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Establishing a Monetary Institute for the Region as an Interim Step leading

to a Monetary Union

Committee of Central Bank Governors

Bank of Mauritius

April 2013

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The views expressed are those of the authors and do not necessarily represent those of the

members of the Committee of Central Bank Governors (CCBG) in the Southern African

Development Community (SADC). While every precaution is taken to ensure the accuracy of

information, the CCBG shall not be liable to any person for inaccurate information or opinions

contained herein. The authors are grateful to Mr Rundheersing Bheenick, Governor, Bank of

Mauritius, for his views.

Any queries should be directed to: N Kowlessur (Neetyanand.Kowlessur@bom.mu), K Hurynag

(Kaveeta.Hurynag@bom.mu), and K. Pitteea (Karankumar.Pitteea@bom.mu).

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1. Abstract

The aim of the study is to examine some pertinent issues in connection with the proposed

establishment of a Monetary Institute in the Southern African Development Community (SADC)

region as an interim step leading to a monetary union. The paper discusses the need for an

institution to drive the monetary integration agenda set out in the Regional Indicative Strategic

Development Plan (RISDP) and briefly highlights some important operational issues in

connection with the establishment of a SADC Monetary Institute (SMI) as well as its main

functions, the most important one being to undertake all the technical, policy, statistical,

institutional and legal preparations to attain the SADC Monetary Union. However, a detailed

discussion of the legal and operational frameworks of the SMI is beyond the scope of this paper.

More importantly, it is the submission of the authors that the process of monetary union in

SADC is not clear in terms of pace and direction in the light of recent international, continental

and regional integration efforts. The Committee of Central Bank Governors (CCBG) and other

stakeholders therefore need clarity from the highest political authority of SADC so that they can

be comfortable in their work and move forward the integration agenda in areas under their

purview.

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Overview

The paper is organised as follows:

Section 2 provides an introduction of the research paper which examines the establishment of a

Monetary Institute for the region as an interim step leading to a Monetary Union. Section 3

states the problem that the decision to set up a monetary institute in the SADC region is political

and that the SADC integration process is not clear in terms of where the region is heading.

Section 4 specifies the objectives of the study, which discusses the operational and functional

aspects of the proposed monetary institute in the SADC region and examines the challenges

being posed in the light of continental and regional integration initiatives. Section 5 covers the

literature review by providing an overview of the European Monetary Institute (EMI), the

COMESA (Common Market for Eastern and Southern Africa) Monetary Institute (CMI) and the

East Africa Monetary Institute (EAMI). It equally discusses the process of monetary union in

SADC in the context of the objectives set out in the RISDP and makes a brief assessment of the

status in this area. Section 6 briefly discusses the importance of setting up of a monetary

institute as a practical route adopted for attaining monetary union. The mandate, functions and

main operational issues pertaining to the proposed monetary institute are also examined in this

section. Section 7 underscores the lessons that SADC could learn from the Euro Sovereign Debt

crisis as it envisages to accelerate its integration programme. The draft Strategy for the creation

of the African Central Bank, as proposed by the AUC-AACB Joint Study Group, is considered

in Section 8, since it has important implications for SADC in terms of reviewing its convergence

criteria and harmonising its timeline with the Strategy. Section 9, which covers regional

integration initiatives summarises developments regarding regional payments system. In Section

10, the key issue of the scope of Tripartite Cooperation between COMESA, East Africa

Community (EAC) and SADC is examined and in particular, the principle of using the CMI as a

Tripartite Institute for the three regional economic communities. Concluding remarks and

recommendations are presented in Section 11.

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List of Abbreviations and Acronyms

AACB Association of African Central Banks

ACB African Central Bank

AU African Union

AUC African Union Commission

EAC East Africa Community

EAMI Eastern Africa Monetary Institute

EAMU Eastern Africa Monetary Union

ECB European Central Bank

EMI European Monetary Institute

EMU European Monetary Union

ESCB European System of Central Banks

EU European Union

CCBG Committee of Central Bank Governors

CFTA Continental Free Trade Area

COMESA Common Market for Eastern and Southern Africa

CMA Common Monetary Area

CMI COMESA Monetary Institute

FTA Free Trade Area

GDP Gross Domestic Product

HLEG High Level Expert Group

MTF Ministerial Task Force

REC Regional Economic Community

REPSS Regional Payment and Settlement System

RISDP Regional Indicative Strategic Development Plan

SADC Southern African Development Community

SIRESS SADC Integrated Regional Electronic Settlement System

SMI SADC Monetary Institute

WAMI West African Monetary Institute

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2. Introduction

The SADC is embarking on a journey towards regional integration which will culminate in the

formation of a monetary union, a single central bank and single currency. It is recognised that

the process will be long and painful, and thus Members States would not only have to exercise

patience but more importantly need to adopt a step-by-step approach given the recent

experiences of the European Union (EU). The study draws mainly from the experiences of the

EU, COMESA and the EAC and examines some pertinent issues that would inform the decision

relating to the establishment of the proposed SADC Monetary Institute (SMI).

