0 months of imports of goods and services in
2008. This was due to the higher levels of capital flows in the form of official development assistance and debt relief. The countries which had
external reserves in 2008, which cover more than 4 months of imports of goods and services which is a requirement in the revised convergence
criteria are: Mauritius, Egypt, Libya, Sudan and Uganda.
12.
It should be noted that reserves which rely too much on capital development assistance could not be sustained and will eventually give
rise to payment crises, economic contraction and a sharp turn around in trade balances. It is, therefore, extremely necessary to combine faster
growth with an improved export performance.
Table 1. COMESA Major Economic Indicators
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Real GDP Growth (%)
Inflation (%)
Total Investment (%GDP)
Domestic Savings (%GDP)
External Current Acc. Excl. grants as % of
GDP
External debt to official creditors in % of GDP
2006
10.6
11.4
2007
11.3
11.4
2087
9.2
14.3
17.9
23.3
-2.9
19.4
22.5
-0.3
18.9
23.0
-0.5.
22.3
17.4
14.5
Source: IMF, African Department Database, March 31, 2008 and World Economic Outlook (WEO) database, March 31, 2008.
Secondary Criteria
(a)
Use of Indirect Monetary Policy Instruments
13.
All countries use indirect monetary policy instruments. In most countries, monetary policy is focused on controlling the money supply to
reduce core (no-food) inflation. Weak financial markets mean that these countries lack effective indirect monetary tools. They are also
characterised by relatively poor coordination between fiscal and monetary policies.
14.
Many member countries started using open market operations by auctioning treasury bills. Reserve and liquidity requirements are also
used as instruments of monetary policy. Many countries also have rediscounting windows and standing facilities. The primary market on
treasury bills is active in most countries. The secondary market for treasury bills and inter-bank market are limited in most countries. All
countries are strengthening bank supervision and regulation and are also modernising their domestic payments and settlement systems. All
countries are also making efforts to diversify their financial systems.
15.
In countries where the financial markets are more sophisticated, governments have relied on interest rates and treasury bill rates as the
main monetary policy instruments’
(b)
Interest Rate Policy
16.
As for interest rate policy, all countries have liberalised interest rates. Some COMESA member States 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. High
nominal rates, even if inflation is also high, impose exceptional risks on borrowers. A business is fairly certain that its costs will rise with the level
of inflation. On the other hand, there is a great deal less certainty that the price of the producer’s product will increase with inflation. The
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business, therefore, runs a risk that input costs will rise faster than output prices. Secondly, it has been established statistically that the higher
the rate of inflation, the more variable it is. This means that a business borrowing at a high nominal interest rate faces the risk that inflation will
actually be less than expected, while the business is committed to paying the high nominal interest rates.
17.
It is therefore greatly preferable to achieve positive real interest rates by having low levels of inflation, than by having high nominal
interest rates in order to offset a high level of inflation. High nominal interest rates have frequently resulted in the commercial banks buying
Treasury Bills rather than lending to the private sector. This suggests that achieving positive real interest rates without also achieving low rates
of inflation may do as much economic harm as good.
(c)
Achievement of Market Determined Exchange Rates and Liberalisation of Exchange Controls
18.
Most of the COMESA member 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. Exchange rate regimes are quite difficult to
classify. A relatively small number are classified as having a “conventional peg” as was the most common arrangement previously. Swaziland
is pegged to the South African Rand, which in turn floats independently. On the other hand, there are nine countries which have freely floating
exchange rate regimes; although it is not possible to be certain that there is no Central Bank interference. Many COMESA member States have
irregular receipts and payments of foreign exchange, making it unlikely that a completely free market can provide a relatively stable exchange
rate.
19.
It is debatable whether a freely floating exchange rate is the optimum strategy for achieving monetary harmonisation in COMESA. It has
been argued that a stable link to major currencies may be a more promising strategy. If that argument is accepted, then Djibouti, which is
classified as a stable peg, may represent the direction in which other COMESA countries should ultimately move. Until countries manage to
reduce their inflation to rates comparable with that of a chosen link currency, however, floating rates may be preferable. Great damage can be
done by trying to maintain a fixed nominal exchange rate when inflation is higher than that of major trading partners.
20.
