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Establishing a Monetary Institute for the Region as an Interim Step leading
to a Monetary Union
Committee of Central Bank Governors
Bank of Mauritius
April 2013
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The views expressed are those of the authors and do not necessarily represent those of the
members of the Committee of Central Bank Governors (CCBG) in the Southern African
Development Community (SADC). While every precaution is taken to ensure the accuracy of
information, the CCBG shall not be liable to any person for inaccurate information or opinions
contained herein. The authors are grateful to Mr Rundheersing Bheenick, Governor, Bank of
Mauritius, for his views.
Any queries should be directed to: N Kowlessur ([email protected]), K Hurynag
([email protected]), and K. Pitteea ([email protected]).
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1. Abstract
The aim of the study is to examine some pertinent issues in connection with the proposed
establishment of a Monetary Institute in the Southern African Development Community (SADC)
region as an interim step leading to a monetary union. The paper discusses the need for an
institution to drive the monetary integration agenda set out in the Regional Indicative Strategic
Development Plan (RISDP) and briefly highlights some important operational issues in
connection with the establishment of a SADC Monetary Institute (SMI) as well as its main
functions, the most important one being to undertake all the technical, policy, statistical,
institutional and legal preparations to attain the SADC Monetary Union. However, a detailed
discussion of the legal and operational frameworks of the SMI is beyond the scope of this paper.
More importantly, it is the submission of the authors that the process of monetary union in
SADC is not clear in terms of pace and direction in the light of recent international, continental
and regional integration efforts. The Committee of Central Bank Governors (CCBG) and other
stakeholders therefore need clarity from the highest political authority of SADC so that they can
be comfortable in their work and move forward the integration agenda in areas under their
purview.
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Overview
The paper is organised as follows:
Section 2 provides an introduction of the research paper which examines the establishment of a
Monetary Institute for the region as an interim step leading to a Monetary Union. Section 3
states the problem that the decision to set up a monetary institute in the SADC region is political
and that the SADC integration process is not clear in terms of where the region is heading.
Section 4 specifies the objectives of the study, which discusses the operational and functional
aspects of the proposed monetary institute in the SADC region and examines the challenges
being posed in the light of continental and regional integration initiatives. Section 5 covers the
literature review by providing an overview of the European Monetary Institute (EMI), the
COMESA (Common Market for Eastern and Southern Africa) Monetary Institute (CMI) and the
East Africa Monetary Institute (EAMI). It equally discusses the process of monetary union in
SADC in the context of the objectives set out in the RISDP and makes a brief assessment of the
status in this area. Section 6 briefly discusses the importance of setting up of a monetary
institute as a practical route adopted for attaining monetary union. The mandate, functions and
main operational issues pertaining to the proposed monetary institute are also examined in this
section. Section 7 underscores the lessons that SADC could learn from the Euro Sovereign Debt
crisis as it envisages to accelerate its integration programme. The draft Strategy for the creation
of the African Central Bank, as proposed by the AUC-AACB Joint Study Group, is considered
in Section 8, since it has important implications for SADC in terms of reviewing its convergence
criteria and harmonising its timeline with the Strategy. Section 9, which covers regional
integration initiatives summarises developments regarding regional payments system. In Section
10, the key issue of the scope of Tripartite Cooperation between COMESA, East Africa
Community (EAC) and SADC is examined and in particular, the principle of using the CMI as a
Tripartite Institute for the three regional economic communities. Concluding remarks and
recommendations are presented in Section 11.
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List of Abbreviations and Acronyms
AACB Association of African Central Banks
ACB African Central Bank
AU African Union
AUC African Union Commission
EAC East Africa Community
EAMI Eastern Africa Monetary Institute
EAMU Eastern Africa Monetary Union
ECB European Central Bank
EMI European Monetary Institute
EMU European Monetary Union
ESCB European System of Central Banks
EU European Union
CCBG Committee of Central Bank Governors
CFTA Continental Free Trade Area
COMESA Common Market for Eastern and Southern Africa
CMA Common Monetary Area
CMI COMESA Monetary Institute
FTA Free Trade Area
GDP Gross Domestic Product
HLEG High Level Expert Group
MTF Ministerial Task Force
REC Regional Economic Community
REPSS Regional Payment and Settlement System
RISDP Regional Indicative Strategic Development Plan
SADC Southern African Development Community
SIRESS SADC Integrated Regional Electronic Settlement System
SMI SADC Monetary Institute
WAMI West African Monetary Institute
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2. Introduction
The SADC is embarking on a journey towards regional integration which will culminate in the
formation of a monetary union, a single central bank and single currency. It is recognised that
the process will be long and painful, and thus Members States would not only have to exercise
patience but more importantly need to adopt a step-by-step approach given the recent
experiences of the European Union (EU). The study draws mainly from the experiences of the
EU, COMESA and the EAC and examines some pertinent issues that would inform the decision
relating to the establishment of the proposed SADC Monetary Institute (SMI).
