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SADC Customs Union or Monetary Union: Which way forward? By Clainos Chidoko Economics Lecturer: Great Zimbabwe University Faculty of Commerce: Department of Economics

The SADC Regional Indicative Strategic Development Plan (RISDP), which was adopted in 2003, advocates for the establishment of a Customs Union by 2010, a Common Market by 2015 and a Monetary Union by 2016. A customs union is an area consisting of two or more customs territories that agree to phase out all tariffs and other trade impediments among themselves. The members replace their tariffs against non-members by a single tariff generally referred to as a common external tariff.

Regional integration arrangements include the following stages in their order towards complete integration: free trade area (FTA), Customs Union (CU), Common Market (CM), Monetary Union (MU) and Economic Union (EU). While the customs union is a good move and the beginning of total regional integration, the bloc could harness more trade benefits by forming a monetary union straight away. Already the Customs Union is behind schedule. It is not entirely possible to by pass some stages but some stages can be carefully fast tracked. I understand there are other economic issues that need to be dealt with first, but these could fall into place once the members agree to launch total integration.

The Republic of South Africa once called for Southern African countries to use the rand as a common currency in their domestic and international transactions. This entails the emergence of a Monetary Union. What is a monetary union? What lessons can be drawn from the experiences of existing monetary unions in other regions? With these questions in mind I have tried to make a review of monetary unions in Sub-Saharan Africa, their benefits and costs, plus lessons that we can draw from their successes and failures. Should Southern Africa and indeed Zimbabwe embrace this idea and find themselves using a common currency? Instead of using the rand, SADC members can invent their own common currency and introduce it into the bloc. A Monetary Union is an area with a single currency controlled by a single Central Bank with individual countries losing autonomy in monetary and exchange rate policies. There are various kinds of monetary integration schemes and these can be classified into two categories, that is, full-fledged monetary union and incomplete monetary union. A full - fledged monetary union is the way towards policy coordination and economic convergence, which is directly implemented by replacing a number of monetary authorities with a single authority. In reality, full monetary unions are rare. Instead there are various monetary arrangements somehow removed from full monetary union. These arrangements include the following: limited and full currency convertibility, partial monetary union, parallel currency union, single common currency, full monetary union.

The process of monetary integration manifests itself in the intensified efforts of countries in particular regions to create an economic and monetary union as the highest monetary integration. Monetary union entails transfer of national monetary sovereignty in favour of a single currency, a single central bank and common monetary and exchange rate policies. The relinquishing of monetary sovereignty is required only in the case of a monetary union, as the highest form of monetary integration. Lower forms (incomplete monetary unions) allow a certain level of freedom or sovereignty enjoyed by the members of the union. They have their own currency and central banks with limited powers.

Support for monetary union results from two facts, which are freedom of capital movement and fixed exchange rates. The achievement of these goals requires a single currency area and single monetary authority. There are informal and formal monetary unions. An informal monetary union is where no agreement between the members has been signed in having it. It is characterized by the fact that a country chooses, as a goal of its monetary policy, to maintain an unchanging exchange rate between a foreign currency and the domestic one and directs its policy to achieve this objective. In formal monetary unions, members agree, on the basis of a treaty to a monetary union with fixed exchange rates between the national currencies of the members.

There are benefits of forming a monetary union. This can be addressed through the macroeconomic management of the economy. The main cost is the loss of an instrument of national demand management (domestic policy) and of the associated ability to adjust exchange rates. The costs are borne by the country relinquishing its national currency. The economic differences between the participating countries in many areas will also be a source of some costs when forming a monetary union because those differences will remain. Only the country’s ability to adopt its own monetary policy, such as being able to adjust exchange rates, can be considered a powerful instrument that can help to control macroeconomic disequilibria, that is demand shocks, inflation rate, unemployment rate and an inadequate fiscal system.

A benefit can be realized from the loss of nation’s currency in the move towards monetary union, in the form of increased macroeconomic efficiency. Common currency will eliminate transaction costs in the exchange of money. This reduces the scope for price discrimination between national markets. Also this system will eliminate the risk that accompanies uncertain future fluctuations in exchange rates. This means monetary union results in a reduction or elimination of the risk of realignment and devaluation included in the interest rates of most participating countries. This will of course promote general welfare gains.