As regards removal of exchange restrictions, many countries accepted Article VIII of IMF Agreement., and thus fully removed restrictions
on their current account. Accordingly many countries can be said to have achieved the removal of restrictions on trade flows. Further efforts are
also being made to remove restrictions to intra-COMESA trade, such as poor transportation net works; restrictions on movements of people;
lack of trade information on products produced within COMESA; lack of linkages among financial institutions operating in COMESA;
unavailability of regional payment and settlement system; etc.
21.
Overall, most of the COMESA member countries have made significant moves towards liberalisation of their financial markets. The main
exceptions are the retention of exchange controls on some capital account transactions, and some continued central bank interference in
exchange rate determination. Many governments also retain some control over interest rates. This is not surprising, given the small domestic
financial markets of many COMESA member countries and considerable central bank controls over interest rates retained in major
industrialised countries.
(d)
Growth
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22.
The average real growth in the COMESA Region in the year 2008 was 9.2% as compared to a growth rate of 11.3% percent in 2007.
The highest performers which achieved growth rates of more than 5% were Mauritius (5.3 %); Djibouti (5.8 %), Ethiopia, (11.6%); Egypt (7.2),
Madagascar (5.0%); Malawi (9.7%); Rwanda (11.2%), Uganda (8.3%);, Zambia (6.0%); Congo (D.R.) (6.2%) , Libya (6.8%), and Sudan (6.0 %).
23.
The improved growth rates for a number of COMESA member countries, despite the global economic and financial crisis was driven
mainly by continued consolidation of macroeconomic stability and improving macroeconomic management, and debt relief . There was also a
decline in political conflicts and wars in the region. Many member countries have implemented macroeconomic as well as microeconomic
reforms that have resulted in a generally improved business environment and investment climate. Other factors include increased government
investment in infrastructure, policies to encourage private sector development and investment in manufacturing, as well as rising FDI and
tourism receipts.
24.
Nonetheless, growth remains below the level required to reach the Millennium Development Goals of halving income poverty by 2015
and is lower than in other emerging market and developing country regions. There is, therefore, need to promote high quality growth that is
broadly shared in terms of generating decent employment, helping to reduce poverty and achieving MDGs. The region’s ability to accelerate
and sustain growth hinges crucially on its progress towards diversification of the sources of growth and success in mobilising domestic and
external financial resources to increase domestic demand in general and investment demand in particular.
25.
The global economic downturn and recession will have substantial effects on the region through reduced capital inflows and lower
demand and prices for primary commodity exports.
26.
In the medium to long term, the member countries of COMESA have to invest more in agriculture and increase productivity through use
of better seeds, more fertilisers, and better methods of cultivation and irrigation, among other policy tools. Strengthening the linkages between
agriculture and other sectors through integrated value chains would among other measures, go a long way towards enhancing economic
diversification and accelerating sustained and shared growth.
(e)
Savings
27.
The saving rates in most COMESA member countries is less than 10%. This is significantly below the 24% average for developing
countries as a group but it is also insufficient to finance the investment necessary for rapid and sustained expansion. This reflects low level of
income, weaknesses in the domestic and regional financial markets, and the inability to use commodity revenues to boost domestic investment
significantly. In addition to harnessing domestic resources, the region also needs to mobilise increasing non-debt creating external resources to
boost domestic investment.
28.
Domestic resource mobilisation for the region remains insufficient to finance the investment needed for achieving the MDGs. The
member countries will continue to rely on external capital inflows (mainly ODA, FDI and remittances) to fill the resource gap in the near future.
The international community should live up to its commitments to scale up aid to the region under various initiatives such as the Multilateral
Debt Relief Initiative (MDRI). In the meantime member countries should ensure that external assistance is used to build productive capacity and
deliver public services to reduce poverty and accelerate progress towards meeting the MDGs.
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(f)
Investment
29.
The average overall investment as a percent of GDP in COMESA decreased from 19.4% of GDP in 2007 to 18.9% in 2008. The
investment performance for most of the countries, which is less than 20% underscore the challenge facing policy makers in the COMESA region
to implement a set of policies that would move the economies into virtuous cycle of higher investment and higher growth.
(g)
External Current Account Excluding Grants
30.
Despite the downward trend in the second half of 2008, high energy and food prices resulted in rising current account deficits in most of
the COMESA member countries. The data clearly shows mounting threats to current account sustainability in most countries. This together with
internal imbalances and inflationary pressures could pose severe risks to macroeconomic stability and growth prospects in the coming years. In
addition to rationalizing energy consumption, these countries should adopt strategies to diversify exports, promote tourism and attract
remittances. In the short term, however, COMESA member countries need more aid inflows to manage their external balances effectively
(h)
External Debt
31.