3. Statement of Problem

The 1991 Abuja Treaty establishing the African Economic Community1 outlines six stages for

achieving an integrated economic and monetary zone for Africa that were set to be completed by

2028. The strategy for African integration is based on progressive integration of the activities of

the regional economic communities, which are regarded as building blocks for Africa. SADC

Member States intend to establish a Monetary Union by 2016 and a Single Central Bank and

Single Currency by 2018. Concurrently, a Tripartite Framework is being negotiated in Southern

and Eastern Africa with a view to widening and consolidating cross-cutting regional integration

processes. The decision to establish a Monetary Institute is political and is inextricably linked to

the SADC integration process, which is somewhat not clear in terms of where the region is

heading.

4. Objectives

It is expected that the study will apprise Governors as well as Heads of States and Government

of SADC Member States of the processes monetary integration entail, especially with regards to

the challenges stemming from recent international, continental and tripartite integration

initiatives. The study will provide an overview of the operational and functional aspects of the

proposed SADC Monetary Institute and underline the need for political decisions so as to move

forward the regional integration agenda in a meaningful manner.

5. Literature Review

5.1 The European Monetary Institute

Under the Maastricht Treaty, a special institution, the EMI, was set up to deal with many tasks

involved in preparing for European Economic and Monetary Union. It became operational on 1

1 which became effective in May 1994 after the required number of signatures

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January 1994. The EMI’s prime function was to develop the operational framework for an

efficient European System of Central Banks (ESCB), which comprises the European Central

Bank (ECB) and the national central banks. The EMI was expected to carry out its work within

a strict deadline and called on experts from the central banks of all Member States. The EMI had

to, inter alia, lay the technical and organisational foundations needed to enable the ESCB to

ensure price stability. In performing its tasks, the EMI worked towards making itself redundant,

since the EMI was liquidated once the ECB had been established.

The EU Member States were then endeavouring to achieve greater economic convergence,

which entailed enhanced coordination of monetary policies as well as the prohibition of

monetary financing of governments by central banks. The EMI carried out its coordination task

on the basis of analyses of overall economic developments in the various Member States and

monetary policies pursued by the respective national authorities (European Monetary Institute,

1997).

5.2 Common Market for Eastern and Southern Africa

The COMESA is a free trade area with 19 Member States stretching from Libya to Zimbabwe. It

was formed in December 1994 and is one of the pillars of the African Economic Community.

The Authority of Heads of State and Government in 1992 adopted the COMESA Monetary

Cooperation Programme towards the establishment of a Monetary Union in 2025. The date for

the achievement of the Monetary Union was later changed to 2018 by the COMESA Council of

Ministers in 2006. This programme is made of four stages and “has as objectives the primary

creation of a common area of monetary and financial system stability which will facilitate

integration of the financial markets in the region in particular and economic integration growth

in general. The achievement of monetary and financial system stability entails the attainment of

economic convergence brought about the removal of all macroeconomic disharmonies which

exist among the Members States as a result of the pursuit of divergent macroeconomic policies”

(www.comesa.int).

The 13th Meeting of the COMESA Council of Governors of Central Banks which was held in

Cairo, Egypt in October 2008, agreed to establish the COMESA Monetary Institute (CMI),

which would be responsible for the preparatory work for achieving Monetary Union in 2018.

This institute is hosted by the Central Bank of Kenya and became operational in March 2011.

The specific policy-oriented activities of the CMI are amongst others: (i) the design of an

appropriate Monetary Policy Framework; (ii) the design of an appropriate Exchange Rate

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Mechanism; (iii) harmonization of concepts, methodologies and statistical frameworks; (iv)

Payment System Development and appropriate design of a unified framework for integration

and interface through the Regional Payment and Settlement Systems (REPSS); (v) instituting

and monitoring of sensitization programmes; (vi) providing technical assistance and capacity

building support to National Central Banks.

5.3 The East African Community

The EAC consists of five countries Burundi, Kenya, Rwanda, Tanzania and Uganda. In 1999,

Kenya, Tanzania and Uganda signed the Treaty for the establishment of the EAC, which entered

into force in July 2000. In 2007, it was signed by Burundi and Rwanda. According to the Treaty,

the EAC should first form a customs union, then a common market and a monetary union, and

finally a political union. The Customs Union was formally completed in 2010. The process of

creating the Common Market begun in 2009, and it is not expected to be completed until 2015.

