2009-11-04 tralac Newsletter

2009-11-04 tralac

News > Newsletters

Hotseat Comment

 Colin McCarthy

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

In the second installment in this series on monetary integration the role of money as a social instituion was discussed, explaining that the use of money as a means of payment (that also serve as a unit of account and a store of value) lowers the transaction cost of trade dramatically. This benefit can also exist in a region when a group of neighbouring states integrate their monetary systems, which is perhaps the principal reason why monetary integration is such a popular goal.

In considering monetary integration, especially in the African context, a distinction should be made between three models or examples.

Full monetary union (single currency)

The first model is full or complete monetary union and the adoption of a single currency, which is envisaged in the SADC roadmap as the final stage of regional integration. It is also the long term goal of the African Union. This model of complete monetary integration can be regarded as the aspirational model that feature in the discourse on African economic integration.

Full monetary union, as found in the euro zone of the European Union, is the ultimate model of monetary integration. Participating countries adopt a single currency as legal tender, which is issued by the region’s central bank. This central bank assumes responsibility for monetary policy, operating  with a single exchange rate of the regional currency vis-à-vis currencies of the rest of the world and a single interest rate regime.

The implication is clear: member states, in adopting a single currency issued and managed by a regional central bank, sacrifice policy independence with regard to two crucial macro-economic variables: the interest rate and the exchange rate

CFA franc Zone

The CFA franc was created in December 1945 when France ratified the Bretton Woods Agreement and as such represents a legacy in Africa of French colonialism. At the time the abbreviation CFA stood for Colonies françaises d’Afrique (French colonies of Africa) but currently it refers to the Communauté Financière Africaine (African Financial Community). The Zone is in fact two separate regions, each with its own currency and central bank. In West Africa there is the CFA franc issued by the central bank (Banque Centrale des États de l’Afrique de l’Ouest) of the eight-member West African Economic and Monetary Union (UEMOA) and in central Africa there is the CFA franc issued by the central bank (Banque des États de l’Afrique Centrale) of the six-member Economic and Monetary Community of Central Africa (CEMAC). The two currencies are effectively pegged through a shared peg to the euro at 655.957 CFA francs = 1 euro. France guarantees the convertibility of the CFA franc into euro (the French franc before 1999) at this exchange rate. The euro peg was established when European monetary union came about and was derived from the fixed exchange rate of 100 CFA francs = 1 French (new) franc = 0.152449 euro. Neither of the two regions’ currency is legal tender in the other region or in France.

Reserves for the two regions of the CFA franc zone are pooled at their respective central banks and attributed to each of the constituent member states, as is the CFA francs in circulation. Having a fixed peg limits the ability of the two central banks to have an independent monetary policy. Monetary management is determined by a ratio of foreign exchange reserves (of which 65 per cent is to be held with the French Treasury) against the short term liabilities of the central bank that has to be maintained. When the reserve ratio falls below 20 per cent for three consecutive months the central bank takes emergency measures to protect the exchange rate by increasing official interest rates and reducing refinancing ceilings.

Common Monetary Area (CMA)

In the case of the CFA franc the currencies of the two regions are linked at a fixed exchange rate to an anchor currency outside the region, the euro, in a monetary system supported by a non-member, France. The CMA, with South Africa, Lesotho Namibia and Swaziland as member states, integrate their monetary systems by using a currency of a member state, the South African rand, as anchor currency. The CMA operates in terms of a Multilateral Monetary Agreement (MMA) and bilateral agreements between South Africa and Lesotho, Namibia and Swaziland respectively.

Lesotho, Namibia and Swaziland (LNS) issue their own national currencies that circulate as legal tender in their respective territories (respectively the loti, Namibian dollar and the lilangeni), but they link their currencies at par to the rand, the currency of the larger and more developed economy, which also circulate as legal tender along side their own currencies. Within LNS, the respective national currencies and rand are convertible through authorised dealers. In practice all traders have a mix of  national currency and rand in their cash tills and are willing to provide change in either the national currency or rand. Although the national currencies are not legal tender in South Africa there is a growing tendency among traders in the border areas to accept the currency of the smaller countries.

The bilateral agreements of South Africa with Lesotho and Namibia require the central banks of the latter two countries to keep foreign reserves at least equal to their currency in circulation. Rand balances held in a Special Rand Deposit Account with the South African Reserve Bank (SARB) form part of their foreign reserves. This is not required by the Swaziland bilateral agreement but experience has been that the Central Bank of Swaziland maintains foreign reserves in excess of currency in circulation. LNS are effectively required to maintain foreign exchange control measures that are similar to those that apply in South Africa. However, they are responsible for authorising foreign transactions of local origin.

