Time to Debate African Monetary Union




With a land mass of over 30 million square kilometers, Africa is as big as India, China the US and most of Europe combined. Betrayed by a Mercator map projection, the common view of the size of the continent has been diminished, pretty much the same way as other characteristics of the continent.

When we realise the Democratic Republic of Congo (DRC) alone is about half the size of the European Union, we could even pretend that at least that much territory is already integrated within the continent. However, the reality is that even in one single country, national integration is a challenge. Just ten years ago, DRC had a public budget smaller than Brussels. Basically, the point is: Africa has a long way to go!

The reality of integration in every region and corner of the planet is a tale of many challenges. Africa is no different. The European Union (EU), considered the most mature integration achievement, has itself started to demonstrate serious difficulties and major shortcomings, particularly relating to the Eurozone.

Africa has a longer history of monetary unions than Europe, but the large size of the European Monetary Union (EMU) and the challenges it has faced since the 2008/09 financial crisis, provide important lessons for both existing and proposed monetary unions in Africa. Europe worked hard to consolidate its single market and achieve a high degree of trade integration before the establishment of the Euro. The Eurozone countries built over time an impressive architecture of processes, institutions and regulations.

One of the key lessons for Africa from the EU’s experience is that the institutional environment has to be conducive to the fostering of regional trade. Another lesson for Africa is the importance of stable macroeconomic policies.

When there are wide differences in the degree of fiscal discipline across member countries, that reality can create challenges for the survival and stability of any union. The Eurozone experience also underscores the need for countries that are about to participate in a monetary union to have a credible and feasible mechanism for fiscal transfers, in order to enable them to respond and adjust to asymmetric shocks. In the absence of such a mechanism, any monetary union will be susceptible to enormous pressure when its members are hit by such asymmetric shocks. There are, however, concerns that the adoption of the stringent convergence criteria will limit policy space to address current and emerging development challenges.

The importance of monetary, fiscal and financial policy harmonization, within the context of economic integration, cannot be overemphasized. Monetary union is defined in the literature as involving two components: “exchange rate union, that is, an area within which exchange rates bear a permanently fixed relationship to each other…” and “convertibility – the permanent absence of all exchange controls, whether for current or capital transactions within an area.”

Nobel Prize Laureate in Economics, Robert Mundell (Prof.), posited that the degree of factor mobility within a currency union is of utmost importance. Movement of labour and capital goods across borders is not restricted. It is therefore easy for factors to move to areas where they can earn maximum remuneration for the services rendered. An essential requirement here is the presence of at least, an internally convertible currency within the union.

Regional Economic Communities (RECs) in Africa aim to establish monetary unions as part of their broader integration agenda. Africa has a long history of some countries sharing single currencies. For example, the West African Economic & Monetary Union (UEMOA) has eight countries using the CFA franc, previously pegged to the French franc and now to the euro. There is also the Economic & Monetary Community of Central Africa (CEMAC) with an additional six countries using the CFA franc. Lesotho, Namibia and Swaziland are pegged at par to the South African Rand, which effectively means that they share the same monetary policy. Countries that are part of these three blocs represent a significant portion of Africa’s gross domestic product (GDP).

In fact, one of the main objectives of pursuing monetary unions in Africa is to boost regional integration, particularly intraregional trade and investments. Intra-African trade is about 16pc on average compared to 21pc for Latin America and the Caribbean, 50pc for Asia, and 70pc for Europe.

Administering 54 sovereign states with an array of national policies and inefficient government apparatus constitutes a massive resource-draining overhead cost on Africa’s fragile, undiversified primary production based economies. An assessment of progress towards macroeconomic convergence in Economic Communities in Africa show that, while some progress is being made, it is generally below the targets set in their monetary integration programmes.

If Africa were a business, the management costs of this type of structure would be uncompetitive. The cost of governing such a fragmented production structure is simply too high for Africa to afford or sustain. Thus, the contribution of regional integration to the promotion of intra-group trade, growth, development and social and political cohesion is unquestionable. The stark conclusion that can be drawn from these facts is that Africa must integrate (or, in business parlance, rationalize and merge) in order to reduce its overhead costs.

The debate about integration, however, has been mostly centered on the political dimensions and the paramount pan-African ideal. Africa has broken the cycle of hopelessness and has hewn for itself an optimistic future through rapid and strong economic growth since the start of the century.

Time has come to move to a more technical debate and focus, partly to give credence to such noble political ideals, but also because the speed of global transformation will not wait, much more, for late comers. Accelerating the pace of and achieving structural transformation remains the greater challenge for the future. In fact, the majority of African countries continues to struggle to diversify their narrow-based economies.

Addressing these challenges will require due attention to an appropriate macroeconomic policy framework. This should be underpinned by a long-term development strategy that facilitates transformation of economic and social structures, and ensure a positive feedback loop in the investment-growth nexus. Such a macroeconomic policy framework for structural transformation should encompass: scaling-up public investment and public goods provision. It should also entail maintaining macro stability to attract and sustain private investment. Coordinating investment and other development policies as well as mobilising resources and reducing aid dependence over time should also be features of a transformation framework. Finally, it would be important to secure fiscal sustainability by establishing fiscal legitimacy.

These key elements of transformation are not optional when discussing monetary unions in the African context. Regional Economic Communities better pay attention, otherwise they risk not being taken seriously about such ambitious goals.

 



By Carlos Lopes
Carlos Lopes is Executive Secretary of the United Nations Economic Commission for Africa (UNECA).

Published on Apr 19,2016 [ Vol 16 ,No 833]


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