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Economic Review November 2008

REGIONAL ECONOMIC INTEGRATION IN AFRICA: BENEFITS FOR The move towards regional economic integration in Africa continues to gain momentum. For instance, the recent implementation of the SADC free trade agreement marked an important step towards further regional unification in the SADC region. This has profound implications on the economies concerned such as Lesotho…………… other hand, African policy makers Introduction hope that regionalism can serve as a egional economic integration remedy for problems encountered by is the coming together of two underdeveloped markets in least and R or more economies through less developed economies. joint preferential trade agreements. Although the issue of regional integration has a long history INSIDE in Africa (way before attainment of 2. Money Laundering and economic independence in many countries), growth ...... recent interest in the formation of ………………………………… regional blocs has been rekindled by 3. Selected Monetary and Financial the successful launch of the Indicators………………………………….. European Monetary Union (EMU). Similarly, the African Union (AU) has, But a key question that remains is: as one of its top priorities, the what are the benefits and costs for establishment of an African Monetary countries participating in regional Union (AMU) by 2021. This goal economic blocs; do costs outweigh would be achieved via establishment benefits? of regional blocs, as a first step, which would at a later stage be Lesotho participates in three regional merged to form AMU. On the one economic blocs, namely, Southern hand, one of the key reasons to form African Customs Union (SACU), regional economic blocs in Africa is to Common Monetary Area (CMA) and counter possible marginalization of Southern African Development small economies by big ones. On the

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Community (SADC). Thus it is regional integration, countries can instructive to ask: what are the enhance their international bargaining benefits for Lesotho in taking part in power. Thus, regional integration can these regional arrangements? This contribute to economic growth. paper aims at providing a brief discussion on regional economic Regional Economic Integration integration in Africa, and in particular in Southern Africa to gauge the benefits accruing to Lesotho for participating in these Regional economic integration is at a regional arrangements. The benefits fairly advanced stage in Southern for Lesotho are assessed with Africa, with both the CMA and SACU reference to the abovementioned having been in existence for quite a regional economic blocs in Southern long period. SACU, the oldest Africa. Amongst the key milestones is customs union in the world, the recent implementation of the comprises , Lesotho, SADC free trade agreement which , Swaziland and . marked a crucial step towards deeper SACU has benefited its members economic integration in Southern tremendously over the years. Intra- Africa. In addition, SADC, through the SACU trade is high, allowing small formation of the Committee of Central members to enjoy high quality Bank Governors (CCBG), envisages imports. In addition, SACU revenue to have a common SADC Central from the common eternal tariff form a Bank in place by 2016. Therefore, it is large part of government revenue, important to also assess the expected usually more than 50 percent of total benefits for Lesotho in that respect. revenue in the LNS countries.

The CMA comprises all the SACU Why Regional Economic members excluding Botswana. The integration? currencies of the LNS countries are In discussing regional economic pegged one-for-one with the South integration, an appropriate and logical African currency, the rand. The CMA question would be: why is there so has a very long history as it was in much interest in regional integration, existence even prior to the or put differently, what is the establishment of the SARB in 1921, economic rationale behind regional although at that time the arrangement integration? The Economic was highly informal. Commission for Africa (ECA) (2004) summarizes the gains from regional The other regional economic bloc is integration as follows: first, it is often SADC, which comprises Angola, argued that regional integration Botswana, Democratic Republic of encourages competition among Congo (DRC), Lesotho, Madagascar, producers and also leads to gains in Malawi, Mauritius, Mozambique, economies of scale. Second, Swaziland, South Africa, Tanzania, integration would boost overall Zambia and Zimbabwe. SADC was investment by reducing distortions initially created with the goal of and enlarging markets. Third, through reducing economic dependence on

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SA during the apartheid era. endeavor to attain regional However, following the transformation integration. As figure 1 depicts SADC of the organization in 1992, the key aims at achieving a free trade area by goals of the organization were to 2008, a customs union by 2010, a achieve development and economic common market by 2015, a monetary growth, and to alleviate poverty union by 2016 and adoption of a through regional integration. SADC common currency in 2018. now follows a linear model in its

