SADC: the case for a single currency

[Image] Martyn Davies says vested interests may stymie plans for a common currency.
(Image: Martyn Davies)

[Image]Rates of development in the Southern African Development Community countries vary greatly.
(Image: Chris Kirchhoff, MediaClubSouthAfrica.com )

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Dr Martyn Davies
  CEO, Frontier Advisory
  +27 11 447 8038.
Peter Draper
  Senior research fellow, SA Institute of    International Affairs
  +27 11 339 2021.
Lee-Roy Chetty
  PhD research fellow, University of Cape Town
 
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When former Reserve Bank governor Tito Mboweni quipped some years ago that Africa should have its own currency, the “afro”, he was only half joking. Plans for a single currency in the Southern African Development Community (SADC) to be achieved around 2016 are on the agenda, while the East African Community (EAC) anticipates a deadline of about 2023. In the west of the continent, the West African Economic and Monetary Union was established in 1994 to promote economic integration among countries that share the CFA franc as a common currency, and it has made inroads towards macroeconomic convergence. However, the West African Monetary Zone, six countries within the Economic Community of West African States, plans a rival unit, the eco, by 2015.

European integration, which culminated in the European Union (EU) and the euro zone, was driven after World War 2 by a desire to prevent that level of conflict ever again between neighbouring countries. But even that noble intention has not ensured harmonious collaboration – the euro has encountered serious problems and there are constant calls from both the left and the right for it to be discontinued. The endeavours in Africa towards a currency union seem to fly in the face of the euro’s woes.

Monetary union and a single currency are seen as the final steps on the path to optimal regional trade integration, and the benefits are easy to imagine. Among the advantages initially envisaged for the euro were that exchange-rate fluctuations and transaction costs would be eliminated, as money would no longer need to be exchanged; lower interest rates; equal pricing across borders; increased trade between countries; increased cross-border employment; expanding markets for business; financial market stability as stock exchanges would deal only in euros; better control of inflation; and pressure on states that wanted to retain their EU membership to improve their economies and encourage growth.

Though a customs union has existed in southern Africa since 1910 – it was established in 1910 between the Union of South Africa and the British High Commission Territories of Bechuanaland, Basutoland and Swaziland – SADC does not have historical ties to bind it in the same way that Europe does.

Economic survival

Some analysts, such as Dr Martyn Davies, the chief executive of Frontier Advisory, a company that provides investment advice on emerging markets, believe that though regional trade integration is imperative for SADC’s economic survival, monetary union in the style of the euro is not – and is in fact not possible given the inequality in the development of the countries in the region.

University of Cape Town academic Lee-Roy Chetty agrees it is an unrealistic goal, depending as it does on variables such as tax integration, political stability and border security in the bloc’s 15 member states. “Within this context, in my opinion the SADC region is not an optimal currency region (OCA) for a successful transition to a single currency model.”

An OCA is an area with similar levels of economic activity and competitiveness, where a free play of market forces can enable the removal of exchange rates. “The free play of market forces relates to variables such as homogeneity and convergence in economic structures, free movement of capital and labour, and an acceptable political structure within and outside each member state’s parameters,” he says.

Chetty adds that at its core, a single currency zone is not only an economic but also a political project: “It would require political unity and co-operation as well as consolidating countries into a regional alliance which would in theory increase productive efficiency and faster economic growth.”

Countries entering monetary union would necessarily lose control over interest and exchange rate policies. “Countries that form part of the SADC bloc are at inconsistent development stages of economic growth. For example, South Africa has significant interests in the SADC region and dominates the region economically. It accounts for 41% of SADC’s total trade and about 63% of SADC’s gross domestic product.”

For these reasons, says Chetty, the “one-size-fits-all” approach of a single currency is unrealistic.

Free trade area

Since 2008, SADC has operated a free trade area with phased-in tariff reductions, and 12 of the 15 member states are part of it. Those that remain outside are Angola, Democratic Republic of Congo and Seychelles, according to SADC data. The next target – planned for 2010 but not met – was a SADC customs union, an agreement of common external tariffs, and an external trade policy. The final target before monetary union would be a common market – the removal of all trade barriers between member countries; establishing common tariff and non-tariff barriers for importers; and allowing for free movement of labour, capital and services within SADC.