3. Statement of Problem
The 1991 Abuja Treaty establishing the African Economic Community1 outlines six stages for
achieving an integrated economic and monetary zone for Africa that were set to be completed by
2028. The strategy for African integration is based on progressive integration of the activities of
the regional economic communities, which are regarded as building blocks for Africa. SADC
Member States intend to establish a Monetary Union by 2016 and a Single Central Bank and
Single Currency by 2018. Concurrently, a Tripartite Framework is being negotiated in Southern
and Eastern Africa with a view to widening and consolidating cross-cutting regional integration
processes. The decision to establish a Monetary Institute is political and is inextricably linked to
the SADC integration process, which is somewhat not clear in terms of where the region is
heading.
4. Objectives
It is expected that the study will apprise Governors as well as Heads of States and Government
of SADC Member States of the processes monetary integration entail, especially with regards to
the challenges stemming from recent international, continental and tripartite integration
initiatives. The study will provide an overview of the operational and functional aspects of the
proposed SADC Monetary Institute and underline the need for political decisions so as to move
forward the regional integration agenda in a meaningful manner.
5. Literature Review
5.1 The European Monetary Institute
Under the Maastricht Treaty, a special institution, the EMI, was set up to deal with many tasks
involved in preparing for European Economic and Monetary Union. It became operational on 1
1 which became effective in May 1994 after the required number of signatures
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January 1994. The EMI’s prime function was to develop the operational framework for an
efficient European System of Central Banks (ESCB), which comprises the European Central
Bank (ECB) and the national central banks. The EMI was expected to carry out its work within
a strict deadline and called on experts from the central banks of all Member States. The EMI had
to, inter alia, lay the technical and organisational foundations needed to enable the ESCB to
ensure price stability. In performing its tasks, the EMI worked towards making itself redundant,
since the EMI was liquidated once the ECB had been established.
The EU Member States were then endeavouring to achieve greater economic convergence,
which entailed enhanced coordination of monetary policies as well as the prohibition of
monetary financing of governments by central banks. The EMI carried out its coordination task
on the basis of analyses of overall economic developments in the various Member States and
monetary policies pursued by the respective national authorities (European Monetary Institute,
1997).
5.2 Common Market for Eastern and Southern Africa
The COMESA is a free trade area with 19 Member States stretching from Libya to Zimbabwe. It
was formed in December 1994 and is one of the pillars of the African Economic Community.
The Authority of Heads of State and Government in 1992 adopted the COMESA Monetary
Cooperation Programme towards the establishment of a Monetary Union in 2025. The date for
the achievement of the Monetary Union was later changed to 2018 by the COMESA Council of
Ministers in 2006. This programme is made of four stages and “has as objectives the primary
creation of a common area of monetary and financial system stability which will facilitate
integration of the financial markets in the region in particular and economic integration growth
in general. The achievement of monetary and financial system stability entails the attainment of
economic convergence brought about the removal of all macroeconomic disharmonies which
exist among the Members States as a result of the pursuit of divergent macroeconomic policies”
(www.comesa.int).
The 13th Meeting of the COMESA Council of Governors of Central Banks which was held in
Cairo, Egypt in October 2008, agreed to establish the COMESA Monetary Institute (CMI),
which would be responsible for the preparatory work for achieving Monetary Union in 2018.
This institute is hosted by the Central Bank of Kenya and became operational in March 2011.
The specific policy-oriented activities of the CMI are amongst others: (i) the design of an
appropriate Monetary Policy Framework; (ii) the design of an appropriate Exchange Rate
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Mechanism; (iii) harmonization of concepts, methodologies and statistical frameworks; (iv)
Payment System Development and appropriate design of a unified framework for integration
and interface through the Regional Payment and Settlement Systems (REPSS); (v) instituting
and monitoring of sensitization programmes; (vi) providing technical assistance and capacity
building support to National Central Banks.
5.3 The East African Community
The EAC consists of five countries Burundi, Kenya, Rwanda, Tanzania and Uganda. In 1999,
Kenya, Tanzania and Uganda signed the Treaty for the establishment of the EAC, which entered
into force in July 2000. In 2007, it was signed by Burundi and Rwanda. According to the Treaty,
the EAC should first form a customs union, then a common market and a monetary union, and
finally a political union. The Customs Union was formally completed in 2010. The process of
creating the Common Market begun in 2009, and it is not expected to be completed until 2015.
