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The CFA-Zone and the Common Monetary Area in Southern Africa

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The CFA-Zone and the Common Monetary Area in Southern Africa 8a. The Common Monetary Area in Southern Africa: A Typical South-South Coordination Project?1 Martina Metzger 1. Introductory Remarks Monetary coordination currently is en vogue in Africa. With the transformation of the OAU to the African Union and the launching of the initiative of the New Partnership for African Development (both in 2001) the old idea of a common African currency seems to be within reach. A common African currency and a common central bank for all AU member countries is set for 2021 (Masson/Pattillo, 2004; Masson/Milkewicz, 2003). According to NEPAD the transition process to monetary union in Africa is to be marked by the establishment of regional monetary unions for already existing integration projects. One of the prime candidates among existing integration schemes is the Common Monetary Area in Southern Africa (CMA) which is regarded as an unusually longstanding and successful monetary coordination project. It is based on a tripartite arrangement between South Africa, Lesotho and Swaziland, at that time known under the Rand Monetary Area, which already came into effect in 1974. From our point of view, to understand the functioning of the CMA and the outstanding role of the Republic of South Africa, we need to take into account the political and historical framework in which the Common Monetary Area has been set from the very beginning. Therefore, we will give a brief overview of what relations were like in the region of Southern Africa until the beginning of the 1990s (Section 2). Later, we will discuss the functioning of 1 Published in: Fritz; B., Metzger, M. (eds.), New Issues in Regional Monetary Coordination – Understanding North-South and South-South Arrangements, London: Palgrave, pp.147-164. 1 the CMA, including issues of institutions, interdependence and convergence (Section 3). Finally we will in the last section try to assess, on the basis of the typology of both north-south coordination (NSC) and south-south coordination (SSC) projects, whether the CMA can be regarded as a typical SSC. 2. Political and Historic Framework of the Common Monetary Area The Republic of South Africa was governed between 1948 and 1994 by the National Party, which not only implemented one of the most sophisticated and drastic racial segregation systems in its own territory, but carried out a harsh destabilization policy throughout Southern Africa and decisively influenced the region’s economic and political destiny.1 The UN Commission on Africa tried, for instance, to assess the direct costs in terms of GDP loss during the 1980s of the South African destabilization policy against its neighboring countries which were all members of the Southern African Development Coordination Conference. Estimated losses during the period 1980 through 1988, measured in relation to the 1988 GDP, ranged from 26 per cent for Tanzania to 550 per cent to 600 per cent for Angola and Mozambique (see also annex table 1 ‘GDP Loss in the SADCC Region’).2 Swaziland and Lesotho, as members of the CMA, were relatively little affected by direct costs. Lesotho is surrounded by South African territory and has depended heavily on South Africa for remittances by Lesotho workers in that country’s mining industry. Furthermore, one of its major export products is water, the main customer for which is South Africa. Swaziland is also a landlocked country, surrounded by South Africa on all sides but the northeast, where it has a common border with Mozambique. Swaziland was in the position of a buffer zone between South Africa and Mozambique, thereby realizing some transient gains e.g. in subsidies to encourage use of South African transport infrastructure instead of Mozambican 2 railways. Furthermore, Swaziland developed a processing industry, especially packaging and labeling, to camouflage South African exports and imports, which were targeted by a boycott and other measures. Lesotho and Swaziland became independent from Great Britain in 1966 and 1968, respectively. After a coup d’état, Lesotho had its first internationally accepted democratic elections in 1993, while Swaziland is the last absolutist monarchy in Africa, where King Mswati III appoints the prime minister and the members of the cabinet. Although Namibia was not formally a member, it was integrated in the CMA from the very beginning. South African troops had invaded Namibia during World War I and this status of occupation was maintained until 1990, when Namibia saw its first democratic elections ever and thereafter issued its own currency, the Namibian Dollar.3 3. The Functioning of the Common Monetary Area The South African pound already became legal tender in the so-called BLS-states (Botswana, Lesotho, Swaziland) in the 1920s, when the South African Reserve Bank was established. After World War II, South Africa dissociated itself from Great Britain and its policies in stages, culminating