The average external debt to official creditors to GDP ratio of the COMESA decreased from 17.4% in 2007 to 14.5% percent in 2008.
The fall in the external debt burden, came as a result of reaching the HIPC completion point by a number of member countries, and the decline
in the reliance on debt creating flows. Despite these encouraging trends, the MDGs remain underfinanced and most of the member countries
are far from making progress on most of the eight goals of the MDGs.
32.
While, the official debt of many countries in the region declined, the debt owed to banks and other private creditors increased in a
number of countries. ODA remained below the level which is necessary to permit achievement of the MDGs.
Conclusions and Recommendations
Conclusions
33.
The overall assessment of progress made in macro-economic convergence in COMESA shows that the fiscal criterion was missed by 9
out of 19 countries. Assessment of the inflationary situation in 2008 indicates that 13 countries missed the criteria. The assessment shows that
the performance of COMESA in respect of compliance with the secondary criteria as regards to the use of indirect monetary policy instruments,
moving towards market determined exchange rates; adherence to the 25 Core Principles of Bank Supervision and adherence to the Core
principles for Systematically Important Payment Systems were in the right direction. The achievements as regards, the other secondary
convergence criteria were however, not very impressive. See Annex table 1 for the progress made by member countries in achieving the
COMESA Macroeconomic Convergence Criteria. . Reports from member countries on the same is contained in Annex 2.
Recommendations
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34.
In order to enhance the implementation of the Monetary Harmonisation Programme of COMESA, the following recommendations are
made:
(a)
Member countries should continue to move towards macro-economic convergence, which take into account poverty reduction
strategies that target growth and equitable distribution of benefits of growth in order to achieve the Millennium Development
Goals.
(b)
It is necessary that government spending be reallocated into priority areas such as education and health and away from nonproductive, non-priority spending, as well as from areas where rationale for public intervention does not exist.
(c)
Medium term fiscal consolidation is necessary to preserve price stability, prevent an erosion of external competitiveness and
avert the unsustainable debt dynamics that can jeopardise the economy’s growth prospects;
(d)
Many countries in the region may face food shortages and food insecurity due to drought, and rigid supply conditions among
other factors. In addition to strengthened emergency measures, long term responses are therefore essential for the region to
meet the challenges of the food and financial crisis, growth volatility, and slow social development. In the short run, governments
need greater policy flexibility as well as external support to combat food shortages through, for example, lower tariffs on food
imports, subsidies and cash transfers to poor households. In the long run, governments should invest more in agriculture and
infrastructure. This together with effective macroeconomic management and institutional reforms will stimulate private-sector
development and investment, accelerating job creation and poverty reduction.
(e)
Resource rich countries in the region need to use commodity revenue and accumulated reserves from the commodity boom to
enhance the diversification of production structures and international competitiveness. This requires increased productivityenhancing public investment, especially in infrastructure, technology and human capital development.
(f)
Avoidance of exchange rate volatility which has significant employment, output and distributional consequences;
(g)
Deepening the financial sector. Increased monetisation in the financial sector will improve liquidity and efficiency. A strong
financial sector promotes clarity of monetary policy as well as the transmission of signals for the achievement of the final
objectives of price stability;
(h)
Achieving and maintaining relatively low and stable real interest rates in the economy;
(i)
Member countries and development partners need to increase efforts to mobilise more resources from domestic and external
non-debt generating sources to increase emergency aid and debt relief as well as concessional lending to finance short term
strategies to mitigate the adverse effects of the global crisis. In addition, to efforts to sustain ODA flows, increased debt relief and
lending by international financial institutions remains essential for the region. The International Monetary Fund, the World Bank,
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regional development banks and others are urged to design special stabilisation and development funds such as the
“Vulnerability Fund” recently proposed by the President of the World Bank, the Emergency Liquidity Facility, and the Trade
Financing Initiative proposed by the African Development Bank.
(j)
Special funds and lending facilities should aim at promoting productive capacity and economic growth in member countries to
address long-term growth challenges.
(k)
The threats posed by the recent crisis and the deepening global recession also call for the speedy and successful conclusion of
the Doha round of trade negotiations and highlight the need to avoid protectionist tendencies in the recovery plans being
implemented by the rich countries.
(l)
Trade integration should be pursued with renewed vigour. Such an improvement would necessarily result in the quest for an
efficient payment and settlement system which would ultimately enhance the monetary integration agenda of COMESA.