The East African Monetary Union (EAMU) protocol 2012 is yet to be signed and the date for
actual implementation of the common currency is uncertain. The EAC has a number of
established organs that are similar to those of EU, namely the Council of Ministers, East African
Legislative Assembly, East African Court of Justice and sectoral committees. Unlike the EU’s
supranational institutions, the EAC’s supranational institutions do not have legal rights to force
national governments to implement integration measures.
The legal framework includes the binding terms for the process leading to the establishment and
operation of EAMU in the form of a Monetary Union Protocol, which lays down the
foundations for EAMU, the Statutes of new monetary institutions, and the relevant Treaty
provisions. The institutional framework would consist of the East African Monetary Institute
(EAMI), an interim institution that should prepare analytically and technically for the Eastern
Africa Central Bank, which would be a transformation of EAMI. According to the EAC
Convergence criteria, the target date for the introduction and circulation of a single Eastern
Africa Currency is 2015.
5.4 Regional Indicative Strategic Development Plan
It is recalled that the RISDP is a roadmap of the policies and strategies that SADC has adopted
over the years to further regional integration. The ultimate objective of the RISDP is to deepen
the SADC integration agenda in order to accelerate poverty reduction and attain regional
integration and development goals. The RISDP considers trade and economic liberalization for
deeper integration and poverty eradication as one of its key catalytic intervention areas. In the
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trade, economic liberalization and development areas, the objectives of the RISDP are to
establish a:
Free Trade Area (FTA) by 2008
Customs Union by 2010
Common Market by 2015
Monetary Union by 2016
Regional Currency by 2018 (source: RISDP, 2003)
The first issue that has to be determined is the extent to which the RISDP is realistic, not only in
terms of actual delivery but also in terms of timelines set for economic and monetary union at
regional and continental level. SADC launched its FTA in August 2008. Twelve (12) of
SADC’s fifteen (15) Member States are currently part of the FTA while three, namely Angola,
DRC and Seychelles have still not joined. Intra-SADC trade has more than doubled between
2000 and 2009, rising from US$13 billion to US$32 billion, but trade with the rest of the world
is much higher than intra-SADC trade (source: www.sadc.int). The quality of infrastructure,
rules of origin, customs and border procedures and non-tariff barriers are the main obstacles
hindering a greater flow of goods within the region. In view of the divergent structure of
economies in SADC and differing productivity levels, the performance of SADC countries with
respect to macroeconomic convergence has been mixed.
The SADC Customs Union was not realised in 2010 as planned. The main challenge with the
establishment of a Customs Union in SADC is the issue of overlapping membership. Almost all
SADC Member States, with the exception of Angola and Mozambique, belong to existing
Customs Unions. The establishment of a SADC Customs Union has to be carefully considered
at this stage as the implications for the Customs Union are that SADC Member States may then
have to choose which Customs Union they want to belong to and this may have overall
implications for SADC. Technically, a Member State cannot belong to more than one Customs
Union because of the Common External Tariff.
In view of these challenges, the SADC Summit during its August 2010 Meeting reaffirmed its
commitment to establish a SADC Customs Union and recognised the need to establish synergies
between the processes to consolidate the SADC FTA, the Customs Union and the COMESA-
EAC-SADC Tripartite FTA. The SADC Summit endorsed the decision of the Ministerial Task
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Force to appoint a High Level Expert Group (HLEG) on the SADC Customs Union whose
mandate was to consolidate and refine previous technical work undertaken in order to reach
agreement and common understanding on key elements. These elements are the parameters,
benchmarks and timelines of a model customs union and its implementation modalities.
The Ministerial Task Force (MTF) on Regional Economic Integration considered the HLEG
report on the framework for a SADC Customs Union at their 25 November 2011 deliberations
that took place in Luanda, Angola. The report of the MTF was considered by the SADC Summit
in August 2012 as well as the overall approach to regional integration in SADC. The key issue
for consideration is to ensure that SADC adopts and implements a developmental approach to
integration to ensure that the region is able to address the critical constraints to development,
which are fundamentally the supply-side constraints.
The immediate priority for SADC is the consolidation of the FTA in terms of the agreed [15-
point action] plan matrix which focuses on the review of rules of origin, completion of tariff
phase down and removal of non-tariff barriers. It is important to ensure full implementation by
Member States of the FTA, while on the other hand, resolve the issue of overlapping
membership before progressing towards a SADC Customs Union.
