Mr. Stals examines the role of financial cooperation in the development of
the Southern African Development Community Lecture by the Governor of the South
African Reserve Bank, Dr. C. Stals, presented to the Harvard Institute for International
Development in Boston on 1/5/97.
1. Background to the formation of SADC
The Southern African Development Community found its origin in 1980 when
nine1 countries in Southern Africa decided jointly "to pursue policies aimed at economic
liberation and integrated development of our national economies". One of the main objectives of
the association at that stage was to make the economies of these countries less dependent on
South Africa -- a country that was then an unwanted ally because of its unacceptable internal
political and social policies.
After major political and social reforms in South Africa led to the fully
democratic election of a Government of National Unity in April 1994, South Africa also joined
SADC, to become the eleventh member, after a newly-independent Namibia already joined in
1990. Mauritius was the next country to join SADC, which now has twelve members with a total
population of about 136 million people.
In August 1992, a revised Treaty for SADC was approved by a Summit Meeting
of the Heads of State of the participating countries. Included in the main objectives of the
Community are the following economic goals:
To achieve development and economic growth, alleviate poverty, enhance the
standard and quality of life of the peoples of Southern Africa, and support the socially
disadvantaged through regional integration; To promote and maximise productive employment
and utilisation of resources of the region, and to achieve sustainable utilisation of natural
resources and effective protection of the environment.
To achieve its objectives, SADC shall
•
Harmonise political and socio-economic policies and plans of member
States.
• Mobilise the peoples of the region and their institutions to take initiatives
to develop economic, social and cultural ties across the region, and to
participate fully in the implementation of the programmes and operations
of SADC and its institutions.
• Develop policies aimed at the progressive elimination of obstacles to free
movement of capital and labour, goods and services, and of the peoples of
the region generally among member States.
•
Promote the development of human resources.
•
Promote the development, transfer and mastery of technology.
•
Improve economic management and performance through regional
co-operation.
The Treaty provides for other political, social and cultural objectives which are
not of direct relevance for the enhancing of financial co-operation in the region.
2. South Africa's position within SADC
The South African economy is by far the most advanced in the region. Although
the total South African population of 42 million people accounts for but 31 per cent of the total
population of all SADC countries together, the South African economy contributes about 80 per
cent of the total gross domestic product of about $170 billion produced in the twelve member
states. South Africa also accounts for almost 70 per cent of the combined total exports of $43
billion of the SADC region.
South Africa's dominance is even more pronounced in the financial markets.
South Africa is about the only country in the region with well-functioning and independent
specialised financial institutions such as banks, long- and short-term insurers, private sector
pension funds, mutual funds, participation mortgage bond schemes and mining and industrial
finance houses. With a total market capitalisation of about $280 billion, the Johannesburg Stock
Exchange dominates the capital markets of the region, and with a daily turnover of about $7
billion, the foreign exchange market in Johannesburg is providing an increasing service for
international settlements for a number of other countries of the region. With a turnover of more
than $700 billion last year in the South African bond market and a growing market for
derivatives, South Africa is in a favourable position to provide sophisticated financial services
for the whole SADC region.
This dominating position of the South African economy has certain advantages,
but at the same time makes harmonious regional co-operation more complex. Some of the other
partners in SADC hold an understandable fear that their economic independence will be
jeopardised by a too aggressive policy of economic integration of the region.
The role that South Africa plays within SADC must therefore be approached with
tact and ingenuity. South Africa was given the responsibility for managing and developing the
Finance and Investment Protocol2. For this purpose, there is a Council of Ministers of Finance
that meet from time to time under the chairmanship of the South African Minister of Finance to
give guidance to a programme for closer financial co-operation amongst the participating
countries in SADC. Two sub-committees were also established, one a Committee of Treasury
Officials, and the other a Committee of Governors of Central Banks and their officials, with
clearly defined terms of reference for each one of these Committees.
3. The work and functions of the Committee of Governors of Central Banks
When South Africa was given the special task of administering the Finance and
Investment Protocol for SADC, the South African Reserve Bank saw in this arrangement a great
opportunity for closer co-operation amongst the central banks of the region. In the beginning,
however, it proved a major task to get recognition from the political leaders for the need of an
independent Committee of Governors of Central Banks. In many of the participating countries
the central bank is regarded, and often unfortunately also used, as just an extension of the
Treasury Department of the central government. In succeeding to get the approval for the
establishment of this Committee of Governors an important seed was sown in each one of these
countries for the acceptance of the undeniable advantages, also for the politicians, of an
independent central bank.
A second major obstacle was overcome when approval was granted for the
establishment of a small specialised Secretariat and Research Facility within the South African
Reserve Bank to serve the Committee of Governors. This avoided the need for adhering to the
cumbersome procedure of communicating within the central banking fraternity through the
conduit of the SADC Secretariat, based in Gaborone, the capital of Botswana.
