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ASSESSING REGIONAL INTEGRATION IN ASSESSING REGIONAL INTEGRATION IN AFRICA (ARIA III):AFRICA (ARIA III):

Towards Monetary & Financial Towards Monetary & Financial

Integration in AfricaIntegration in Africa

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1. Introduction1. Introduction

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The importance of Regional The importance of Regional IntegrationIntegration in Africa in Africa

•Creating a common market for the 53 individual African should lead to economies of scale to make countries competitive

•Wider trading and investment environment, inducing backward and forward linkages

•A framework for African countries to cooperate in developing common public goods: e.g. infrastructure; peace & security.

Regional Integration - Vision of African leaders since early years of independence. Several reasons:

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Assessment of Africa’s regional integration agenda on a regular basis to draw lessons for improving its implementation

ARIA I was the first coherent and comprehensive analyses on this integration process

Subsequent ARIA focused on thematic challenges (ARIA II- Rationalization of RECs; ARIA III – Macro-economic policy convergence, monetary and financial integration )

ARIA IV, now in progress is focusing on the important issue of enhancing intra-African trade.

Assessment of Africa’s regional integration agenda on a regular basis to draw lessons for improving its implementation

ARIA I was the first coherent and comprehensive analyses on this integration process

Subsequent ARIA focused on thematic challenges (ARIA II- Rationalization of RECs; ARIA III – Macro-economic policy convergence, monetary and financial integration )

ARIA IV, now in progress is focusing on the important issue of enhancing intra-African trade.

Rationale for ARIA Rationale for ARIA Rationale for ARIA Rationale for ARIA

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Rationale for Macro-economic policy Rationale for Macro-economic policy convergence, monetary and convergence, monetary and

financial integration in Africafinancial integration in Africa

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The success of the integration process will The success of the integration process will require economies of the constituent members require economies of the constituent members that are strong and stablethat are strong and stable

Macroeconomic stability implies lesser Macroeconomic stability implies lesser fluctuations in output and employment, better fluctuations in output and employment, better overall price stability, very low inflation on overall price stability, very low inflation on average, and low variabilityaverage, and low variability

It also implies cultivating a fiscal discipline in It also implies cultivating a fiscal discipline in terms of terms of government expenditure in relation to government expenditure in relation to efficiency in taxationefficiency in taxation to avoid excessive budget to avoid excessive budget deficits deficits

The success of the integration process will The success of the integration process will require economies of the constituent members require economies of the constituent members that are strong and stablethat are strong and stable

Macroeconomic stability implies lesser Macroeconomic stability implies lesser fluctuations in output and employment, better fluctuations in output and employment, better overall price stability, very low inflation on overall price stability, very low inflation on average, and low variabilityaverage, and low variability

It also implies cultivating a fiscal discipline in It also implies cultivating a fiscal discipline in terms of terms of government expenditure in relation to government expenditure in relation to efficiency in taxationefficiency in taxation to avoid excessive budget to avoid excessive budget deficits deficits

Rationale for Macro-economic policy Rationale for Macro-economic policy convergence, monetary and financial convergence, monetary and financial

integration in Africa (contd)integration in Africa (contd)

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Rationale for Macro-economic policy Rationale for Macro-economic policy convergence, monetary and financial convergence, monetary and financial

integration in Africa (contd)integration in Africa (contd)

Financial integration in terms of harmonisation Financial integration in terms of harmonisation of money and capital markets would ease of money and capital markets would ease payment systems and provide a primary payment systems and provide a primary source for medium to long-term securities, source for medium to long-term securities, which are essential for investmentswhich are essential for investments

Monetary integration, especially in terms of Monetary integration, especially in terms of monetary union, would remove exchange monetary union, would remove exchange uncertainty and transaction costs, and deepen uncertainty and transaction costs, and deepen the integration process.the integration process.

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ARIA III HIGHLIGHTS ARIA III HIGHLIGHTS

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The report shows that RECs did better at controlling inflation and budget deficits than they did at reducing external debt ratios. Debt relief helped some countries in improving on external debt targets

Budget deficits generally remain an area of difficulty due to pressures on government spending (e.g on social development)

Economic growth rates as an important convergence variable are also generally encouraging across Africa

The report shows that RECs did better at controlling inflation and budget deficits than they did at reducing external debt ratios. Debt relief helped some countries in improving on external debt targets

Budget deficits generally remain an area of difficulty due to pressures on government spending (e.g on social development)

Economic growth rates as an important convergence variable are also generally encouraging across Africa

A. A. Implementation of macro-economic Implementation of macro-economic convergence criteriaconvergence criteria

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ImplementationImplementation of macro-economicof macro-economic convergence criteria (contd)convergence criteria (contd)

Monetary unions tend to do better on meeting macroeconomic policy convergence targets as they tend to have more effective surveillance mechanisms (e.g UEMOA).