The Regional Indicative Strategic Development Plan Desk Assessment 2005-2010 highlights the
key achievements, challenges and lessons learned in the implementation of the RISDP. While
the review indicates some significant progress for Trade, Industry, Finance and Investment
(TIFI) that has contributed to the region’s integration process, there are various other
outstanding issues to be addressed. A key finding is that the majority of the Member States did
not set aside resources for planning and implementation of RISDP programmes at national level,
as a result of which targets in many instances, have been missed. The SADC Secretariat, in
partnership with Member States is currently engaged in a review of the RISDP towards
reconfiguring the SADC roadmap to guide the regional integration process aligned to realistic,
measureable and deliverable milestones and timelines. The review process of the RISDP is
expected to be finalised in 2013 (Report of the Strategy Planning Session, December 2012).
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6. Methodology
6.1 Setting up of Monetary Institute to attain Monetary Union
The aim of achieving a monetary union is extremely challenging and requires a number of steps
which have to be taken with strong commitment and proper planning to ensure sound and
sustainable outcomes. In particular, the monetary union has to be prepared within a
comprehensive legal and institutional framework. Regional as well as international experiences
pertaining to monetary union point to the setting up of monetary institutes as interim institutions
for undertaking all preparatory work required to establish a single central bank and a single
currency. The proposed SMI is intended to be an interim body and its mission will be completed
once the common Central Bank is created.
Examples of other Monetary Institutes include the EMI, which was set up in January 1994 to
prepare for European Monetary Union. In Africa, the West African Monetary Institute
(WAMI), an interim institution, was set up in 2001 to undertake technical preparations for the
establishment of a common West African Central Bank and currently monitors the
macroeconomic convergence programme. The CMI was officially launched on 7 March 2011 at
the Kenya School for Monetary Studies in Nairobi. The aim of the institute is to fast-track the
realisation of the regional economic bloc’s Monetary Co-operation Programme, with the
ultimate objective of establishing the COMESA Monetary Union in the year 2018. The EAC is
also considering the establishment of the EAMI ‘with a view to making the preparations
necessary for the realisation of EAMU and the changeover to the single currency, with special
emphasis on the regulatory, operational and logistical framework necessary for the conduct of a
single monetary and exchange rate policy by the future East African Central Bank (source:
www.eac.int).
It is also noteworthy that the Draft Report of the Joint African Union Commission (AUC)/
Association of African Central Banks (AACB) Study Group on the Strategy for the Creation of
the African Central Bank has recommended the setting up of an interim body, the African
Monetary Institute, by 2014 to undertake all preparatory work leading to the ACB.
6.2 SADC Monetary Institute: Mandate, Functions and other Operational Issues
This section briefly examines some operational issues pertaining to the establishment of an
eventual SMI, underlining some of its key functions. It is also deemed important that the SMI
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works in close collaboration with the Committee of Central Bank Governors (CCBG) and
SADC structures to benefit from their expertise on areas pertinent to enhanced financial
integration. However, a detailed discussion of the legal and operational frameworks of the
Monetary Institute is beyond the scope of this paper.
6.2.1 Establishment and Operational Issues
Given its key role as a catalyst to the process of monetary integration in SADC, it is extremely
important that the SMI be established within a specific and appropriate institutional framework,
fully equipped to move forward the regional integration agenda through the formulation and
implementation of appropriate decisions and policy measures.
Once a decision is taken by the SADC Summit to go ahead with the setting up of the SMI, it is
proposed that a SMI Charter be prepared to set out amongst others the legal underpinnings,
organizational structure, operational issues and funding issues. The Charter would be examined
and endorsed by the CCBG, submitted to the SADC Committee of Finance Ministers and
eventually to SADC Summit for their consideration and endorsement. The Charter would enter
into force upon deposit of the Instrument of Acceptance by an agreed per cent of central banks.
The Charter could form an integral part of the Finance and Investment Protocol.
6.2.2 Purpose and Mandate
The main objective of the SMI would be to undertake all the technical, policy, statistical,
institutional and legal preparations towards attaining monetary integration in SADC and the
establishment of the SADC Central Bank. The mandate of the SMI should be clearly defined
for accountability purposes. The organisation would have to be entrusted with adequate powers
so that it could perform its various tasks efficiently, including coordination of national
monetary and exchange rate policies and monitoring and reporting on compliance by Member
States regarding their commitments.
6.2.3 Organisation and Budget
Monetary institutes are usually funded by central banks, which are its members. As Board
members, Governors would participate actively in the decision-making process. For practical
reasons, the Board of the SMI could also comprise a President as the Chairperson and a Vice-
President, both appointed preferably by SADC Summit to work on a full-time basis at the
Institute. Finally, as an autonomous body, the Institute should be able to determine its
organisational structure and recruit qualified and competent staff to deliver on its statutory tasks.