The East African Monetary Union (EAMU) protocol 2012 is yet to be signed and the date for

actual implementation of the common currency is uncertain. The EAC has a number of

established organs that are similar to those of EU, namely the Council of Ministers, East African

Legislative Assembly, East African Court of Justice and sectoral committees. Unlike the EU’s

supranational institutions, the EAC’s supranational institutions do not have legal rights to force

national governments to implement integration measures.

The legal framework includes the binding terms for the process leading to the establishment and

operation of EAMU in the form of a Monetary Union Protocol, which lays down the

foundations for EAMU, the Statutes of new monetary institutions, and the relevant Treaty

provisions. The institutional framework would consist of the East African Monetary Institute

(EAMI), an interim institution that should prepare analytically and technically for the Eastern

Africa Central Bank, which would be a transformation of EAMI. According to the EAC

Convergence criteria, the target date for the introduction and circulation of a single Eastern

Africa Currency is 2015.

5.4 Regional Indicative Strategic Development Plan

It is recalled that the RISDP is a roadmap of the policies and strategies that SADC has adopted

over the years to further regional integration. The ultimate objective of the RISDP is to deepen

the SADC integration agenda in order to accelerate poverty reduction and attain regional

integration and development goals. The RISDP considers trade and economic liberalization for

deeper integration and poverty eradication as one of its key catalytic intervention areas. In the

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trade, economic liberalization and development areas, the objectives of the RISDP are to

establish a:

Free Trade Area (FTA) by 2008

Customs Union by 2010

Common Market by 2015

Monetary Union by 2016

Regional Currency by 2018 (source: RISDP, 2003)

The first issue that has to be determined is the extent to which the RISDP is realistic, not only in

terms of actual delivery but also in terms of timelines set for economic and monetary union at

regional and continental level. SADC launched its FTA in August 2008. Twelve (12) of

SADC’s fifteen (15) Member States are currently part of the FTA while three, namely Angola,

DRC and Seychelles have still not joined. Intra-SADC trade has more than doubled between

2000 and 2009, rising from US$13 billion to US$32 billion, but trade with the rest of the world

is much higher than intra-SADC trade (source: www.sadc.int). The quality of infrastructure,

rules of origin, customs and border procedures and non-tariff barriers are the main obstacles

hindering a greater flow of goods within the region. In view of the divergent structure of

economies in SADC and differing productivity levels, the performance of SADC countries with

respect to macroeconomic convergence has been mixed.

The SADC Customs Union was not realised in 2010 as planned. The main challenge with the

establishment of a Customs Union in SADC is the issue of overlapping membership. Almost all

SADC Member States, with the exception of Angola and Mozambique, belong to existing

Customs Unions. The establishment of a SADC Customs Union has to be carefully considered

at this stage as the implications for the Customs Union are that SADC Member States may then

have to choose which Customs Union they want to belong to and this may have overall

implications for SADC. Technically, a Member State cannot belong to more than one Customs

Union because of the Common External Tariff.

In view of these challenges, the SADC Summit during its August 2010 Meeting reaffirmed its

commitment to establish a SADC Customs Union and recognised the need to establish synergies

between the processes to consolidate the SADC FTA, the Customs Union and the COMESA-

EAC-SADC Tripartite FTA. The SADC Summit endorsed the decision of the Ministerial Task

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Force to appoint a High Level Expert Group (HLEG) on the SADC Customs Union whose

mandate was to consolidate and refine previous technical work undertaken in order to reach

agreement and common understanding on key elements. These elements are the parameters,

benchmarks and timelines of a model customs union and its implementation modalities.

The Ministerial Task Force (MTF) on Regional Economic Integration considered the HLEG

report on the framework for a SADC Customs Union at their 25 November 2011 deliberations

that took place in Luanda, Angola. The report of the MTF was considered by the SADC Summit

in August 2012 as well as the overall approach to regional integration in SADC. The key issue

for consideration is to ensure that SADC adopts and implements a developmental approach to

integration to ensure that the region is able to address the critical constraints to development,

which are fundamentally the supply-side constraints.

The immediate priority for SADC is the consolidation of the FTA in terms of the agreed [15-

point action] plan matrix which focuses on the review of rules of origin, completion of tariff

phase down and removal of non-tariff barriers. It is important to ensure full implementation by

Member States of the FTA, while on the other hand, resolve the issue of overlapping

membership before progressing towards a SADC Customs Union.