Figure 1

monetary union, all countries Are there Benefits for Lesotho? surrender control over their monetary As earlier highlighted, the benefits for and exchange rate policies to a Lesotho are assessed in relation to regional (common) central bank. the three economic blocs that Since decisions are Lesotho participates in; the CMA, to a larger extent determined solely SACU and SADC. by the South African Reserve Bank (SARB), other CMA members stand Discussion of Benefits under to lose because South African SACU and CMA monetary authorities undertake Under the CMA and SACU decisions that suit their own economic arrangements, the most important circumstances, not what obtains in benefit that Lesotho reaps is the bulk other CMA member countries. of imports of goods and services from However, there are some mitigating other members especially South factors in that, generally, the Africa, motivated by the one-to-one economies of CMA countries tend to exchange rate between member respond to external shocks in a countries. These imports have a similar manner. positive spillover effect on the rest of the economy. SA accounts for about The CMA countries have since 85 percent of LNS countries imports, recognized the fact that the benefits which are free from tariffs and of the CMA can be maximized by barriers to trade. Furthermore moving towards a fully fledged Lesotho benefits through importation monetary union. Under such an of the credible SA’s monetary policy. arrangement, SA would have to give However, it can be argued that since up control over monetary policy and the CMA is not a fully fledged this is likely to have positive effect on monetary union, Lesotho bears a cost Lesotho’s economy. The recent through lack of monetary policy shocks (both oil prices and drought) autonomy. Under a fully fledged bear testimony to the magnitude of

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the costs to the member economies, conversion of currencies by the as Lesotho cannot independently individual countries. However, for absorb the shocks. The other cost Lesotho to fully reap the benefits, it Lesotho is exposed to under the CMA would have to diversify its production arrangement is loss of seignorage base. revenue through co-circulation of the rand in the member countries. On trade integration, Lesotho will Although the SARB compensates the reap the following benefit from the CMA countries for the forgone FTA: Lesotho can acquire new seignorage, it is not yet established if markets, especially for manufactured the compensation fairly approximates goods in SADC. Moreover, given the forgone seignorage revenue. relatively cheap labour cost in Lesotho, goods from Lesotho are Discussion of Benefits under likely to be more price-competitive in SADC the SADC region. The market In discussing the benefits that creation would also increase Lesotho gets in the SADC region, employment prospects. However, reference it made to trade integration elimination of tariffs would imply a efforts in SADC, in particular, the FTA squeeze on tax revenue, more so that has been implemented recently. given that smaller economies such as Furthermore, the other important Lesotho rely heavily on customs economic integration that SADC revenue due to their limited sources envisages to achieve is establishment of revenue. Furthermore, the extent of of a monetary union in the SADC the benefit from the trade integration region. CCBG has already been efforts would depend on whether established to facilitate achievement trade creation is greater than trade of the goal. diversion.

A logical question to ask, in this Conclusion regard, is: what would be the benefits The paper attempts to examine for Lesotho from joining the regional economic integration efforts envisaged SADC monetary union? in Africa, and in particular to gauge There are several benefits that the benefits that Lesotho reaps from Lesotho can get from such a participating in the regional economic monetary union. First, a common blocs in Southern Africa. The paper central bank would be independent of further discusses the benefits, to government influence. This, in turn, Lesotho, that result from its would foster discipline on fiscal membership in CMA, SACU and SADC. It is found that the benefits policies or provide an ‘agency of that accrue to Lesotho through its restraint’ for them. Second, adopting a common currency reduces participation in these regional blocs, transactions costs in the region by and large, outweigh the costs. because trade no longer entails