The SADC Finance and Investment Sector was formally established only in 1995,
and the Committee of Governors held its first meeting on 24 November 1995 in Pretoria. Now,
eighteen months later, this Committee can already look back on a number of accomplishments,
and can report good progress with a number of projects being pursued in the interest of
promoting economic development in the Southern African region. A number of Technical
Subcommittees and Working Groups have been formed, consisting mainly of officials of the
SADC central banks, to work on specialised projects.
4. The basic philosophy behind financial co-operation in the region
Before the Governors' Committee was established, SADC approached financial
co-operation in the region on the basis of proposals made by European advisers, and was based
mainly on the model of financial integration in the European Community. The folly of this
approach was immediately grasped by the Governors at their first meeting. The divergencies in
the stage of economic development of the members of SADC are so vast that there can be no
talk at this juncture of a European type of economic integration in Southern Africa. The
Governors' Committee therefore had to design its own model for sensible financial co-operation
in the region. In drafting its own mission statement, the Committee designed a model for
financial co-operation that was described as a "bottom-up" approach. This approach is based on
building financial co-operation by laying an appropriate foundation in the form of an effective
institutional framework for the financial system in each country. More grandiose schemes for the
harmonisation or integration of macroeconomic monetary polices can be considered once central
banks, private banking sectors and financial markets have been established and are functioning
effectively in most of the participating countries.
A second challenge that had to be faced was the diverse roles and functions
assigned by their Governments to the various central banks in the region. In finding an answer to
the question of what contribution central banks can make towards the achievement of the goals
of SADC, a consensus had to be found on what the task of the central banks should be in
promoting optimum economic development and growth. There may not yet be full agreement on
this daunting question, but the majority view now favours the contemporary approach of the
more advanced economies that the central bank's responsibilities should be restricted to the
creation and maintenance of a stable financial environment that will be conducive for sustainable
economic growth. Central banks must protect the value of the currency. This is gospel, not only
in more industrialised, but also in developing and emerging economies. Overall financial
stability may not be a guarantee for, but certainly is a precondition for, sustainable economic
growth.
5. The framework for financial co-operation within SADC
In terms of the bottom-up approach, the Committee of Governors kicked-off its
work programme by exchanging views on the nature, structure and functions of each central
bank in the region. In many developing countries, central banks, acting as extensions of
Government Finance Departments, are often directly involved in normal commercial and
development banking, and in many other macroeconomic activities such as export promotion,
social upliftment programmes, and financing of government budgetary shortfalls. This, of
course, often creates a conflict with the prime objective of central banking, and that is to protect
the value of the currency. The powers of the central bank in such countries must first be reduced
to improve the effectiveness of monetary policy.
In the second phase of its deliberations, the Committee of Governors is
concentrating on the quantity and quality of private banking in the region. The establishment of
sound and well-managed privately-owned banking institutions must be encouraged to provide
financial services in a competitive environment. The two tiers of banking, that is central banking
and private banking, must be separated on a clearly-defined basis.
In the third phase of financial co-ordination, the central bank Governors are
working together in a joint effort to develop compatible and inter-linkable national payments,
clearing and settlement systems for financial transactions. Eventually, the national systems must
be linked to each other to provide for more effective cross-border settlement of inter-regional
financial transactions. This project requires some co-operation in the development of compatible
electronic data processing and technology systems in the twelve participating central banks.
In a fourth phase, more attention will be focused on the development of financial
markets in the region. A lot of research work must be done on the introduction of appropriate
legal institutional frameworks, the introduction of financial instruments and the improvement of
technological systems and human resource skills in the foreign exchange, money and capital
markets. Some rationalisation in the use of the existing markets to the advantage of the whole
region will be necessary.
Only then will it become possible to consider greater harmonisation and even
integration of macroeconomic financial policies such as interest and exchange rate policies, the
management of bank liquidity and credit extension on a regional basis, and operations by central
banks in a more integrated financial market environment.
6. The practical implementation of the programme for financial co-operation
The SADC Committee of Governors is determined gradually to implement its
plan for greater financial co-operation over the next few years in the whole region. On the
African Continent, many ambitious plans for economic co-operation exist on paper, but are
never executed. The Governors' Committee has already embarked on the implementation stage,
and is now actively involved in a number of the ground-work projects:
1. It has become necessary for the twelve Governors to have a better
understanding of the regional economic environment within which they operate. For this
purpose the Secretariat of the Governors' Committee established a statistical data base for
essential economic time series from the twelve countries in the computer capacity of the South
African Reserve Bank. It is the intention to connect all the central banks in due course with
realtime on-line linkages to the data base.
2. To enable Governors to learn from the experiences of each other, a data bank
with information on issues such as legislation, relationships with Governments, functions and
responsibilities, management, policy objectives, procedures and instruments of monetary policy,
and administrative structures for each central bank, has been compiled and is now available to
all the Governors.