The Regional Indicative Strategic Development Plan Desk Assessment 2005-2010 highlights the

key achievements, challenges and lessons learned in the implementation of the RISDP. While

the review indicates some significant progress for Trade, Industry, Finance and Investment

(TIFI) that has contributed to the region’s integration process, there are various other

outstanding issues to be addressed. A key finding is that the majority of the Member States did

not set aside resources for planning and implementation of RISDP programmes at national level,

as a result of which targets in many instances, have been missed. The SADC Secretariat, in

partnership with Member States is currently engaged in a review of the RISDP towards

reconfiguring the SADC roadmap to guide the regional integration process aligned to realistic,

measureable and deliverable milestones and timelines. The review process of the RISDP is

expected to be finalised in 2013 (Report of the Strategy Planning Session, December 2012).

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6. Methodology

6.1 Setting up of Monetary Institute to attain Monetary Union

The aim of achieving a monetary union is extremely challenging and requires a number of steps

which have to be taken with strong commitment and proper planning to ensure sound and

sustainable outcomes. In particular, the monetary union has to be prepared within a

comprehensive legal and institutional framework. Regional as well as international experiences

pertaining to monetary union point to the setting up of monetary institutes as interim institutions

for undertaking all preparatory work required to establish a single central bank and a single

currency. The proposed SMI is intended to be an interim body and its mission will be completed

once the common Central Bank is created.

Examples of other Monetary Institutes include the EMI, which was set up in January 1994 to

prepare for European Monetary Union. In Africa, the West African Monetary Institute

(WAMI), an interim institution, was set up in 2001 to undertake technical preparations for the

establishment of a common West African Central Bank and currently monitors the

macroeconomic convergence programme. The CMI was officially launched on 7 March 2011 at

the Kenya School for Monetary Studies in Nairobi. The aim of the institute is to fast-track the

realisation of the regional economic bloc’s Monetary Co-operation Programme, with the

ultimate objective of establishing the COMESA Monetary Union in the year 2018. The EAC is

also considering the establishment of the EAMI ‘with a view to making the preparations

necessary for the realisation of EAMU and the changeover to the single currency, with special

emphasis on the regulatory, operational and logistical framework necessary for the conduct of a

single monetary and exchange rate policy by the future East African Central Bank (source:

www.eac.int).

It is also noteworthy that the Draft Report of the Joint African Union Commission (AUC)/

Association of African Central Banks (AACB) Study Group on the Strategy for the Creation of

the African Central Bank has recommended the setting up of an interim body, the African

Monetary Institute, by 2014 to undertake all preparatory work leading to the ACB.

6.2 SADC Monetary Institute: Mandate, Functions and other Operational Issues

This section briefly examines some operational issues pertaining to the establishment of an

eventual SMI, underlining some of its key functions. It is also deemed important that the SMI

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works in close collaboration with the Committee of Central Bank Governors (CCBG) and

SADC structures to benefit from their expertise on areas pertinent to enhanced financial

integration. However, a detailed discussion of the legal and operational frameworks of the

Monetary Institute is beyond the scope of this paper.

6.2.1 Establishment and Operational Issues

Given its key role as a catalyst to the process of monetary integration in SADC, it is extremely

important that the SMI be established within a specific and appropriate institutional framework,

fully equipped to move forward the regional integration agenda through the formulation and

implementation of appropriate decisions and policy measures.

Once a decision is taken by the SADC Summit to go ahead with the setting up of the SMI, it is

proposed that a SMI Charter be prepared to set out amongst others the legal underpinnings,

organizational structure, operational issues and funding issues. The Charter would be examined

and endorsed by the CCBG, submitted to the SADC Committee of Finance Ministers and

eventually to SADC Summit for their consideration and endorsement. The Charter would enter

into force upon deposit of the Instrument of Acceptance by an agreed per cent of central banks.

The Charter could form an integral part of the Finance and Investment Protocol.

6.2.2 Purpose and Mandate

The main objective of the SMI would be to undertake all the technical, policy, statistical,

institutional and legal preparations towards attaining monetary integration in SADC and the

establishment of the SADC Central Bank. The mandate of the SMI should be clearly defined

for accountability purposes. The organisation would have to be entrusted with adequate powers

so that it could perform its various tasks efficiently, including coordination of national

monetary and exchange rate policies and monitoring and reporting on compliance by Member

States regarding their commitments.