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While not strictly comparable, it could be interesting to consider the budgetary implications of
establishing and operating a Monetary Institute. A case in point is the recently established CMI.
The latter is located in the premises of the Kenya School of Monetary Studies. It has been
agreed that administration and finance services and information and communication technology
would be initially provided by the host Central Bank. For a staff comprising 4
economists/statisticians and support staff the initial cost in the first year of operations was
around US$926,510 to be equally shared amongst all COMESA Central Banks (amounting to
US$48,764 per Central Bank per year). (Source: Report of the Eighteenth Meeting of the
COMESA Committee of Central Bank Governors, 2012)
SADC Secretariat could consider enlisting the support of cooperating partners to finance partly
the operations of the SMI given the recurrent and capital expenditure that its set-up and
operation would entail.
6.2.4 Reporting Obligations
The SMI should be held accountable for its work and would thus be called upon to submit
regular reports to the CCBG, SADC Ministers responsible for Financial Matters, and Heads of
State or Government. The reports would cover its activities as well as the status on economic
convergence in SADC and policy decisions to advance the regional integration agenda.
6.2.5 Liquidation and transition to SADC Central Bank
The SMI would be liquidated once the SADC Central Bank has been established.
6.2.6 Functions of the Monetary Institute
The main functions of the SMI are outlined below:
(i) Undertake all the technical, policy, statistical, institutional and legal preparations to
attain the SADC Monetary Union.
(ii) Monitor the state of macroeconomic convergence of the Member States against the
prescribed convergence criteria.
(iii) Undertake work to harmonise concepts, methodologies and statistical frameworks.
(iv) Undertake work to harmonise and coordinate monetary and exchange rate policies and
operations in the run-up to monetary union.
(v) Study the issue of exchange rate parities within the SADC region and recommend the
appropriate exchange rate mechanism and parities for the existing currencies in the
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region. It would be responsible for determining the value of the common currency and
the conversion rates of national currencies into the common currency.
(vi) Recommend appropriate regulations for an integrated financial and capital market in the
region.
(vii) Harmonise banking regulations and accounting practices in all member countries
(viii) Undertake work and policies to develop a Regional Payments System.
(ix) Recommend policy frameworks for improving the investment climate and unlocking the
productive potential in the region.
(x) Undertake studies and prepare reports recommending the establishment of a common
SADC Central Bank.
(xi) Conduct a sensitization programme on the net benefits of a single currency in order to
create wide public support for the introduction of a common currency.
(xii) Advise on the sharing/ allocation/ distribution of seignorage revenue or how it would be
used.
(xiii) Provide a platform for cooperation between central banks in SADC, and with other
relevant structures in other regional/continental groupings with a view to establishing
conditions necessary for the achievement of monetary union.
6.2.7 Cooperation with CCBG and SADC Structures
Close collaboration between the SMI and CCBG and SADC structures is a necessary condition
for rapid and tangible progress on the monetary integration process. The experts of the SMI
would benefit from the technical expertise of the CCBG and other SADC structure in areas
critical for deeper monetary and financial integration. These areas include exchange control
policies, harmonisation of legal and operational frameworks, cross-border payment, clearing and
settlement systems, banking regulatory and supervisory matters and financial markets. For
instance, the general principles underpinning the Model Central Bank Law developed by the
CCBG, in particular the principles of operational independence of central banks as well as
standards of accountability and transparency could provide essential inputs for the establishment
of a SADC Central Bank.
In sum, the setting up of a Monetary Institute is the standard and practical route adopted before
attaining monetary union (Durevall, 2011). However, it is also vitally important to examine the
relevance of setting up the SADC Monetary Institute in the context of global, continental and
regional monetary integration initiatives and developments.
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7. Lessons from the Euro Area Sovereign Debt Crisis
The recent Euro area debt crisis should serve as a valuable lesson for Africa in general and
SADC in particular, on the pitfalls of rushing into a monetary union when the preconditions for
a sustained integration have not been achieved. Some extremely useful lessons to SADC, as it
envisages putting in place necessary tools and policies to enhance integration in the region are as
follows:
• Degree of convergence by Member States. Common monetary policy may not be
adequate if the monetary union members have structural and cyclical differences;
• A banking, fiscal and economic union would complete the existing monetary union
and prevent future debt crises;
• The importance of fiscal rules to enforce fiscal discipline;
• Appropriate mechanisms for burden sharing for countries affected by shocks are
important. This underlines the need for a lender of last resort.
