‘Monetary union requires hard work’
The 19-member COMESA should strengthen fiscal surveillance at regional and national levels to deepen convergence as a precursor to establishing a monetary union.
A study conducted by the African Development Bank (AfDB) at COMESA’s request proposes a roadmap for fiscal convergence.
The AfDB study recommends fiscal convergence as one way of bringing complementarity between trade and monetary integration as well as ensuring that regional convergence programmes reflect national level situations.
COMESA seeks to deepen trade integration and subsequently monetary and financial integration. While progress has been made, there are still challenges in the area of monetary and financial integration.
The AfDB says COMESA’s progress towards achieving macro-economic convergence, a key factor in advancing monetary integration, has been slow.
“Fiscal convergence is essential to COMESA’s macro-economic convergence programme, and is a bridge between monetary and trade integration programmes,” AfDB president, Dr Donald Kaberuka, notes in his foreword to the report.
The AfDB says COMESA still has a lot of ground to cover in the area of fiscal convergence, which is pivotal to macro-economic convergence.
“A major responsibility also lies with the national authorities to encourage national ownership of the multilateral fiscal surveillance framework, reinforce their national public finance management systems, and formulate their individual convergence programmes,” AfDB”s principal economist, Jian Zhang, says.
AfDB analysts point out that the benefits of a common monetary area and a single currency arise from the elimination of transaction costs.
Furthermore, if the introduction of the single currency is preceded by an effective regional financial integration, there will be further gains from economies of scale.
Benefits will accrue depending on the degree of intra-regional trade, the greater the labour mobility and greater degree of adjustment provided by fiscal tools.
Sceptics of monetary unions in Africa have argued that countries have an extremely limited degree of intra-regional trade, lack surplus national savings essential to stimulate intra-regional capital mobility and have narrow and shallow financial systems.
Analysts at AfDB say that monetary integration is a fusion of financial integration and real economy integration and its sustainability depends on close integration of members’ economies.
“Economic viability and sustainability of a monetary union depends upon close integration of members’ economies. Indeed, a monetary union is a fusion of two separate, but consistent, integration processes; financial integration and real integration.
“It should be noted that a monetary union is not an objective in itself but an instrument to achieve certain economic (and political) goals,” AfDB says.
A COMESA monetary union could be premised on regional financial integration, which links credit and capital markets of member countries, the AfDB says.
This would enhance and enlarge channels for monetary policy transmission, thereby enabling the common central bank to conduct its monetary policy more efficiently and across the union as a whole.
“Hence, there is a need for ensuring that financial integration progresses in tandem with real integration to underpin the viability of an eventual monetary union.”
The study also recommends that COMESA prescribe fiscal convergence criteria, which it says will ensure viability and sustainability of the monetary union.
This will also ensure that a member country does not outpace other members in terms of larger budget deficits and inflation rates and will protect member states from exposure to contagion effects of macro-economic instability from other members.
The analysts say this will help member states maintain their relative competitiveness within the monetary union.
But for COMESA to realise this dream it needs to have in place precise definitions, realistic quantitative targets, legal obligations on member countries to provide regular reports on their progress, AfDB advises.
The COMESA Secretariat will also need to be strengthened to carry out assessments and surveillance. Member states need to be incentivised or be sanctioned to meet the economic convergence criteria.
The framework for establishing the monetary area has to take into consideration the fact that most COMESA members are low-income countries, have limited export base, trade mostly with non-African countries and there is little intra-regional trade.
Most member countries possess limited financial and technical resources and are consequently aid dependent. Infrastructure is underdeveloped, a situation, which hampers market flexibility, while financial systems are narrow and shallow thereby inhibiting productivity and competitiveness.
AfDB says for most COMESA members, benefits from achieving fiscal convergence with other members are not immediately available or visible, whilst the costs of putting on the straight jacket of fiscal convergence are immediate, and possibly, painful.
“This calls for a surveillance mechanism that is not only preventive but also incentive based and promotion in nature, as well as includes a crisis management feature,” AfDB says.