For successful monetary union to be implemented, most economists concur that there should be macroeconomic convergence; stability of the exchange rate systems; liberalised capital and current accounts; and the adoption of market-orientated approaches to the conduct of monetary policy. As customs union has not yet been achieved, SADC’s stated 2016 milestone for monetary union is unlikely to be met.

Davies believes a SADC currency union in the style of the euro zone will not be possible, not only because of economical and practical reasons, but also because of political factors: there would be a sense of concern from other member states regarding South Africa’s role, he points out. “Due to South Africa’s dominance in the region there is sometimes a sense that ‘South Africa is colonising us’. Any attempt to push for a single currency is likely to be met by political resistance and hostility from some other SADC governments.”

Peter Draper, a senior research fellow at the South African Institute of International Affairs, agrees: a crucial step towards achieving a single currency would be “major political will to yield sovereignty over monetary policy. It would also need to be clear who actually calls the shots, which in practice would have to be South Africa given its regional dominance and powerful institutions. Would the other countries (a) accept South African leadership; and (b) give up control over their monetary and fiscal policies? I doubt it.”

Stock exchange integration

A case in point is the JSE’s attempts in the past to integrate with regional stock exchanges to accomplish better economies of scale, trade off a single technological platform, and help companies seeking additional competition. The offer was rejected, says Davies, mainly for political reasons but also because of a lack of economic literacy on the part of decision-makers.

In SADC countries where the economy has been pegged to the US dollar – such as Zimbabwe – or where the local unit of exchange has been superseded by the dollar, he adds, there is little incentive to join a regional monetary union. When shopping or doing business in countries such as Mozambique and Democratic Republic of Congo, he says, the shopkeeper or businessman is bound to prefer to be paid in dollars rather than rand or the local currency.

It has also become clear in the euro zone that a surplus in one member nation inevitably means a deficit in another, and that the central bank cannot sustain the large borrowings required by the less better-off nations. In fact, says Draper, access to cheaper finance is what led to problems in the southern part of the euro zone “since the reduction in the cost of capital was squandered on unsuitable projects and expanding social welfare nets. Who is to say countries in our neck of the woods would not succumb to such temptations?”

That South Africa’s development and infrastructure are far more sophisticated than its neighbours is evident in the number of economic refugees coming to the country. And of the 12 functioning stock exchanges in Africa, the JSE accounts for approximately three-quarters of the market capitalisation.

“In addition, I have a deep concern about the future of the small states such as Namibia, Lesotho and Malawi,” says Davies. “With their demographics they are barely investable. Obviously, to counter economic regression in those countries, increased regional integration through trade makes sense. If we trade more among ourselves, investors will see us as a 285 million strong, integrated market” rather than a fragmented series of markets. But that does not mean adopting a single currency, he stresses. “Asia has successfully achieved growth without regional integration or monetary union.”

EAC benchmark

Davies is more upbeat about integration in East Africa through the EAC, however: the region has about 142 million people supported by a technocratic and pragmatic will. It is being driven by the efficient EAC secretary-general, Dr Richard Sezibera, who is good at deploying people to where they are needed. A well-established mercantilist Indian diaspora adds substance to the region, he adds, and especially the landlocked countries, such as Rwanda, are highly motivated to collaborate.

SADC is some way from this benchmark. “Unfortunately a number of the governments are not sufficiently driving the regional integration agenda,” says Davies. “There are often too many vested economic interests at border posts that obstruct freer trade.”

The recent outcome of the election in Zimbabwe demonstrates that there are be vastly divergent opinions in the region and that SADC cannot be relied on to provide a credible verdict. Agreement on basic democratic values and procedures would surely be a minimum requirement for a successful regional union.

The obstacles towards a common SADC currency appear to outweigh the proposition, but if the project was to succeed, says Draper, “each country would need to up its institutional game in order to influence regional decisions and prevent the zone from serving one or more member states’ interests to their own detriment”.

It is evident that SADC’s timeline for monetary union will need to be extended, and some way beyond 2016. Perhaps by that time the euro’s woes will have convinced the region, and maybe even the world, that a common currency zone is not preferable after all.