3. Programmes are encouraged for the establishment of efficient and
wellmanaged privately-owned banking institutions in all SADC countries. Assistance is being
provided for the revision of the banking laws in some countries, and central banks are
encouraged where necessary to withdraw themselves from private sector banking activity.
4. The South African Reserve Bank is playing a leading role in the development
of the quality of, and capacity for, proper bank regulation and supervision. Some harmonisation
is encouraged on policies such as bank licensing, minimum financial prudential requirements,
and regular auditing of banking institutions. A joint effort is also being made to take the
necessary action against illegal banking activities in the region, such as money laundering and
pyramid schemes.
5. There is a great need for training and the development of skills in central
banking in the region. The South African Reserve Bank has introduced a specialised Training
Institute for Central Banking, and is now providing specialised courses in central banking and
financial management for its own staff and officials of other central banks in the SADC region.
The central banks of the region also formed an East and Southern Africa Banking
Supervisors Group (ESAF) to standardise bank regulation and supervision in the region. ESAF
is providing specialised courses for the development of the financial regulatory capacity in the
region.
There is also a more ambitious training programme provided through the
Macroeconomic and Financial Management Institute (MEFMI). A number of Southern African
countries, but not all members of SADC, participate in this venture. With its headquarters in
Harare, MEFMI's operational mandate covers two broad areas:
"(i) In-depth capacity building, involving training, institutional development,
networking and technical support, to strengthen countries' ability to manage their debt and
external reserves;" and
"(ii) a training programme for public officials with duties relating to
macroeconomic and financial management, providing courses in a wide range of high-priority
fields." MEFMI has the support of a number of international institutions, such as the World
Bank, and has the potential to make an important contribution to the development of desperately
needed skills for the management of the economic transformation of African countries.
6. The removal of remaining exchange controls in the region is a major priority
of the Governors' Committee. Arrangements have been introduced for the unrestricted
repatriation of notes and coin used in participating countries amongst the members of SADC,
and the movement towards an unrestricted flow of capital in the region is being promoted. South
Africa is lifting its remaining exchange controls in respect of SADC countries faster than for the
rest of the world. Two members, namely Zambia and Mauritius, have already removed all
exchange controls in their countries.
7. Reference has already been made to the work that is being done in the area of
electronic data processing and the development of a cross-border network for financial clearing,
payment and settlement transactions. International assistance is now sought (through the World
Bank) for the development of the national payment and clearing systems in the less-developed
economies of the region.
7. The road ahead
There is growing enthusiasm in Southern Africa for a regional approach to
economic development issues. There are, unfortunately, more than one initiative for
multinational regional economic co-operation arrangements in Sub-Saharan Africa, initiatives that
often compete with each other. In Southern Africa itself, the SADC and COMESA (the
Common Market for Eastern and Southern Africa), groupings provide many overlapping
services and some countries belong to both organisations, and others to only one of the two. The
time has come for Governments in the region to consider a merger of the two competing
regional groupings in a more viable single regional association.
Both SADC and COMESA have their own Secretariats with a strong bureaucracy
that often inhibits initiatives because of unnecessary rigid procedural requirements. In the case
of the Committee of Governors of SADC, we often live in sin because of non-compliance with
the prescribed procedures of the SADC Secretariat. Forgiveness, however, can easily be
extorted, as long as progress and successes can be claimed.
There is among some governments still a strong suspicion of the motives behind
closer economic co-operation in the region. The question arises whether it is perhaps not a real
danger that the powerful South African economy will exploit the smaller economies for its own
advantage: South Africa has to act with great discretion in performing its role in the programme.
South Africa obviously has a vested interest in the economic development of the region as a
whole.
Internally, South Africa still has many serious economic problems that must be
resolved to improve the living conditions of its own people. Unemployment is high, many
communities live in great poverty, and there is a relatively wide spread between high and low
incomes earned in the country. Many people therefore believe that South Africa should
concentrate all its resources on the development of its own economy. There is, however, a basic
fallacy in this approach. Whenever South Africa makes some progress in solving its own
economic problems without a parallel development in other countries in the region, the
unemployed from the other countries get sucked into the South African system. If South Africa
is not prepared to accept more exports from other African countries and does not want to allow
part of the South African savings to be invested in these countries, the country will have to
absorb great numbers of unemployed people from the rest of the region.
The region of SADC is gradually becoming an attractive place for foreign
investors. Its potential for economic development is vast, and undeveloped human resources and
the exploding demand for goods and services emanating from people who are now being
absorbed for the first time in a real market economy, must lure many multi-national institutions
to the Southern Africa region. It depends on us how attractive we can make our own region for
the outside world as a place for long-term, durable, and productive investment.