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Is SACU Ready for a Monetary Union?

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Is SACU Ready for a Monetary Union? OCCASIONAL PAPER NO 1 4 3 Economic Diplomacy Programme A p r i l 2 0 1 3 Is SACU Ready for a Monetary Union? Hilary Patroba & Morisho Nene s ir a f f A l a n o ti a rn e nt f I o te tu sti n In rica . th Af hts Sou sig al in Glob African perspectives. About SAIIA The South African Institute of International Affairs (SAIIA) has a long and proud record as South Africa’s premier research institute on international issues. It is an independent, non-government think-tank whose key strategic objectives are to make effective input into public policy, and to encourage wider and more informed debate on international affairs with particular emphasis on African issues and concerns. It is both a centre for research excellence and a home for stimulating public engagement. SAIIA’s occasional papers present topical, incisive analyses, offering a variety of perspectives on key policy issues in Africa and beyond. Core public policy research themes covered by SAIIA include good governance and democracy; economic policymaking; international security and peace; and new global challenges such as food security, global governance reform and the environment. Please consult our website www.saiia.org.za for further information about SAIIA’s work. A b o u t t h e e C o N o M I C D I P L o M A C Y P r o g r amm e SAIIA’s Economic Diplomacy (EDIP) Programme focuses on the position of Africa in the global economy, primarily at regional, but also at continental and multilateral levels. Trade and investment policies are critical for addressing the development challenges of Africa and achieving sustainable economic growth for the region. EDIP’s work is broadly divided into three streams. (1) Research on global economic governance in order to understand the broader impact on the region and identifying options for Africa in its participation in the international financial system. (2) Issues analysis to unpack key multilateral (World Trade Organization), regional and bilateral trade negotiations. It also considers unilateral trade policy issues lying outside of the reciprocal trade negotiations arena as well as the implications of regional economic integration in Southern Africa and beyond. (3) Exploration of linkages between traditional trade policy debates and other sustainable development issues, such as climate change, investment, energy and food security. SAIIA gratefully acknowledges the Swedish International Development Cooperation Agency, the Danish International Development Agency, the UK Department for International Development and the Swiss Development Corporation, which generously support the EDIP Programme. Programme head: Catherine Grant, [email protected] © SAIIA April 2013 All rights are reserved. No part of this publication may be reproduced or utilised in any form by any means, electronic or mechanical, including photocopying and recording, or by any information or storage and retrieval system, without permission in writing from the publisher. Opinions expressed are the responsibility of the individual authors and not of SAIIA. Please note that all currencies are in US$ unless otherwise indicated. A b S t r A C t Attaining a monetary union is an ambition for most African regional economic communities. Although studies have been undertaken on the costs and benefits of monetary unions, there has been little focus on the viability of a Common Monetary Area for member states of the South African Customs Union (SACU). The paper seeks to determine the challenges SACU may face in working towards achieving a monetary union objective. Given that SACU by itself has no criteria for evaluating macroeconomic convergence – a key prerequisite for realising a monetary union – the paper uses criteria formulated by the Southern African Development Community to answer this fundamental question. The study finds that it would be beneficial for SACU to establish a monetary union. In such a case, the South African Reserve Bank could continue formulating a monetary policy for a possible SACU monetary union. A key challenge in obtaining this goal is the disparity across SACU member states and their poor macroeconomic performance over the years. Further studies would help to provide deeper insight on SACU’s readiness for a monetary union. These include a cost- and-benefit analysis of the possibility of a monetary union using the conventional criteria of optimal currency areas; and further statistical tests on the significance of the marginal macroeconomic convergence so far realised within SACU. A b o u t t h e A u t h o r S Hilary Patroba has a Master’s Degree in Economics from the University of Nairobi. Patroba was a research assistant at the South African Insitiute of International Affairs and the European Centre for Development Policy Management in Maastricht for six months respectively in 2011. His research interests include trade and development; business