6.2.3 Organisation and Budget

Monetary institutes are usually funded by central banks, which are its members. As Board

members, Governors would participate actively in the decision-making process. For practical

reasons, the Board of the SMI could also comprise a President as the Chairperson and a Vice-

President, both appointed preferably by SADC Summit to work on a full-time basis at the

Institute. Finally, as an autonomous body, the Institute should be able to determine its

organisational structure and recruit qualified and competent staff to deliver on its statutory tasks.

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While not strictly comparable, it could be interesting to consider the budgetary implications of

establishing and operating a Monetary Institute. A case in point is the recently established CMI.

The latter is located in the premises of the Kenya School of Monetary Studies. It has been

agreed that administration and finance services and information and communication technology

would be initially provided by the host Central Bank. For a staff comprising 4

economists/statisticians and support staff the initial cost in the first year of operations was

around US$926,510 to be equally shared amongst all COMESA Central Banks (amounting to

US$48,764 per Central Bank per year). (Source: Report of the Eighteenth Meeting of the

COMESA Committee of Central Bank Governors, 2012)

SADC Secretariat could consider enlisting the support of cooperating partners to finance partly

the operations of the SMI given the recurrent and capital expenditure that its set-up and

operation would entail.

6.2.4 Reporting Obligations

The SMI should be held accountable for its work and would thus be called upon to submit

regular reports to the CCBG, SADC Ministers responsible for Financial Matters, and Heads of

State or Government. The reports would cover its activities as well as the status on economic

convergence in SADC and policy decisions to advance the regional integration agenda.

6.2.5 Liquidation and transition to SADC Central Bank

The SMI would be liquidated once the SADC Central Bank has been established.

6.2.6 Functions of the Monetary Institute

The main functions of the SMI are outlined below:

(i) Undertake all the technical, policy, statistical, institutional and legal preparations to

attain the SADC Monetary Union.

(ii) Monitor the state of macroeconomic convergence of the Member States against the

prescribed convergence criteria.

(iii) Undertake work to harmonise concepts, methodologies and statistical frameworks.

(iv) Undertake work to harmonise and coordinate monetary and exchange rate policies and

operations in the run-up to monetary union.

(v) Study the issue of exchange rate parities within the SADC region and recommend the

appropriate exchange rate mechanism and parities for the existing currencies in the

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region. It would be responsible for determining the value of the common currency and

the conversion rates of national currencies into the common currency.

(vi) Recommend appropriate regulations for an integrated financial and capital market in the

region.

(vii) Harmonise banking regulations and accounting practices in all member countries

(viii) Undertake work and policies to develop a Regional Payments System.

(ix) Recommend policy frameworks for improving the investment climate and unlocking the

productive potential in the region.

(x) Undertake studies and prepare reports recommending the establishment of a common

SADC Central Bank.

(xi) Conduct a sensitization programme on the net benefits of a single currency in order to

create wide public support for the introduction of a common currency.

(xii) Advise on the sharing/ allocation/ distribution of seignorage revenue or how it would be

used.

(xiii) Provide a platform for cooperation between central banks in SADC, and with other

relevant structures in other regional/continental groupings with a view to establishing

conditions necessary for the achievement of monetary union.

6.2.7 Cooperation with CCBG and SADC Structures

Close collaboration between the SMI and CCBG and SADC structures is a necessary condition

for rapid and tangible progress on the monetary integration process. The experts of the SMI

would benefit from the technical expertise of the CCBG and other SADC structure in areas

critical for deeper monetary and financial integration. These areas include exchange control

policies, harmonisation of legal and operational frameworks, cross-border payment, clearing and

settlement systems, banking regulatory and supervisory matters and financial markets. For

instance, the general principles underpinning the Model Central Bank Law developed by the

CCBG, in particular the principles of operational independence of central banks as well as

standards of accountability and transparency could provide essential inputs for the establishment

of a SADC Central Bank.

In sum, the setting up of a Monetary Institute is the standard and practical route adopted before

attaining monetary union (Durevall, 2011). However, it is also vitally important to examine the

relevance of setting up the SADC Monetary Institute in the context of global, continental and

regional monetary integration initiatives and developments.

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7. Lessons from the Euro Area Sovereign Debt Crisis

The recent Euro area debt crisis should serve as a valuable lesson for Africa in general and

SADC in particular, on the pitfalls of rushing into a monetary union when the preconditions for

a sustained integration have not been achieved. Some extremely useful lessons to SADC, as it

envisages putting in place necessary tools and policies to enhance integration in the region are as

follows:

• Degree of convergence by Member States. Common monetary policy may not be

adequate if the monetary union members have structural and cyclical differences;

• A banking, fiscal and economic union would complete the existing monetary union

and prevent future debt crises;

• The importance of fiscal rules to enforce fiscal discipline;

• Appropriate mechanisms for burden sharing for countries affected by shocks are

important. This underlines the need for a lender of last resort.