In the light of the above lessons, a fundamental issue that would need to be resolved is whether
in Africa or SADC the benefits from monetary union would exceed the costs, given the
divergent structures of the economies and level of productivity, along with the current and
expected degree of economic and legal convergence in the years ahead. The level of trade
integration within SADC is relatively low which underlines the importance of boosting intra-
SADC regional trade to a minimum threshold before considering moving forward to a monetary
union. The issue becomes even more complicated, given the emerging consensus that for a
sustainable monetary union a movement towards financial, budgetary and political union is
inevitable, which implies the creation of new supranational bodies. Hence, going forward, the
objective of monetary union would entail not only the surrender of monetary sovereignty – in
terms of decisions to adjust interest and exchange rates – but also fiscal policy. How far are
SADC countries willing to surrender sovereignty on these key policies to a supranational body
would be a key determining factor for the pace of regional and eventually continental
integration.
A recent study by the Reserve Bank of Malawi on ‘Single Central Bank: Macroeconomic Costs
and Benefits for the Monetary Union’ (April 2013) has found that the creation of a single central
bank in SADC will confer benefits to some Member States while also resulting in greater
adjustment costs to others due to differing structures of the economies of Member States. It was
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also noted that the benefits are more likely to be reaped in the long run and that macroeconomic
convergence remains a critical element before a single regional central bank is established.
8. AUC-AACB Draft Strategy for the Creation of the African Central Bank
It is recalled that a Joint AUC-AACB Study Group was established in 2007 to propose a
common strategy and roadmap toward attaining monetary integration in Africa and the
establishment of the ACB. The Study Group came up with a Draft Report at the end of 2012
which has been submitted to all central banks in Africa for comments.
The Study Group proposes the adoption of a gradual, step-by-step approach which conforms to
the traditional and holistic stages leading to economic and monetary union, with the Regional
Economic Communities (REC) as the building blocks. The AACB African Monetary
Cooperation Programme timeline of 2021 for the setting up of the ACB would be harmonized
with the Abuja Treaty timeline of 2028. The recommended stages leading to the establishment
of the African Central Bank are as follows:
African Monetary Institute : 2014
Continental Free Trade Area : 2017
Continental Customs Union : 2019
Regional Central Banks/ Regional Currencies/ Fiscal Union : 2021
African Common Market : 2023
African Central Bank / African Single Currency /Continental Fiscal Union : 2028 Source: Draft Report on the Establishment of the African Central Bank by the Joint AUC-AACB Committee Study Group,
February 2013
There is a disparity between the timelines for the establishment of the SADC Central Bank
(2018) as per the RISDP and the date proposed by the Joint Study Group for the setting up of
the REC Central Banks, that is, 2021, which may require a realignment of the RISDP targets.
The CCBG could also develop a common position on the Draft Strategy for the Creation of the
African Central Bank that has been prepared by the Joint AUC-AACB Study Group. More
specifically, the CCBG and by extension the Southern Africa Sub-Region of the AACB could
form an opinion as to whether the timeframes proposed for setting up the REC Central Banks
and African Central Bank are realistic taking into consideration ground realities in Africa. The
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report of the Joint Study Group could be discussed at the next AACB Assembly meeting
scheduled in Mauritius in August 2013.
9. Regional Integration Initiatives
The Treaties establishing the COMESA, the EAC, and the SADC provide for the establishment
of a Monetary Union in each bloc. In the EAC integration process, the Monetary Union is in the
third phase before the final step of a political federation. The EAC target date for launching the
EAC Monetary Union is 2012 as decided at the Heads of State Summit in June/July 2007.
SADC intends to establish one in 2016 and the COMESA target date is 2018.
RECs such as COMESA, SADC and EAC have an important role to play as building blocks for
the broader goal of African Monetary Integration. However, going forward overlapping
memberships could be a serious obstacle to the process of regional and continental integration.
There are also serious and legitimate concerns over the duplication of some activities as the
RECs are progressing at different paces due to:
(a) slow ratification of protocols and reluctant implementation of agreed plans,
(b) socio-economic policy divergences, and
(c) limited national and regional capacities.
A modern and integrated payments system at regional level is an important infrastructure to
stimulate trade and investment within the bloc. Currently, there are initiatives in the three
groupings to develop separately a regional payments system, notwithstanding the issue of
overlapping membership and duplication of resources. While EAC and SADC are still working
on a model cross-border payments system, the REPSS of COMESA started operations in
October 2012.