Although the central banks of LNS, since the introduction of their own currencies, have been responsible for their own monetary policies they have lost their ability to implement these policies independently of the monetary policy adopted by the SARB

The CMA is a unique hybrid of monetary integration that has evolved from a colonial regime that brought political independence to a number of territories that shared an integrated economy, which is dominated by South Africa. Trade integration was from early on accommodated through a formal customs union agreement, the Southern African Customs Union (SACU) consisting of Botswana, Lesotho, Namibia, South Africa and Swaziland.

Botswana was a member of the CMA, earlier known as the Rand Monetary Area (RMA) but established its own central bank and in 1976 introduced the pula as the sole legal tender in Botwana. The main reason for Botswana’s withdrawal from the RMA was to have the ability to formulate its own monetary policy and to adjust its exchange rate in response to shocks that affect the economy. The exchange rate of the pula is determined on the basis of a basket of currencies in which the rand carries the largest weight, hence allowing the pula to maintain a close link to the currency of the source of most of Botswana’s imports.

Conclusion

This rather long comment draws attention to the fact that monetary integration can take on different forms. For a group of neighbouring states to adopt a single currency issued by a regional central bank, which seems to be the continent’s preference, is not the only route to follow. Africa has two examples of alternative approaches, although it has to be recognised that their development history has been unique and rooted in colonial history. However, with the exception of South Africa in the CMA, all particpating member states sacrifice control over the interest rate and the exchange rate. In forthcoming installments this outcome will feature prominently.

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Special Features

Discussion Note:  Export Taxes

Sean Woolfrey, a tralac Researcher, discusses export taxes:  In October this year South Africa’s ferrochrome producers called on the government to help protect the local industry’s position as the global leader in ferrochrome production. The industry has faced declining global market share largely due to increased production in China. The irony is that Chinese production of ferrochrome is heavily dependent on imports of chromite ore – an important input in ferrochrome production – from South Africa. The local ferrochrome industry has thus called for government to impose a tax and quantitative restriction on exports of chromite ore in the hope that this will lower the cost of domestic production of ferrochrome, in turn making locally produced ferrochrome more internationally competitive. This would hopefully also address the idle production capacity that has resulted from South Africa’s declining market share.  Read more here...

Monitoring Trade and Climate Change

tralac is monitoring preparations for the United Nations Climate Change Conference taking place in Copenhagen, Denmark in December 2009. 


tralac Media Library

Weekly Customs, Excise, Tariff and Trade Remedy Summary Notification

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News

Namibia Meeting Ends With Trade Agreements
A cooperation agreement in the field of transport and infrastructure development has been signed by South Africa and Namibia.

Nissan SA's switch to Maputo port is purely based on lower charges
Nissan South Africa has switched its completely built up vehicle imports from Durban's port to Maputo to benefit from lower costs.

Doing Business Made Easy by AfDB Support
The one-stop shops have made a real difference to our community," says a small grocery shop owner in the northern city of Pemba, Issa Valigy Sungyahama, pointing proudly to her newly acquired business license that has been nicely framed and hung on the wall.

WTO says use of anti-dumping measures jumped in year to June
Anti-dumping measures against unfairly priced imports jumped by more than one third in the year to June, the World Trade Organisation said at the weekend. The figures suggested that governments had become more aggressive during the financial crisis in countering imports that they believed were unfairly competing with home products.

Beef for South Africa
Brazil is lobbying South Africa to lift a ban on beef and pork imports, which has been in place since the outbreak of foot-and-mouth disease (FMD) in Brazil in October 2005. “We hope to solve at least the beef embargo by year-end,” said the head of the trade section at the Brazilian embassy in Pretoria, Mari Carmen, at a recent Brazilian trade fair. Several countries have since lifted their embargoes fully or partially.

Success stories and drivers of CDM projects in sub-Saharan Africa
A UN case study of a CDM reforestation project in central Africa provides some valuable insights into two familiar obstacles in the carbon project development space. First, is the difficulty of establishing CDM projects in the afforestation and reforestation sector, and second, the barriers to getting any sort of carbon project up and running in Africa, a continent poorly represented in the CDM and voluntary carbon markets now worth hundreds of billions worldwide.