Monetary unions have occurred in Sub-Saharan Africa since the 1920s, beginning with the formation of the East African Monetary Union. The longest surviving Monetary Union is the CFA Franc zone. The CFA franc zone has its origin from the economic and political relations between France and its African colonies. The members are each affiliated with one of two monetary unions; the West African Economic and Monetary Union (WAEMU), founded in 1994 to build on the foundation of the West African Monetary Union founded in 1973. The second monetary union is the Central Economic and Monetary Union.

Formerly known as the West African Monetary Union, the West African Economic Monetary Union (WAEMU) was founded in 1994 in response to the devaluation of the common currency, the CFA Franc. It came into effect after ratification by seven member countries. WAEMU has made notable progress in meeting its goal of developing a competitive common market based on the free movement of factors of production, goods and services. Members share a common currency, the CFA Franc with a regional central bank in Dakar and a regional development bank in Lome. Members have adopted a customs union and common external tariff, have harmonized indirect taxation and have initiated regional structural and sectoral policies.

The Central African Economic and Customs Union (CAECU / UDEAC) was founded through the Brazzaville Treaty of 1964 and became operational in January 1966. The six UDEAC leaders signed a treaty for the establishment of an Economic Monetary Community of Central Africa (CEMAC), which was to promote the process of sub-regional integration within the framework of an economic union and monetary union. Like any other union, its objectives were pooling of foreign reserves at French Treasury, common trade policies, free capital mobility, and convertibility of currencies into French Francs at fixed parity.

In order to hasten the realization of the various regional economic, political and social benefits, the Authority of Heads of State and Government of the West African sub-region agreed to the establishment of the Economic Community of West African States (ECOWAS) comprising 15 countries, in 1975. ECOWAS, in 1987, adopted ECOWAS Monetary Cooperation Programme (EMCP) with the specific objectives of improving and strengthening sub-regional payments systems under the West African Clearing House (now West African Monetary Agency – WAMA); introducing limited currency convertibility; establishing a single monetary zone, and eventually a common central bank and a single currency. The EMCP contained a set of macroeconomic convergence criteria which member countries were expected to observe prior to the emergence of the monetary union. However the pace of implementation of the EMCP, had not matched the expectations of the founding members. This led the authorities to formally launch and establish the second Monetary Zone, that is the West African Monetary Zone and approved a set of convergence criteria to be attained by member states before the commencement of the monetary union. The West African Monetary Institute was also established to undertake all preparatory work for the introduction of the single currency, and a common central bank. Southern African region already sustains a successful and long running monetary union, the Common Monetary Area, also known as the Rand Zone. The region’s leading economic organization, Southern African Development Community (SADC) has been opposed to joining the union, while the Common Market for East and Southern Africa (COMESA) favours it. However within the SADC itself, is the Common Monetary Area (CMA), composed of South Africa, Namibia, Swaziland and Lesotho. It is the region’s only currency area. Before independence Botswana, Lesotho and Swaziland used the South African Rand and there was free movement of capital among the states. The Rand Monetary Authority came into force in 1974 when Botswana opted out. The Common Monetary Authority later replaced the Rand Monetary Authority in 1986 with the signing of the Trilateral Monetary Agreement between South Africa, Swaziland and Lesotho. This agreement gave both Swaziland and Lesotho considerable power in determining their respective monetary policies although in reality not much was changed. The Multilateral Monetary Agreement in turn replaced the Trilateral Monetary Authority in 1992 when Namibia formally joined. South African Reserve Bank (SARB) plays a dominant role in monetary policy of each member country. Members share a common pool of foreign exchange reserves managed by the SARB.

Instituting a common currency among geographically related countries could be to reduce expected exchange rate fluctuation and uncertainty and thus lessen costs of foreign currency conversions. This can promote greater price stability under a flexible exchange rate system. Greater price stability can in turn lead to long term increased foreign investment, trade and growth. However despite all benefits the most obvious loss from a monetary union is the loss of autonomy and control over domestic and fiscal affairs. For instance the small members of the CMA have surrendered their monetary policy to the SARB. Ultimately, the best interest of South Africa may not necessarily be always in the interest of Common Monetary Authority.

The East African Monetary Union became operational in 1920, with the East African Shilling being a vital element in the unification of the three East African states, that include Kenya, Uganda and Tanzania. However, the monetary union of East Africa was only in operation during the colonial period. Its dissolution came barely five years after independence in 1966 when Tanzania, with the concurrence of Uganda announced the dissolution of East Africa common currency despite failed attempts to agree on the principles of corrective action. After the dissolution, the East African Community was established in 1967 with the aim of creating a common market, currency and ultimately a political federation.