EAC
• The EAC Payment and Settlement Systems is expected to provide a sound technological
platform aimed at enhancing payment and settlement systems in the EAC Partner States
as a prelude to the successful introduction of the East African Monetary Union and will
contribute to managing the convertibility of the EAC Partner States’ currencies in the
region.
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SADC
• The SADC Banking Association, which is an association of banking associations, has
been mandated to develop the various payment instruments that are expected to be
deployed within the region. Settlement of the inter-bank obligations arising from these
instruments will be made through SADC Integrated Regional Electronic Settlement
System (SIRESS). SADC has, within its boundaries, had an integrated area known as the
Common Monetary Area (CMA) for many years. The intention is to use the CMA as the
basis for the development of an integrated payments infrastructure for SADC as a whole.
• It is noted that the SIRESS is expected to start operations in July 2013, with the four
countries of the CMA. It will initially start with the South African Rand as the settlement
currency and thereafter move to a currency conversion system.
COMESA
• The COMESA REPSS was launched into live operations on 3 October 2012. Although
six countries, namely Mauritius, Egypt, Kenya, Sudan, Swaziland and Zambia have
closely collaborated towards its live operations, only Mauritius and Rwanda made it
through on the live date. The other countries are expected to join soon. In terms of speed
of the payment together with the low cost, REPSS has the potential to stimulate cross-
border trade in the COMESA region.
• COMESA authorities hold the view that REPSS has the potential to become a Tripartite
Payments System and could potentially serve as a continent-wide settlement system.
In view of limited resources, there is some merit in the argument that cross cutting issues, for
instance the development of a regional payments system, could to be addressed within the
Tripartite Framework.
10. COMESA-EAC-SADC Tripartite Framework
The Tripartite Framework is currently under negotiation with the aim of widening and
consolidating existing cross-cutting regional integration processes. Successful completion of
these discussions will bring together RECs such COMESA, SADC and the EAC with the aim of
creating a free market consisting of 26 countries with a population of about 600 million people
and a combined GDP of one trillion US dollars. The region makes up half of the African Union
(AU) in terms of membership, just over 58% in terms of contribution to GDP and 57% of the
total population of the African Union.
19
In the wake of the decision of the 18th Ordinary Session of the Summit of the AU that was held
from 29 to 30 January 2012 in Addis Ababa, Ethiopia on the theme Boosting Intra-African
Trade, discussions are on-going to establish the Tripartite Free Trade area by 2014, preceding
the establishment of the Continental Free Trade Area (CFTA) by 2017.
10.1 Considering the COMESA Monetary Institute as a Tripartite Institute
At its first meeting in Lusaka, Zambia on 13 July 2011, the Joint Meeting of COMESA
Ministers of Finance and Central Bank Governors approved the principle of using the COMESA
Monetary Institute as the Tripartite Institute for the three RECs that is, COMESA, EAC and
SADC. With the CMI having been established and already operational, and with a view to
avoiding duplication of resources stemming from overlapping memberships, efforts could be
coordinated through a single Monetary Institute.
It is to be noted that the COMESA-EAC-SADC Summit which was held on 20th October 2008
in Kampala, Uganda under the theme ‘Deepening COMESA-EAC-SADC Integration’, has re-
emphasized that the three RECs should harmonise their activities. According to the ‘Final
Communiqué of the Joint COMESA-EAC-SADC Heads of State and Government Tripartite
Summit’ meeting, the Tripartite Summit agreed on: “a programme of harmonisation of trading
arrangements amongst the three RECs, free movement of people, joint implementation of inter-
regional infrastructure programmes as well as institutional arrangements on the basis of which
the three RECs would foster cooperation, given the challenge of multiple membership....”
The Tripartite Summit directed the three RECs “to enhance cooperation and coordination in the
areas of competition, financial and payments systems, capital markets and commodity
exchange.....”
The Tripartite Summit further directed the three RECs “to develop a formal institutional and
legal framework for joint cooperation and implementation of agreed programs amongst the
three RECs…”
In view of the above decisions of the Tripartite Summit which aim at harmonisation of efforts of
the three RECs, the next logical step could be to consider using the CMI as a Tripartite
Monetary Institute. The Institute, which has already started operations, could potentially
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undertake the technical, policy, statistical, legal and institutional preparatory work leading to the
creation a Monetary Union at a Tripartite level.
It is worth highlighting that COMESA has already undertaken a study on the utilization of CMI
as the Tripartite Monetary Institute for the three RECs. The findings and recommendations of
the study on the way forward will first be submitted to Senior Officials of the Ministries of
Finance and Central Banks of the three RECs, prior to presentation to a Tripartite Task Force.
