Macro-economic convergence within the SADC region”- Why is it important?
SADC designed a 15-year strategic roadmap called Regional Indicative Strategic Development Plan (RISDP) that was approved in 2003 while the implementation began in 2005. The roadmap outlined among others the different stages of regional integration: starting with a Free Trade Area envisaged for 2008, a Customs Union (2010), a Common Market (2015), a Monetary Union by 2016 and a common currency by 2018.
However, SADC Member States recognised the fact that achieving the above stages of regional economic integration will be a challenge considering differences in the level of economic developments. In this regard, member states agreed to converge on a set of stability oriented macro-economic variables, such as inflation rates, budget deficits as well as public and publicly guaranteed debts.
The convergence towards these macro-economic targets reflects prudent macro-economic policies that are a pre-requisite for creating a Monetary Union and a single currency. The timeframe for achieving these higher levels of regional integration are currently being revised as part of the overall revision of the RISDP. However, a sound macro-economic environment is not only relevant for deeper regional integration, but it is also a factor for international investors’ confidence and hence in the best interest of each member State.
The importance of macro-economic convergence for deeper regional integration and a conducive investment climate is corroborated by its inclusion in the SADC Protocol on Finance and Investment.
By signing the MOU on Macroeconomic Convergence (which became Annex 2 to the Protocol), SADC Member States are committed to achieving a set of primary indicators, namely the rate of inflation at 5 percent by 2012, which is now changed to a band of 3 to 7 per cent, a budget deficit of less than 3 per cent in relation to GDP and a ratio of public and publicly guaranteed debts over GDP of not more than 60 per cent.
They further agreed to consider secondary indicators that include a current account balance; economic growth rate (of 7 per cent); an import cover of six months (foreign exchange reserves should be sufficient to cover imports for six months); Central Bank credit to Government of not more than five per cent from 2015 onwards of previous year’s tax revenue; and domestic savings and investment of each 30 per cent of GDP.
It is required that all Member States provide annual progress reports to the regional sub-committee on macro-economic convergence.
Furthermore, the three primary indictors are part of the annual monitoring and evaluation report that Member States have to submit to the SADC Secretariat.
The Secretariat then compiles a report for the Committee of Ministers responsible for Finance and Investment.
Moreover, Member States have committed themselves to establishing a Peer Review Panel to assess the progress made in respect of the macro-economic convergence criteria. Four countries volunteered in 2014 to be part of the pilot peer review project: Lesotho and Malawi were reviewed by a team consisting of officials from Angola and Namibia. Officials from the Bank of Namibia and the Ministry of Finance have formed the Namibian part of the review team.
The report was submitted to the reviewed countries beginning of 2015 and the verified report was presented at the regional Macro-economic Convergence sub-committee meeting in March.
The final draft reports will be presented at the next meetings of Senior Treasury Officials’ and Ministers’ Peer Review Panel scheduled for June 2015.
Namibia has done well during 2014 and achieved four of the five criteria used in the monitoring and evaluation report. The annual inflation rate averaged 5.4 per cent and public debts amounted to 27.8 per cent of GDP in 2014.
Namibia also submitted the required annual macro-economic convergence report for 2014 and participated in the Peer Review pilot programme. However, the country has missed the budget deficit target of 3 per cent, with an estimated deficit of 3.8 per cent in 2014.
But more efforts are required to meet the secondary indicator targets, such as import cover, economic growth rate, rate of investment and current account balance. For further information and relevant documents, please view our website – www.sadc-fip.gov.na.
* Mr Festus Nghifenwa is the SADC FIP Implementation Coordinator at the Ministry of Finance. He can be contacted for comments and further information by email: firstname.lastname@example.org. This article is the third in a series of 12 articles on the SADC Finance and Investment Protocol.