in the introduction of the South African rand (ZAR) and departure from the Commonwealth in 1961. After the independence of the BLS-states from Great Britain, negotiations between them and South Africa began which resulted in the first official agreement about the establishment of a Rand Monetary Area (RMA) in 1974. --- Insert Figure 1 --- Brief Overview of CMA history 3 Although Botswana participated in the negotiations, it opted out in favor of a managed floating of its currency, the pula. Since then however, Botswana has pegged the pula to a basket comprised of estimated 60 per cent to 70 per cent ZAR, which is the reason why it is often called a de-facto member of the current CMA (e.g. Grandes, 2003). Swaziland and Lesotho began to issue their own currencies, the lilangi and the loti, in 1974 and 1980 respectively. The CMA today formally consists of four countries, to which we will mainly refer: Lesotho, Swaziland, Namibia and South Africa. Concretely, the CMA arrangement covers the following features:4 Each of the four members has its own central bank, which is formally responsible for monetary policy within the respective country, and issues its own currency. Both Lesotho and Namibia have to back their currency issues by South African Rand assets. In order to maintain financial stability within the CMA, the South African Reserve Bank acts as a lender of last resort. In both Lesotho and Namibia the ZAR serves as legal tender; Swaziland abolished the legal status of the ZAR in 1986, although de facto it is still widely used. By contrast, none of the other currencies is legal tender in South Africa, nor are they commonly used within South Africa. A clearing system repatriates ZAR coins and notes circulating in the other member countries. Already in 1986, South Africa committed itself to making compensatory payments to CMA members in return for circulating the ZAR within their currency areas; therefore Lesotho and Namibia partly share the seigniorage of the ZAR; this does not apply to Swaziland. The loti of Lesotho and the Namibian dollar are all pegged at par to the ZAR; Swaziland abolished this commitment in 1986, but it is still valid de facto. 5 4 Within the CMA, there are no restrictions on capital movements; vis-à-vis the rest of the world, CMA members apply a common exchange control system, determined by the South African Department of Finance and administered by the South African Reserve Bank in cooperation with central banks of the other members. Member countries share a common pool of foreign exchange reserves, managed by the South Africa Reserve Bank and increasingly also managed by South African authorized dealers (commercial banks); central banks and authorized dealers of other member countries have free access to the foreign exchange market in South Africa. On request, the South Africa Reserve Bank will make the foreign exchange of the common pool available to other member countries. Lesotho, Namibia and Swaziland may hold additional foreign exchange themselves for direct and immediate needs; up to 35 per cent of this foreign exchange may be held in currencies other than the ZAR Institutions From the very beginning, the South African Reserve Bank (SARB) has enjoyed a close relationship with the central government, which can be characterized as relatively devoid of conflict. This refers not only to those policy areas, such as exchange and capital controls, which lie in the competence of the central government and for which the SARB is only the executive agency. It also applies to such core functions of the central bank as interest-rate policy and regulation of the domestic money and credit market. Although the SARB is autonomous with regard to the design of monetary policy,6 it has always seen itself as only one of several domestic macroeconomic actors, which is therefore an integral part of the overall structure of 5 domestic economic policy. Hence, the following characterization made almost forty years ago is still valid: ‘(T)he Bank enjoys “independence within the government rather than of the government”’7. The two governors of the SARB, which ruled the SARB after the abolition of the apartheid regime, declared their adherence to this political consensus. Chris Stals, governor of the SARB until 1999, stated that ‘(T)he central bank, vested with the right to create money, cannot be allowed to be a power supreme to the sovereign government of the country. Even monetary policy must in the end be subject to the overall macro-economic objectives of government.’8 While stressing that the power to spend money needed to be separated from the power to create money, Tito Mboweni, the current governor of the SARB, stressed that ‘(C)entral banks are powerful institutions. They are staffed and managed by a bunch of unelected officials and governors. The power of central banks permeates society as a whole – particularly as they determine the cost of money.’9 Therefore, he rejects the position that central banks were not accountable to government, parliament and even the people.
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