Colin McCarthy, a tralac Associate, comments on Monetary integration in Africa (VI).

In the previous comments in this series a monetary union, characterised by a union central bank and a single currency, was taken as the format of monetary integration that African regional integration arrangements are aiming for. At the widest geographic level an example of such a union is the continent-wide African Monetary Union, an African Central Bank and a single currency by 2028 envisaged in the Abuja Treaty of 1991. The monetary union and the single currency intended for the Southern African Development Community (SADC) in 2016 and 2018, in turn, are an example of monetary union envisaged for a regional integration arrangement.

In the first comment the two existing monetary integration arrangements in Africa, the Common Monetary Area (CMA) in southern Africa and the CFA franc zone (consisting of two regional currency unions) were mentioned. It can be argued that the CMA provides the best prospects for first seeking and then expanding the membership of the monetary union. Therefore, in this, the final instalment in the series, brief attention is given to the transformation and expansion of the CMA as a driver of regional integration in SADC.

The CMA has South Africa, Lesotho, Namibia and Swaziland as member states. The arrangement operates in terms of the Multilateral Monetary Agreement (MMA) and three bilateral agreements between South Africa and Lesotho, Namibia and Swaziland (LNS) respectively. The South Africa rand, issued by the South African Reserve Bank (SARB), circulates as legal tender in all four member states, in LNS alongside each country’s national currency, issued by its central bank, which is legal tender only within the specific country. As travellers in the region will know the LNS currencies, although not legal tender in South Africa, are increasingly being accepted by traders in the South African border towns.

A review of the technicalities and legal aspects of the CMA’s operations falls outside the scope of this brief comment. Suffice it to note that the rand serves as the anchor currency in the area, with the currencies of LNS fully convertible into rand at par. The SARB is principal monetary authority and hence responsible for monetary policy in the area. An important facet of the CMS’s operation is the independence of the SARB, being one of the few central banks in the world that has its independence and primary objective of protecting the purchasing power of the currency it issues, enshrined in the Constitution of the country, which happens to be the largest and most developed economy in the region with a currency that can be regarded as Africa’s only hard currency. For LNS the loss of dependence in monetary and exchange rate policy is presumably compensated by the stability offered by an anchor to a stable and tradable currency, as well as the benefits of being integrated into the South African money and capital markets and the absence of exchange rate risk, both factors that favour cross-border investment.

Monetary union for the CMA will require two crucial developments. The first is the establishment of a union central bank and the second is the introduction of a single currency for the union. The transition to monetary union will take place in two phases.

During the first, the preparatory phase, the four national central banks will have to be prepared for their transformation into subordinate institutions, which for the SARB will be the most difficult exercise, including changes to the Constitution of South Africa. Simultaneously, the ground will have to be prepared for the establishment of an independent union central bank. This will require intensive negotiations between the member states, with perhaps the most sensitive issue being the question of voting rights at board level and in strategic operational committees such as a monetary policy committee. It is unlikely that South Africa will agree to an equal weight in voting rights for each member state. A fortunate product of transforming an existing monetary integration arrangement is that convergence of inflation rates and exchange rates will not be required of the member states during the preparatory phase. The countries involved already share a remarkable degree of convergence of inflation because of the CMA, with LNS currencies linked to the rand at par.

The preparatory phase will be followed by a transitional phase during which the national currencies will be withdrawn and the new union currency phased in. Simultaneously, monetary control functions will be transferred to the union central bank.

Once the monetary union has been established and is operating smoothly new members can join, provided that they meet the requirement of macro-economic stability and convergence. In the case of the CMA-turned-monetary-union the first candidate to join could be Botswana, who left the CMA (the Rand Monetary Area as it was then known) in 1976 to pursue its own independent monetary policy and exchange rate regime. In fact, with the pula so closely tracking the rand since the adoption of the crawling peg system in 2005, and with its inflation rate not far from those of the CMA member states, Botswana could imaginably join the current members of the CMA in establishing monetary union. SACU will then be a customs, excise and monetary union and hence the most advanced regional integration arrangement on the African continent, which within the spirit of variable geometry could become the nucleus of deeper and expanding integration within SADC.

Identifying these broad steps appears to portray transition to monetary union as a simple and easy process, and perhaps mere wishful thinking. There is no denying the fact that it will require difficult decisions and an excruciating process of negotiation and planning. The first hurdle might be the most pivotal one and that is a decision by LNS to sacrifice the national identity embodied in their own currencies and willingness by South Africa to forego a substantial slice of policy independence. South Africa is the dominating economy in the region and once the 2002 SACU Agreement is fully implemented and a regional central bank is in place, the country would have transferred a substantial chunk of policy sovereignty to supra-national regional institutions.

Given the current discourse in South Africa on the need for new thinking on trade and industrial policy, and the desire in some circles to have the mandate of the SARB reviewed to allow interest rate and exchange rate policies to encourage faster job-creating growth, it is difficult to imagine that this policy independence will easily be sacrificed. 
  
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