Iedp 2010 Action Learning Project Regional Integration of Financial Systems


Evaluating the progress that SADC has made towards Macro-economic Convergence



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Evaluating the progress that SADC has made towards Macro-economic Convergence


The SADC Macro-economic Convergence (MEC) programme involves commitment by member states to meet a set of macro-economic convergence criteria at three points in time over the period 2008 to 2018. As stated earlier in the SADC economic integration section of this paper, four primary macro-economic indicators were chosen to measure convergence which will path the way for a Monetary Union in 2016.

It must be noted that these convergence targets have not been set as entry criteria for inclusion into SADC, and that political pressure is the only mechanism driving compliance.

In order to establish the level of readiness of SADC for financial integration (building block for Monetary Union), the following are evaluated in the upcoming section:


  1. SADC’s performance against MEC targets for 2012

  2. Required reforms to meet targets in 2012

  3. The consistency of the MEC programme with other regional macro-economic convergence programmes, being the European Monetary Union (EMU) and the Common Market of Eastern and Southern African (COMESA)



    1. SADC convergence performance against MEC targets for 2012

The year 2008 was a difficult year for SADC economies with the global economy experiencing a period of recession causing international trade volumes to fall sharply. It is widely acknowledged to be the most serious economic crisis since the 1930s.

In 2009, SADC’s economic performance was affected by the second round effects of the global economic crisis. Economic growth slowed down but remained positive in most member states. The most affected sectors were mining, manufacturing and tourism. (SADC, 2010). Consequently, performance towards the macro-economic convergence targets for 2012 was adversely affected.



Inflation

Global inflation eased throughout 2009 as a result of stable food prices combined with improvements in food supply in the region. This resulted in downward inflation trends, with ten states recording single digit inflation. However, the region still recorded a double digit inflation rate averaging 10.2% in 2009 compared to 13.8% (excluding Zimbabwe) in 2008, which was slightly above the SADC inflation targets.



Figure 6: Average annual inflation, 2009 SADC


104,543


Data source: SADC (2009) Note: Excludes Madagascar and Seychelles

Fiscal Deficit and Public Debt

With global demand and commodity prices declining, resulting in deteriorating external balances, government revenue declined in most member states. On the other hand, expenditures were maintained and in some cases increased to finance critical programmes. As such fiscal deficit for the region deteriorated to 5.5% in 2009 compared to a surplus of 2% in 2008.

These deficits were mostly financed by borrowing both from domestic and external markets. Consequently, public debt increased, although still within ranges of target. The region recorded a public debt of 48.6% of GDP compared to 38.4% in 2008.

Figure 7: Fiscal Balance / GDP, 2009 SADC


29.9


Data source: SADC (2009) Note: Excludes Madagascar and Seychelles

Figure 8: Debt / GDP, 2009 SADC

Data source: SADC (2009), Note: Excludes Madagascar and Seychelles

Current Account

Current account deficits rose sharply in 2009, largely reflecting higher import costs. Very limited reporting was done in 2009, due to the impending removal of current account balances from primary MEC targets.



Figure 9: Current Account / GDP, 2009 SADC

Data source: 2009 - SADC (2009), Data source: 2008 – IMF (2009)

    1. Required reforms to meet targets in 2012.

The period between 2010 and the next assessment date for meeting the SADC MEC targets in 2012 will be dominated by the fallout from the global financial and economic crisis, and the anticipated global recovery.

The impact of the global financial crisis will make it difficult for SADC member states to meet some of the 2012 MEC targets. The immediate outlook is for rising fiscal and current account deficits, increased public debt with slower growth and declining inflation. However, it is likely that the adverse trend will reverse prior to 2012, so at least MEC indicators should be moving in the right direction.

SADC countries will require deep structural changes and policy reforms that are already under way in many countries.

The necessary reforms include the following (SADC 2009):



  1. Improving the efficiency of product, labour and financial markets through enhanced competition and improving the effectiveness of the price mechanism

  2. Higher levels of productivity through investment in education, skills and training, and addressing legal constraints

  3. Reducing cost levels and improving competitiveness

  4. Pursuing trade reforms, especially using tariff reform to bring down cost levels, and implementing trade facilitation measures to reduce the costs of international trade

  5. Fiscal reforms to simplify tax regimes and improve revenue mobilisation

  6. Investment in economic infrastructure

  7. Taking advantage of the economies of scale and potential for cost-reduction offered by regional economic integration, and being prepared to forego national sovereignty in order to achieve greater regional integration

    1. Consistency of the SADC MEC targets with COMESA and EMU MEC targets

As mentioned previously, a number of Macro-economic Convergence Programmes exist worldwide. In addition to the SADC MEC programme, there are similar programmes in COMESA and outside of Africa; the European Monetary Union (EMU) has MEC criteria for both existing members and as entry criteria for aspiring new members.

Table 2 below draws a comparison between SADC, EMU and COMESA.

There is considerable variation across MEC programmes in terms of both the specific variables included and the numerical values of the targets. The most commonly included variables are inflation, fiscal deficit and public debt.

In the case of COMESA and EMU the inflation objective is 5% or less; the 2008 SADC inflation objective of less than 10% is therefore relatively high with the 2012 target being in line.

Fiscal deficits vary in terms of the specific definition of the target variable. The EMU target is <3%, so the 2008 SADC MEC target is towards the high end (matched only by the COMESA Stage 1 target of 5%). The 2012 and 2018 SADC targets for inflation and fiscal deficit are more in line with those of other MEC programmes.

The SADC public debt target is in line with those used in the EMU region.



Table 2: Macro-economic Targets for convergence primary target comparison

Indicator

SADC 2008

SADC 2012

EMU

COMESA Stage 1

COMESA Stage 2

Inflation rate

<10%

<5%

≤3 lowest inflation + 1.5%

≤5%

≤3%

Fiscal Deficit

<5%

<3%

<3%

≤5%

≤4%

Public Debt

<60%

<60%

<60%

“Sustainable level” (secondary)

Status of the Current Account

<9%

<9%

None

“Sustainable level” (secondary)

Source: SADC (2009)

Beyond these three criteria, there is no consistent pattern. Only SADC of the evaluated three have targets for the current account of the balance of payments, which might be behind the proposal to demote it to a secondary target.

Where secondary targets are concerned, SADC and COMESA have targets for foreign exchange reserves, but for COMESA this is a primary target. SADC and COMESA both have investment and central bank financing of fiscal deficit targets, while only SADC has a secondary target of domestic savings. Several countries have secondary fiscal targets, such as the proportion of revenues spent on wages.

Perhaps the most striking contrast between SADC and other MEC programmes relates to exchange rates and interest rates. The EMU sets criteria for prospective members, relating to the convergence of nominal exchange rates and interest rates and being maintained within a prescribed range for a period of time. By contrast, COMESA has targets for real exchange rates and interest rates, although these are stability targets rather than convergence targets.

Nevertheless, the fact that SADC is the only regional integration bloc with a monetary union objective but without exchange rate or interest rate targets suggests that this gap should be reconsidered. (SADC, 2009)


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