In the light of the above lessons, a fundamental issue that would need to be resolved is whether

in Africa or SADC the benefits from monetary union would exceed the costs, given the

divergent structures of the economies and level of productivity, along with the current and

expected degree of economic and legal convergence in the years ahead. The level of trade

integration within SADC is relatively low which underlines the importance of boosting intra-

SADC regional trade to a minimum threshold before considering moving forward to a monetary

union. The issue becomes even more complicated, given the emerging consensus that for a

sustainable monetary union a movement towards financial, budgetary and political union is

inevitable, which implies the creation of new supranational bodies. Hence, going forward, the

objective of monetary union would entail not only the surrender of monetary sovereignty – in

terms of decisions to adjust interest and exchange rates – but also fiscal policy. How far are

SADC countries willing to surrender sovereignty on these key policies to a supranational body

would be a key determining factor for the pace of regional and eventually continental

integration.

A recent study by the Reserve Bank of Malawi on ‘Single Central Bank: Macroeconomic Costs

and Benefits for the Monetary Union’ (April 2013) has found that the creation of a single central

bank in SADC will confer benefits to some Member States while also resulting in greater

adjustment costs to others due to differing structures of the economies of Member States. It was

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also noted that the benefits are more likely to be reaped in the long run and that macroeconomic

convergence remains a critical element before a single regional central bank is established.

8. AUC-AACB Draft Strategy for the Creation of the African Central Bank

It is recalled that a Joint AUC-AACB Study Group was established in 2007 to propose a

common strategy and roadmap toward attaining monetary integration in Africa and the

establishment of the ACB. The Study Group came up with a Draft Report at the end of 2012

which has been submitted to all central banks in Africa for comments.

The Study Group proposes the adoption of a gradual, step-by-step approach which conforms to

the traditional and holistic stages leading to economic and monetary union, with the Regional

Economic Communities (REC) as the building blocks. The AACB African Monetary

Cooperation Programme timeline of 2021 for the setting up of the ACB would be harmonized

with the Abuja Treaty timeline of 2028. The recommended stages leading to the establishment

of the African Central Bank are as follows:

African Monetary Institute : 2014

Continental Free Trade Area : 2017

Continental Customs Union : 2019

Regional Central Banks/ Regional Currencies/ Fiscal Union : 2021

African Common Market : 2023

African Central Bank / African Single Currency /Continental Fiscal Union : 2028 Source: Draft Report on the Establishment of the African Central Bank by the Joint AUC-AACB Committee Study Group,

February 2013

There is a disparity between the timelines for the establishment of the SADC Central Bank

(2018) as per the RISDP and the date proposed by the Joint Study Group for the setting up of

the REC Central Banks, that is, 2021, which may require a realignment of the RISDP targets.

The CCBG could also develop a common position on the Draft Strategy for the Creation of the

African Central Bank that has been prepared by the Joint AUC-AACB Study Group. More

specifically, the CCBG and by extension the Southern Africa Sub-Region of the AACB could

form an opinion as to whether the timeframes proposed for setting up the REC Central Banks

and African Central Bank are realistic taking into consideration ground realities in Africa. The

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report of the Joint Study Group could be discussed at the next AACB Assembly meeting

scheduled in Mauritius in August 2013.

9. Regional Integration Initiatives

The Treaties establishing the COMESA, the EAC, and the SADC provide for the establishment

of a Monetary Union in each bloc. In the EAC integration process, the Monetary Union is in the

third phase before the final step of a political federation. The EAC target date for launching the

EAC Monetary Union is 2012 as decided at the Heads of State Summit in June/July 2007.

SADC intends to establish one in 2016 and the COMESA target date is 2018.

RECs such as COMESA, SADC and EAC have an important role to play as building blocks for

the broader goal of African Monetary Integration. However, going forward overlapping

memberships could be a serious obstacle to the process of regional and continental integration.

There are also serious and legitimate concerns over the duplication of some activities as the

RECs are progressing at different paces due to:

(a) slow ratification of protocols and reluctant implementation of agreed plans,

(b) socio-economic policy divergences, and

(c) limited national and regional capacities.

A modern and integrated payments system at regional level is an important infrastructure to

stimulate trade and investment within the bloc. Currently, there are initiatives in the three

groupings to develop separately a regional payments system, notwithstanding the issue of

overlapping membership and duplication of resources. While EAC and SADC are still working

on a model cross-border payments system, the REPSS of COMESA started operations in

October 2012.