The gains from a monetary union would accrue primarily in the form of increased macroeconomic efficiency. With specific references to monetary unions in Africa, there are several benefits that can be accrued; first, one great reward that monetary unions should drive for the region is low inflation, assured by a regional central bank that would be independent. Secondly there is improved fiscal prudence. Monetary unions can also force governments to become more fiscally prudent even though this might sometimes have political costs for sitting governments. Thirdly, there are lower transaction costs and higher trading volume. Monetary unions usually implement policies that help to foster intra - regional trade among its members. Fourthly, there will be effective allocation of resources. Monetary unions help to increase the certainty of relative prices. An increase in the relative prices helps to allocate resources more efficiently across the region. Lastly, there will be capital mobility and gains in trade. The reduction of exchange risk for investors across the sub-region is possible under common currency, and this can facilitate increased capital mobility. Also, gains from trade should result from both the reduction in exchange - rate uncertainty and the greater price transparency that the monetary union would bring across the region.

The single most obvious cost associated with monetary union is the participants’ loss of national sovereignty in the use of monetary instruments, such as the exchange rate. There would be gains at the regional level, however, since the participant countries would decide collectively on monetary policy. We expects monetary management at the regional level, with the national central banks coming under single regional umbrella, to result in better and more efficient use of available resources.

Another potential cost is related to the susceptibility of these economies to different shocks. Economies linked by a monetary union must have the same monetary policy, which is most necessarily appropriate in the face of very different shocks. A major source of shocks, especially for countries that export primary commodities, is the terms of trade. Large asymmetric terms of trade shocks are less likely among monetary union members that have diversified economies with similar structures. Also being a member of a monetary union may cost a country in terms of seigniorage revenue. This comes in as a result of a common currency for which no individual country has any control over it. Furthermore, the monetary policies will not be effective in the individual countries.

Monetary unions in the African continent in general suffer from implementation lapses including those due to weak governance. Most countries could not cope with loss of national sovereignty. Other factors include lack of adequate technical and management expertise, concerns about losing trade tax revenues and concerns about equitable growth and polarized industrial transformation within the region. This partly explains the laxity of most countries forming monetary unions and the emerging crisis in trying to sustain them.

Experience from the EU indicates that the existence of a number of financially stable economies with sound economic leadership is crucial for the sustenance of the union. The monetary history of the SSA countries does not portray this situation. Monetary unions in the region comprise a single dominant economy with a number of relatively smaller economies. As such the relatively smaller economies would feel disadvantaged in terms of sharing the benefits from the union. This is a threat to the sustainability of the union, for example South Africa in the rand zone.

The pattern of trade in SSA is largely external with bilateral flows between them lagging. Each individual country produces its own particular mix of primary commodity for export much more than engaging in intra-industry trade. This coupled with geographical and natural barriers limits programmes to build single markets as an important step towards monetary integration in the region. Changes in world oil prices would affect their economies differently.

A monetary union, through the use of a single currency can foster economic growth and attract foreign investment. However, there is the participants’ loss of national sovereignty in the use of monetary instruments, such as the exchange rate and the interest rate. Despite this, we find that more benefits accrue to member states than costs. The collapse and failure of most monetary unions in Africa has made Africa realize that the existence of financially stable economies within a monetary union is crucial for the sustenance of the union.

Taking into consideration the benefits associated with monetary unions, we find that the SADC countries can do better by adopting a single currency. I am quite aware that participating countries would have sacrificed their sovereignty in the use of monetary instruments, but the long run gains would accrue in the form of increased macroeconomic efficiency. The industry benefits, tourism expands, the markets for products widen and the general welfare of the population will be realized and hence economic development. However, let me hasten to say that we need not a ‘big bang’ approach to this, but we should carefully allow adjustments in the different sections of the economies to take place through our active initiative and involvement. Social, economic and political effects should be considered. Taking into consideration what is obtaining in the Zimbabwean economy as a result of the multi-currency system, we find that using a common currency in the region can bring even better economic results.

Adopting a single currency will be easier since many Southern African countries are already using the rand (note that I am not advocating for the use of the rand, but a single currency that may be agreed upon by the different monetary authorities or governments). The question, which may arise, is whether SADC countries will be able to meet the preconditions for integration at almost the same period. The move will help contribute significantly to the process of regional economic cooperation and integration. The enhanced macroeconomic stability will ensure some confidence in investors. This will then lead to economic growth and development.

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