Source: Background Document circulated by CMI, 2011, on ‘Operations of the COMESA
Monetary Institute and its Potential to become a Tripartite Monetary Institute.’
11. Conclusions and Recommendations
As has been observed from the experience of the EMU, forming a monetary union is a complex
project, and there are non-negligible risks of failure. Therefore, it would be necessary to ensure
that the pre-conditions for forming a monetary union are adequate. This entails ensuring that the
economic, political, and institutional requirements are in place, since benefits are likely to be
less visible than short-run costs (Durevall, 2011).
Establishing a Monetary Union in the SADC region is a key milestone in the drive for deeper
integration in SADC. The RISDP implementation framework identified 2018 as the target for
the SADC Central Bank and SADC Single Currency. However, SADC Member States have not
been able to move from the FTA stage to the Customs Union mainly due to multiple
memberships to regional blocs, which entail important delays in achieving other integration
milestones.
SADC Member States are committed to the Abuja Treaty of 1991, which makes the case for
African integration first at sub-regional level, and then at continental level. SADC is also
committed to the resolution of the African Union Summit held in Banjul, Gambia in 2006,
which directed the AUC and the RECs to harmonize and coordinate policies and programmes of
RECs as important strategies for rationalization, and put in place mechanisms to facilitate the
process of harmonization and coordination within and among the RECs. The harmonization and
rationalization of RECs is also underpinned by the Tripartite Agreement approved by the
Tripartite Summit.
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In the wake of these continental and tripartite integration initiatives, there is much confusion in
the minds of central bankers, policy makers, the broader trade and investment community and
the public at large regarding where the region is heading in its integration objectives. Governors
and other stakeholders need clarity from Finance Ministers and Heads of States and
Governments on the direction of the SADC integration agenda so that they are more
comfortable in their work and move forward the integration agenda in areas under their purview.
The SADC integration process could evolve as follows:
1. SADC moves forward its integration agenda in line with the objectives of the RISDP,
culminating in the establishment of the SADC Central Bank in 2018 or a future date. In such a
case, there is need for a political decision to set up the SADC Monetary Institute to undertake all
technical, institutional and legal preparations in view of the SADC monetary union. The CCBG
could be mandated to drive the SMI project.
2. The other option for SADC is to focus its efforts and resources to attain monetary union
in a unified COMESA-EAC-SADC REC in line with the resolution of the first Tripartite
Summit that “the three RECs should immediately start working towards a merger into a single
REC with the objective of fast-tracking the attainment of the African Economic Community”. In
this case, the CMI could be considered as the Tripartite Monetary Institute for the COMESA-
EAC-SADC Regional Economic Community.
Presently, a developmental approach to the Tripartite Integration process anchored on three
pillars namely trade, infrastructure and industrial development is emphasised. If the intention is
to move towards a single COMESA-EAC-SADC regional bloc, then there is a strong case to
broaden tripartite cooperation to monetary and financial integration. It is observed that the
RISDP Desk Assessment 2005-2010 underlined the need to increase resources, both financial
and human, for SADC-COMESA-EAC Tripartite Cooperation to fulfill the greater than
anticipated potential of the Tripartite arrangement to tackle constraints impeding the speedy
attainment of deeper regional integration.
In sum, there is an urgent need for political decisions to shed light on the SADC integration
process, going forward. The decision to set up the SMI is also political and is inextricably linked
to the SADC integration agenda.
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It is accordingly recommended that:
(a) Governors be more vocal in expressing their concerns about the lack of clarity on the
regional integration agenda.
(b) The CCBG could consider preparing a comprehensive Position Paper on this complex
issue for the consideration of SADC Heads of State and Government through the Committee of
Finance Ministers. Alternatively, with a view to proceeding more rapidly, the CCBG could
consider requesting Governors to directly sensitize their respective Finance Ministers and Heads
of State and Government on the need for appropriate decisions to clarify the SADC integration
process.
(c) The CCBG could consider aligning its macroeconomic convergence criteria with the
African Monetary and Cooperation Programme put in place by the AACB. The CCBG could
support a surveillance mechanism which could ensure tangible progress towards
macroeconomic convergence within and across regions.
(d) Pending decisions at the political level to throw light on the SADC integration process,
the CCBG Macroeconomic Subcommittee is of the view that the establishment of the SADC
Monetary Institute is not feasible at this stage. The CCBG could consider setting up a ‘Learning
Institute’ to conduct studies and look at harmonisation of monetary policies. The CCBG
Secretariat could be utilised for this purpose, provided it is restructured and adequately staffed.
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Annex 1: Overlapping Regional Membership
* Madagascar is temporarily suspended from the SADC
24
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