EAC

• The EAC Payment and Settlement Systems is expected to provide a sound technological

platform aimed at enhancing payment and settlement systems in the EAC Partner States

as a prelude to the successful introduction of the East African Monetary Union and will

contribute to managing the convertibility of the EAC Partner States’ currencies in the

region.

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SADC

• The SADC Banking Association, which is an association of banking associations, has

been mandated to develop the various payment instruments that are expected to be

deployed within the region. Settlement of the inter-bank obligations arising from these

instruments will be made through SADC Integrated Regional Electronic Settlement

System (SIRESS). SADC has, within its boundaries, had an integrated area known as the

Common Monetary Area (CMA) for many years. The intention is to use the CMA as the

basis for the development of an integrated payments infrastructure for SADC as a whole.

• It is noted that the SIRESS is expected to start operations in July 2013, with the four

countries of the CMA. It will initially start with the South African Rand as the settlement

currency and thereafter move to a currency conversion system.

COMESA

• The COMESA REPSS was launched into live operations on 3 October 2012. Although

six countries, namely Mauritius, Egypt, Kenya, Sudan, Swaziland and Zambia have

closely collaborated towards its live operations, only Mauritius and Rwanda made it

through on the live date. The other countries are expected to join soon. In terms of speed

of the payment together with the low cost, REPSS has the potential to stimulate cross-

border trade in the COMESA region.

• COMESA authorities hold the view that REPSS has the potential to become a Tripartite

Payments System and could potentially serve as a continent-wide settlement system.

In view of limited resources, there is some merit in the argument that cross cutting issues, for

instance the development of a regional payments system, could to be addressed within the

Tripartite Framework.

10. COMESA-EAC-SADC Tripartite Framework

The Tripartite Framework is currently under negotiation with the aim of widening and

consolidating existing cross-cutting regional integration processes. Successful completion of

these discussions will bring together RECs such COMESA, SADC and the EAC with the aim of

creating a free market consisting of 26 countries with a population of about 600 million people

and a combined GDP of one trillion US dollars. The region makes up half of the African Union

(AU) in terms of membership, just over 58% in terms of contribution to GDP and 57% of the

total population of the African Union.

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In the wake of the decision of the 18th Ordinary Session of the Summit of the AU that was held

from 29 to 30 January 2012 in Addis Ababa, Ethiopia on the theme Boosting Intra-African

Trade, discussions are on-going to establish the Tripartite Free Trade area by 2014, preceding

the establishment of the Continental Free Trade Area (CFTA) by 2017.

10.1 Considering the COMESA Monetary Institute as a Tripartite Institute

At its first meeting in Lusaka, Zambia on 13 July 2011, the Joint Meeting of COMESA

Ministers of Finance and Central Bank Governors approved the principle of using the COMESA

Monetary Institute as the Tripartite Institute for the three RECs that is, COMESA, EAC and

SADC. With the CMI having been established and already operational, and with a view to

avoiding duplication of resources stemming from overlapping memberships, efforts could be

coordinated through a single Monetary Institute.

It is to be noted that the COMESA-EAC-SADC Summit which was held on 20th October 2008

in Kampala, Uganda under the theme ‘Deepening COMESA-EAC-SADC Integration’, has re-

emphasized that the three RECs should harmonise their activities. According to the ‘Final

Communiqué of the Joint COMESA-EAC-SADC Heads of State and Government Tripartite

Summit’ meeting, the Tripartite Summit agreed on: “a programme of harmonisation of trading

arrangements amongst the three RECs, free movement of people, joint implementation of inter-

regional infrastructure programmes as well as institutional arrangements on the basis of which

the three RECs would foster cooperation, given the challenge of multiple membership....”

The Tripartite Summit directed the three RECs “to enhance cooperation and coordination in the

areas of competition, financial and payments systems, capital markets and commodity

exchange.....”

The Tripartite Summit further directed the three RECs “to develop a formal institutional and

legal framework for joint cooperation and implementation of agreed programs amongst the

three RECs…”

In view of the above decisions of the Tripartite Summit which aim at harmonisation of efforts of

the three RECs, the next logical step could be to consider using the CMI as a Tripartite

Monetary Institute. The Institute, which has already started operations, could potentially

20

undertake the technical, policy, statistical, legal and institutional preparatory work leading to the

creation a Monetary Union at a Tripartite level.

It is worth highlighting that COMESA has already undertaken a study on the utilization of CMI

as the Tripartite Monetary Institute for the three RECs. The findings and recommendations of

the study on the way forward will first be submitted to Senior Officials of the Ministries of

Finance and Central Banks of the three RECs, prior to presentation to a Tripartite Task Force.