cycles; health economics and related issues; and BRICS in Africa. Morisho Mwana Biningo Nene is currently undertaking his PhD in economic geography at the Bayreuth University in Germany. His areas of expertise are development economics, with a particular interest in poverty analysis and international trade. He is a junior lecturer at Kigali Independent University and the Catholic University of Bukavu in the Democratic Republic of Congo. ECONOMIC DIPLOMACY PROGRAMME A b b r e v ia t I o ns and A C r o nyms ASEAN Association of Southeast Asian Nations BCEAO Central Bank of West African States (La Banque Centrale des Etats de l’Afrique de l’Ouest) BEAC Bank of Central African States (Banque des États de l’Afrique Centrale) BNLS Botswana, Namibia, Lesotho and Swaziland CEMAC Central African Economic and Monetary Community CFA African Financial Community (Communauté Financière Africaine) CMA Common Monetary Area DRC Democratic Republic of Congo EAC East African Community EACB East Africa Central Bank EAMU East African Monetary Union ECA Economic Commission for Africa ECB European Central Bank ECDPM European Centre for Development Policy Management EMU European Monetary Union GDP gross domestic product GIIPS Greece, Ireland, Italy, Portugal and Spain IMF International Monetary Fund REC regional economic community RMA Rand Monetary Area SACU South African Customs Union SADC Southern African Development Community SARB South African Reserve Bank WAEMU West African Economic and Monetary Union SAIIA OCCASIONAL PAPER NUMBER 143 4 IS SACU READY FOR A MONETARY UNION? IN t r o D u C t I o N s regional economic communities (RECs) strive to deepen their level of integration, Aan increasing number are considering forming a monetary union.1 Of the 14 RECs that existed in 2001, nine have expressed the objective of attaining a full economic union (monetary and fiscal integration).2 In Latin America the Mercosur countries,3 the Andean Community4 and the Central American Common Market countries5 have held informal discussions on their monetary union ambitions. Similar intentions have been voiced within the Caribbean Community (CARICOM)6 for a Caribbean single currency and a proposed ‘Amero’ or NAFTA dollar in North America,7 while the Association of Southeast Asian Nations (ASEAN) has conducted a feasibility study on a common ASEAN currency. After a trial period of several years, in 2010 the Gulf Cooperation Council launched a new plan for a currency area, to be called the Gulf dinar.8 Of course, the European Monetary Union (EMU) has always been a prime example of reference for monetary unions, given its unprecedented scope and success. In the Southern African context, the Southern African Development Community (SADC)9 has established a framework for outlining procedures and milestones that need to be realised for achieving the necessary macroeconomic convergence for a unified Common Monetary Area (CMA). This form of monetary union is already active in the Southern African Customs Union (SACU), which maintains national currencies but has a unified monetary policy that is pegged to a regional anchor currency. Studies have been conducted on the benefits of a monetary union and the use of currency areas in Africa, but little work has been done on the readiness of SACU for a monetary union, assuming it decided to upgrade the CMA. The paper seeks to contribute to filling that knowledge gap by identifying challenges or hurdles SACU may face in moving towards a monetary union. Key to this is the question of convergence. Monetary unions limit the capacity of individual states to manage their own financial affairs by centralising monetary policy, and as such a union without convergence can give rise to inappropriate policies and expose countries to damaging idiosyncratic shocks. The paper begins with a review of the CMA theoretical framework, and a practising example of this in the form of SACU. It then analyses the possible costs and benefits that a monetary union could offer compared with a CMA. The question of the state of convergence between member states will be identified as a key determinant of the benefits of a monetary union, with this fact demonstrated by comparative case studies of EMU and the African Financial Community (CFA). The paper examines the level of convergence within SACU, and therefore its preparedness for a monetary union, before offering its final conclusions and policy recommendations. C o MM o N M o N e t A r Y A r e A F r AM e W o r K The perceived need to fast-track regional integration has motivated a proliferation of RECs. Although RECs help to facilitate integration, they also set limits on the extent of integration. Just as free trade agreements often maintain selective barriers to trade, monetary arrangements often stop short of a full currency union. In the case of SACU, the SAIIA OCCASIONAL PAPER NUMBER 143 5 ECONOMIC DIPLOMACY PROGRAMME point of compromise is the freely transferrable, pegged-currency regime of a CMA.
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