Though REC members are making tremendous efforts towards sound macro-economic policy convergence, challenges still remain on the path towards the ideal situation

We see little evidence in convergence of per capita incomes. This is where support to poor economies in catching up with richer economies in per capita incomes will be necessary.

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B. Financial integrationB. Financial integration

The environment for financial integration remains precarious. There is general lack of financial depth as money and capital markets are relatively underdeveloped, coupled with a limited array of financial instruments

On the positive side, cross-border direct and portfolio investments are on the upward trend, particularly in SADC area as many stock exchanges are being established and harmonisation of listing requirements and trading procedures is taking place.

There is however only one Regional Stock exchange: Bourse de Valeur Immobiliere (BRVM) serving UEMOA countries

The environment for financial integration remains precarious. There is general lack of financial depth as money and capital markets are relatively underdeveloped, coupled with a limited array of financial instruments

On the positive side, cross-border direct and portfolio investments are on the upward trend, particularly in SADC area as many stock exchanges are being established and harmonisation of listing requirements and trading procedures is taking place.

There is however only one Regional Stock exchange: Bourse de Valeur Immobiliere (BRVM) serving UEMOA countries

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Financial integration (contd)Financial integration (contd)

Community financial institutions have been established in some RECs (e.g. BEAC & BDEAC in CEMAC; PTA Bank & PTA Re-insurance Company in COMESA; EADB in EAC; ECOWAS Fund and Ecobank in ECOWAS; BCEAO & BOAD in UEMOA; Maghreb Bank for Investment and External Trade in UMA.

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C. Monetary IntegrationC. Monetary Integration

CEMAC and UEMOA are already monetary unions in terms of having a single currency. This has been part of their structure from the outset.

The rest of the RECs have plans to become monetary unions within a span of 5-10 years.

Monetary union cannot be achieved overnight. As it implies deeper level of integration, greater efforts are required towards achieving a single market in each REC.

CEMAC and UEMOA are already monetary unions in terms of having a single currency. This has been part of their structure from the outset.

The rest of the RECs have plans to become monetary unions within a span of 5-10 years.

Monetary union cannot be achieved overnight. As it implies deeper level of integration, greater efforts are required towards achieving a single market in each REC.

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That implies a fully integrated market with total free mobility of people, labour, goods, services and capital.

The monetary union with a single currency would thereby reinforce the single market. One market needs one money.

In the context of the African Union, there are plans to establish in the not too distant future, the African Central Bank, the African Monetary Fund and the African Investment Bank.

MonetaryMonetary Integration (contd) Integration (contd)

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D. Conclusions D. Conclusions The empirical analysis shows strong evidence of the The empirical analysis shows strong evidence of the

convergence of macroeconomic stability indicators for convergence of macroeconomic stability indicators for SADC, COMESA, ECOWAS, CEMAC and UEMOASADC, COMESA, ECOWAS, CEMAC and UEMOA

  The income convergence analysis however indicates very The income convergence analysis however indicates very little evidence that the countries in the various RECs are little evidence that the countries in the various RECs are converging their capita incomes, except those in UEMOA converging their capita incomes, except those in UEMOA

The integration policies would have to address the lack or The integration policies would have to address the lack or slow pace of convergence in per capita incomes. Unless slow pace of convergence in per capita incomes. Unless there is a major structural shift, it will take decades for there is a major structural shift, it will take decades for most RECs economies to converge and thus attain the most RECs economies to converge and thus attain the expected outcomes of regional integration initiatives in expected outcomes of regional integration initiatives in Africa.Africa.

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Conclusions (contd)Conclusions (contd) An important stepping-stone to monetary

unification is monetary harmonization. But two factors make this process difficult

1. Africa has a host of local currencies, most of which are non-convertible within and across RECs. And different countries have different exchange rate regimes.The only exceptions are UEMOA and CEMAC, which form a single currency zone (CFA), and to some extent the CMA, where the rand is used side by side with domestic currencies

2. RECs need to redouble their efforts towards a single

currency. COMESA, for example, could build on the experience of the EAC, where the Kenyan, Tanzanian, and Ugandan shillings are now mutually convertible, paving the way for a common currency in the near future.

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Thank youThank you