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2. Money Laundering and Economic growth Introduction “washing” of dirty money through financial institutions. Thus funds or Poverty poses an enormous assets obtained or generated by challenge to many countries across criminal activity are moved or the globe, particularly those in the concealed to obscure their link with developing world like Lesotho. criminal acts. Purchases and sales of According to the 2006 Household goods and services at point of sale Budget Survey, there is an (POS) using cash bear no identity of improvement in poverty between the buyer or seller. As such, there is 1994/95 and 2002/03 in Lesotho. no audit trail of transactions with Nonetheless, the report indicates that suspicious customers in a case where poverty remains a major problem they do not operate bank accounts. because 50.2 percent of the households were below the poverty Money laundering erodes financial line in 2002/03. Consequently, the institutions, which are crucial for Government adopted a pro-poor economic growth. It diverts resources growth strategy. and encourages crime and corruption which impede economic growth and One of the crucial pillars of economic development. Tax evasion becomes growth is financial development. rampant due to under-reporting of Finance provides the funds that are income with a consequence of necessary for fostering robust reduced tax revenue. economic activity. However, the impact of financial development on The effects of money laundering can growth can be undermined by the be severely detrimental to the macro prevalence of money laundering. economy. For example, due to Thus anti-money laundering unpredictable changes in money legislation was put in place in Lesotho demand, money laundering poses a as an attempt to combat it. This huge threat to the soundness of the article discusses the role that money financial system, and contaminates laundering plays in retarding legal financial transactions. As a economic growth, as well as the repercussion of unanticipated cross- importance of putting in place anti- border transfers, severe increases in money laundering policies to volatility of international capital flows discourage it. may ensue. It can have a dampening effect on foreign direct investment if a Money laundering hinders capital country’s commercial and financial formation sectors are perceived to be driven by criminal activities. Money laundering is defined as any act or attempted act to conceal or Money Laundering and economic disguise the identity of illegally growth, and poverty obtained proceeds so that they appear to have originated from It has been argued in the foregoing legitimate sources. This is actually that money laundering hurts

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economic growth by undermining has been made in this article. The financial intermediation. If poverty developing world is attractive to responds to growth and changes in money laundering due to the weak income distribution then such growth regulatory framework. The adverse is pro-poor. Strong financial impact of this phenomenon warrants intermediation fosters robust attention. The Government of Lesotho economic growth, hence reduces has, by enacting anti money poverty. It is noteworthy that laundering laws, taken a first step in economic growth is a necessary but the right direction. It is important to: not a sufficient condition for poverty reduction. Economic growth  strengthen international co- accompanied by progressive operation on information distributional changes is fundamental exchange and law to poverty reduction. enforcement;  embrace proper mechanisms Money laundering may lead to for handling suspicious reports; formulation of inappropriate policies  encourage a compliance arising from errors of measurement in culture among financial macroeconomic statistics. Tax institutions, and to ensure that evasion precipitates enormous they put proper systems and revenue losses which directly reduce procedures in place; the pool of available resources,  encourage financial therefore, can undermine supervisors to apply bank government’s efforts to provide licensing procedures strictly, services, and finance programs that exchange information, and are geared to poverty reduction. It provide adequate training to also has the potential to introduce practitioners; market failure because businesses  increase public awareness of that fulfill their tax obligations face the threat from money unfair competition from those that do laundering; not.  enhance co-ordination between the multiple agencies Conclusion (national and international) involved and to improve the A brief expose of the erosive effects limited intelligence sharing. of money laundering on the economy .

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3. Selected Monetary and Financial Indicators

2008 July August Sept 1. Interest rates (Percent Per Annum) 1.1 Prime Lending rate 16.58 16.58 16.58 1.2 Prime Lending rate in RSA 15.50 15.50 15.50 1.3 Savings Deposit Rate 5.28 5.28 5.28 1.4 Interest rate Margin( 1.1 – 1.3) 11.30 11.30 11.30 1.5 Treasury Bill Yield (91-day) 9.94 9.94 10.01 2. Monetary Indicators (Million Maloti) 2.1 Broad Money (M2) 4337.04 4375.75 4378.56 2.2 Net Claims on Government by the Banking System -4677.78 -4346.04 -3939.21 2.3 Net Foreign Assets – Banking System 10189.05 10021.10 9891.51 2.4 CBL Net Foreign Assets 8007.13 7791.54 7766.18 2.5 Domestic Credit -3151.06 -2786.73 -2404.32 2.6 Reserve Money 572.17 581.73 723.49

3. Spot Loti/US$ Exchange Rate (Monthly Average) 7.6272 7.6680 8.0599

4. Inflation Rate (Annual Percentage Changes) 10.5 11.2 12.1 5. External Sector (Million Maloti) 2007 2008 QIV QI QII 5.1 Current Account Balance 328.65 507.48 824.12 5.2 Capital and Financial Account Balance -83.21 330.96 117.74 5.3 Reserves Assets -116.19 -774.19 -165.33 +These indicators refer to the end of period. Prime and deposit (savings) rates are averages of all commercial banks’ rates operating in Lesotho. The Statutory Liquidity Ratio in Lesotho is 25 percent of commercial banks’ short-term liabilities

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