ANNEX 1. PROGRESS MADE TOWARDS ACHIEVING MACRO-ECONOMIC CONVERGENCE
IN THE COMESA REGION IN THE YEAR 2008
Name
Country
Burundi
of Achievements under Primary Criteria
1
13.6%(not
met)
2
24.5%(not
met
3
4
6.3%m
et
Achievements under secondary Criteria
1
met
2
met
3
4.3%
not met
4
5
6
19.8%
met
7
21.7%
not met
8
met
9
met
10
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Comoros
Congo(D.R)
Djibouti
Egypt
Eritrea
Ethiopia
Kenya
Libya
Madagascar
Malawi
Mauritius
Rwanda
Seychelles
Sudan
Swaziland
Uganda
Zambia
-12.9%
Not met
-0.43%
met
1.3%
met
7.0% not
met
-10.6%
Not met
-7.2%
Not met
-5.1
%almost
met
36.7
%
met
-7.1 %not
met
-17.2%
not met
-3.5 %met
4.8% met
27.57%
not met
5.5 %met
11.7%
met
11.0 %
met
25.3 %
met
26.2%
met
10.4%
meet
9.2 %
met
8.7 %
met
9.7%
met
not
not
not
not 0.0
5.9%
met
0.5 not
met
0.2
Not met
6.4%
met
-0.9not
met
0.9 not
met
3.4 not
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
not
met
not
2..0 not met
met
2.2 not met
met
3.8 met met
met
-11.0
% 15.4% not 0.0
not met
met
-1.1% met 37.0 %not
met
1.64%
14.3% met
met
-2.1%met 12.6% not 0
met
-6.2% not 12.1%
met
not met
5.0t
met
met
0.6 not met
met
1.8
met
met
4.6 met
met
met
5.1%
met
met
met
-6.3% not 16.6% not 1.1
met
met
2.1 not met
met
met
not 1.0
not -10.2
met
met
met
met
met
1.0%
not met
6.2%
met
5.8
%
not met
7.2
%
met
1.0%
not met
11.6%
met
1.7%
not met
6.7 not
met
5.0%
not met
9.7%
met
5.3%
not met
11.2%t
met
0.1%
not met
6.0%
met
2.6%not
met
8.3%
met
6.0%
met
12.9%
not met
22.5%
met
13.5 % met
not met
7.8%
met
met
met
met
met
met
met
10.9%
met
21.8%
met
19.2%
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
met
35.1%
met
21.8%
7.6%m
met
et
19.1 % 24.5%
almost
met
met
15.6%
31.3
not met %met
36.0%
met
20.5%
23.5%
met
met
40.7
12.4%
%met
met
12.8%
12.4%n
not met ot
met
22.0%
2.4%
met
not met
met
met
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Zimbabwe
Source; IMF African Department Data Base April 14, 2009 and World Economic Outlook database, April 14, 2008.
Notes:
Primary criteria 1;
Overall budget deficit (Excluding grants /GDP ratio) of not more than 5%
Primary criteria 2.
Annual inflation rate not exceeding 5 percent (annual averages).
Primary Criteria 3:
Minimize central bank financing of budget deficit towards zero percent.
Primary Criteria 4:
External reserves equal to or more than 4 months of imports of goods and services.
Secondary Criteria 1:
Achieve and maintain stable real exchange rates.
Secondary Criteria 2:
Achieve and maintain market based positive real interest rates (Annual average deposit Rate).
Secondary Criteria 3:
Achieve sustainable growth of real GDP of not less than 7 percent
Secondary criteria 4.
Sustainable pursuit of debt reduction initiative on domestic and foreign debt
(Reduction of Debt/GDP ratio to a sustainable level).
Secondary criteria 5:
Total domestic revenue/GDP of not less than 20 percent. Reduction of current account deficit
(excluding grants)/GDP to a sustainable level.
Secondary Criteria 6:
Total domestic revenue to GDP ratio of not less than 20%
Secondary Criteria 7:
Achieve and maintain domestic investment rate of at least 20 percent
Secondary Criteria 8:
Implementation of the 25 Core Principles of Bank Supervision and Regulation based on
agreed Action Plan for Harmonization of Bank Supervision for the COMESA region; and
Secondary Criteria 9:
Adherence to the Core Principles for Systematically Important Payments Systems, by modernizing
the payment and settlements system.
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