China maintains investment focus on Africa amid trying economic climate
The economic downturn notwithstanding, China is far from turning away from Africa, which has been one of its key investment areas in this decade. Despite the declines in China’s outbound direct investment (ODI), investment into African countries keeps growing at a rather fast pace with £345 million having been invested so far this year, marking a twofold increase from 2008, whilst China’s total ODI has plummeted 60% year on year during the first half of 2009.

EAC deal to facilitate jobs and trade
By the end of this financial year, it could become possible for a citizen of any of the East African Community member states to get employed in any of the five countries or set up a business.

African nations seeking united front on trade talks
African countries are drawing up a unified position this week to try to pry open the markets of developed countries ahead of a World Trade Organisation ministerial conference in Geneva on November 30.

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Events

Updated: tralac Annual Conference 2009

The tralac Annual Conference 2009 Report and audio recordings of speakers' presentations are now available.  Click here to access the Annual Conference 2009 page on tralac's website.

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Publications

Measuring the gains from currency union membership in southern Africa

New working paper:  Measuring the gains from currency union membership in southern Africa by Johan Fourie and María Santana-Gallego.  African countries have latched on to growing empirical evidence that creating a currency union may result in large trade gains. This is based on the belief that lower transaction costs would lead to large increases in intra-regional trade volumes, augmenting growth. Yet there is growing evidence that not all countries may benefit from entering a currency union. This paper is an attempt to measure the gains from trade that are realised when entering a currency union. Using a standard gravity framework, we find that countries that decide to give up their currency and adopt an existing one or create a new common currency area stand to benefit significantly from a shared currency. However, these benefits are greater for a select few and the gains in terms of trade will depend on how open the country is and the intensity of trade flows with the other members of the currency union.  Read more here...

Anti-dumping on TOFA: Hopping a country too far?

New working paper:  Anti-dumping on TOFA: Hopping a country too far? by Gustav Brink, a tralac Associate.  The circumvention of anti-dumping duties has given rise to significant discussion on the topic in the World Trade Organisation. At present the WTO Anti-Dumping Agreement does not contain any anti-circumvention provisions and it is up to each country to regulate the use thereof. South Africa’s Anti-Dumping Regulations provide for several different forms of anti-circumvention, including country hopping, i.e. where an importer switches supply from a producer in one country to a related producer in a third country as a result of the imposition of preliminary or definitive anti-dumping duties or the initiation of an investigation against the exporter in the first country. This is not recognised as circumvention by any other country.  Read more here...

Safeguards and trade remedies in the SADC and ESA Economic Partnership Agreements

New working paper:  Safeguards and trade remedies in the SADC and ESA Economic Partnership Agreements by Prof. Gerhard Erasmus, a tralac Associate.  This paper discusses the “Trade Defence Instruments” in the Economic Partnership Agreements (EPAs) currently being negotiated between the European Union (EU), on the one hand, and different configurations of ACP (African, Caribbean and Pacific) countries on the other. These “instruments” cover remedies against unfair trade practices (anti-dumping and countervailing measures) as well as safeguards. ACP concerns about infant industry protection, food security and agriculture are also on the agenda.   Read more here...

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AGOA.info

Data to August

Data for trade under AGOA is currently to August 2009, with September data due to be released from 13 November onwards. As a result of major declines in the value of exports from the largest traders Nigeria and Angola (-65% and -60% respectively), aggregate AGOA exports are down 61%.  Although each of the leading exporting countries under AGOA have seen a contraction in their US-bound exports this year, there are some notable examples within the Southern African and East African region where this is not the case. Lesotho (-4%), Kenya (-4%) and Swaziland's exports (-1%)  have remained relatively stable for the year to August, while Malawi has recorded a 118% increase thus far to US$ 45mn.

Other updated AGOA data sections include disaggregated bilateral trade profiles for each AGOA country individually (as well as within various regional configurations), aggregate bilateral trade, preferential trade under AGOA / GSP and sectoral data from AGOA-eligible countries by value and as a proportion of US imports, as well as sectoral “new AGOA” and “GSP AGOA” data. Textile data is available by value and by volume. Clothing export data to August 2009 shows exports of clothing are down 12% year-on-year (clothing exports made from third country fabrics are 9% lower in the current year).  Export data is available at this link .

The recently completed most recent quota period commenced in October 2008 and terminated in until September 2009. October 2009 should be published shortly (official release date is 13 November). Quota utilisation for the full year was 15.7%, and 30.5% under the LDC sub-quota (applicable to the use of third country fabrics). Follow the link to the data here.

Trade acronyms and terminology

Visit AGOA.info's alphabetically-ordered database of trade-related acronyms and terminology

Latest AGOA news

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