Source: Background Document circulated by CMI, 2011, on ‘Operations of the COMESA

Monetary Institute and its Potential to become a Tripartite Monetary Institute.’

11. Conclusions and Recommendations

As has been observed from the experience of the EMU, forming a monetary union is a complex

project, and there are non-negligible risks of failure. Therefore, it would be necessary to ensure

that the pre-conditions for forming a monetary union are adequate. This entails ensuring that the

economic, political, and institutional requirements are in place, since benefits are likely to be

less visible than short-run costs (Durevall, 2011).

Establishing a Monetary Union in the SADC region is a key milestone in the drive for deeper

integration in SADC. The RISDP implementation framework identified 2018 as the target for

the SADC Central Bank and SADC Single Currency. However, SADC Member States have not

been able to move from the FTA stage to the Customs Union mainly due to multiple

memberships to regional blocs, which entail important delays in achieving other integration

milestones.

SADC Member States are committed to the Abuja Treaty of 1991, which makes the case for

African integration first at sub-regional level, and then at continental level. SADC is also

committed to the resolution of the African Union Summit held in Banjul, Gambia in 2006,

which directed the AUC and the RECs to harmonize and coordinate policies and programmes of

RECs as important strategies for rationalization, and put in place mechanisms to facilitate the

process of harmonization and coordination within and among the RECs. The harmonization and

rationalization of RECs is also underpinned by the Tripartite Agreement approved by the

Tripartite Summit.

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In the wake of these continental and tripartite integration initiatives, there is much confusion in

the minds of central bankers, policy makers, the broader trade and investment community and

the public at large regarding where the region is heading in its integration objectives. Governors

and other stakeholders need clarity from Finance Ministers and Heads of States and

Governments on the direction of the SADC integration agenda so that they are more

comfortable in their work and move forward the integration agenda in areas under their purview.

The SADC integration process could evolve as follows:

1. SADC moves forward its integration agenda in line with the objectives of the RISDP,

culminating in the establishment of the SADC Central Bank in 2018 or a future date. In such a

case, there is need for a political decision to set up the SADC Monetary Institute to undertake all

technical, institutional and legal preparations in view of the SADC monetary union. The CCBG

could be mandated to drive the SMI project.

2. The other option for SADC is to focus its efforts and resources to attain monetary union

in a unified COMESA-EAC-SADC REC in line with the resolution of the first Tripartite

Summit that “the three RECs should immediately start working towards a merger into a single

REC with the objective of fast-tracking the attainment of the African Economic Community”. In

this case, the CMI could be considered as the Tripartite Monetary Institute for the COMESA-

EAC-SADC Regional Economic Community.

Presently, a developmental approach to the Tripartite Integration process anchored on three

pillars namely trade, infrastructure and industrial development is emphasised. If the intention is

to move towards a single COMESA-EAC-SADC regional bloc, then there is a strong case to

broaden tripartite cooperation to monetary and financial integration. It is observed that the

RISDP Desk Assessment 2005-2010 underlined the need to increase resources, both financial

and human, for SADC-COMESA-EAC Tripartite Cooperation to fulfill the greater than

anticipated potential of the Tripartite arrangement to tackle constraints impeding the speedy

attainment of deeper regional integration.

In sum, there is an urgent need for political decisions to shed light on the SADC integration

process, going forward. The decision to set up the SMI is also political and is inextricably linked

to the SADC integration agenda.

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It is accordingly recommended that:

(a) Governors be more vocal in expressing their concerns about the lack of clarity on the

regional integration agenda.

(b) The CCBG could consider preparing a comprehensive Position Paper on this complex

issue for the consideration of SADC Heads of State and Government through the Committee of

Finance Ministers. Alternatively, with a view to proceeding more rapidly, the CCBG could

consider requesting Governors to directly sensitize their respective Finance Ministers and Heads

of State and Government on the need for appropriate decisions to clarify the SADC integration

process.

(c) The CCBG could consider aligning its macroeconomic convergence criteria with the

African Monetary and Cooperation Programme put in place by the AACB. The CCBG could

support a surveillance mechanism which could ensure tangible progress towards

macroeconomic convergence within and across regions.

(d) Pending decisions at the political level to throw light on the SADC integration process,

the CCBG Macroeconomic Subcommittee is of the view that the establishment of the SADC

Monetary Institute is not feasible at this stage. The CCBG could consider setting up a ‘Learning

Institute’ to conduct studies and look at harmonisation of monetary policies. The CCBG

Secretariat could be utilised for this purpose, provided it is restructured and adequately staffed.

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Annex 1: Overlapping Regional Membership

* Madagascar is temporarily suspended from the SADC

24

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