Tom Alweendo: Prospects for a monetary union in the Southern African
Development Community (SADC)
Address by Mr Tom Alweendo, Governor of the Bank of Namibia, at the Bank of Namibia's annual
governor's address, Windhoek, 18 November 2004.
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Invited Guests,
Ladies and Gentlemen:
I am happy to welcome you once again at our annual event, where over the last five years I have
shared my views on a number of issues of economic nature. This evening, I am going to share with
you my views on the prospects for a monetary union in the Southern African Development Community
(SADC). This topic is by no means new and it has been discussed by various speakers on various
occasions. However, because of its importance it is worth repeating and hopefully we will start building
a consensus around the issue.
The issue of monetary integration that is meant to ultimately lead to a monetary union on the African
continent is being addressed at two levels. The first level of discussion is the continent-wide, where
under the African Union the continent shall establish a common monetary policy and therefore a
common central bank. The Association of African Central Banks (AACB) has been requested by the
African Union to prepare the establishment of the African Central Bank and the time framework. The
AACB has suggested a tentative work program that will see the African Central Bank being
established by the year 2021.
The second level of discussion with regard to monetary integration is taking place at regional level,
where all five African regions are expected to work on regional monetary integration. In the Southern
African region, SADC is working on a program where we are going to establish a common central
bank in the region by 2016 and a common currency by 2018. The year 2016 sounds far enough, but
this is a mere twelve years from now.
Namibia's position with regard to a SADC monetary union is further complicated by our membership to
the CMA. At the CMA level, we have also started with preliminary discussions that more and more
points at the establishment of a CMA central bank ahead of the SADC central bank. An argument
could be made that since all CMA member countries are members of SADC, it will be better for
Namibia to concentrate on the SADC monetary union discussions. However, this will only be true if
one was certain that the SADC discussions will go ahead as per the agreed timeframe. The concern
here is that the CMA is a de facto monetary union, except that the function of making monetary
decisions is exercised by one member country only. This is not an acceptable arrangement and we
need to find a more equitable solution where decision making power is exercised by all member
countries.
The decision to discuss the continental monetary integration issue at two levels was seen to be the
only realistic strategy if we were to succeed. This is so because the continent is faced with diverse
economic and social challenges and to try to discuss integration at continental level only will be
foolhardy, at best.
Joining a monetary union will mean giving up your national currency and adopting a new currency or a
currency of a larger country. To some people giving up your currency is a provocative notion that could
be equated to treason. This is especially true for small, developing countries that might have just
gained their political independence. The idea of being subsumed by a larger country is not appealing
at all. Why, then, should a country want to enter into a monetary union?
The increased interest in monetary integration is closely linked to the process of globalization,
especially financial globalization, which has been a dominant feature of discussions at various forums.
In today's globalized financial markets, capital has become too mobile and cross-border investment
too vast. Today world financial markets are too large, economies are closely integrated and financial
technology too innovative.
In this context, the initiatives for free trade areas, customs unions and common markets are clearly
designed as strategies of promoting a region within the global economy. Increasingly, the globalization
process in terms of integrated markets is seen as a mechanism to enhance and promote the region's
competitiveness vis-à-vis other trading blocks and enlarged internal markets. The key elements of this
process are the removal of the internal trade barriers and free flow of the factors of production
especially labour and capital.
In a globalised financial market, the effectiveness of an independent monetary policy is questionable,
especially for small open economies with one form or the other of fixed exchange rates arrangements.
It is argued that it is very hard for a country to simultaneously maintain a fixed exchange rate and an
open capital market while pursuing an independent monetary policy geared towards domestic
economic policy. A country can opt not to be part of the financial globalization, except that the
outcome will not be desirable. What is likely to happen is that such a country will be isolated and might
become further marginalized in terms of its participation in the world economy. I must also hasten to
add that while globalization is being portrayed as good for the world, it is also true that in itself
globalization will not benefit those countries that are not prepared to take advantage of the new
system.
In order to benefit from a globalised economy, I do recognize three issues that are of critical
importance. First, a country needs to ensure that it has the necessary human skills capable of
competing effectively within the world economy. Second, a country would need to have an institutional
arrangement that conforms to international standards. Examples here are that your institutions must
practice good governance; you must have an effective accounting regime; and you must have clear
demarcation of functions and responsibilities among your institutions. The third issue I believe is
important is an effective legal framework, where businesses and individuals alike are certain that their
legal contracts are enforceable in a timely manner.
In our region, the increasing interest and momentum for the creation of a monetary union seems to
revolve around two main considerations. The first is that the establishment of a monetary union in
combination with free trade agreements is increasingly being seen as part of a strategic push to
integrate the region. In this regard, a monetary union is seen as a way of reinforcing regional cohesion
and demonstrating a commitment to regional solidarity. Indeed, the harmonization and unification of
monetary policy represents the deepest form of economic and financial integration.
The second consideration for the formation of a monetary union is the desire to counteract perceived
economic and political weakness which dates back to the period of colonial rules by putting in place
regional institutions, of which a monetary union and common currency would be strong symbols. It
would also appear that the launching of the European monetary union has influenced this process.
A strong argument and motivation for a monetary union is that it brings a number of benefits. The most
often cited benefits are the increased intra trade, price stability, increased aggregate investment, and
the elimination of the exchange rate risk. It is argued that the elimination of the exchange rate risk
would allow for increased capital inflow and regional investment opportunities resulting in welfare
gains and growth. It also reduces transaction cost within the region incurred when changing one
currency to another.
Besides increased intra-trade, economic theory and experience also suggest that a single regional
currency is expected to have a more stable internal and external value. Therefore, the benefits of price
stability and monetary policy credibility are more likely to be realized in a monetary union. This is
especially true if the regional monetary authority is autonomous in carrying out its functions and where
its primary objective is price stability.
It is also suggested that a monetary union would improve macroeconomic stability by ensuring fiscal
and monetary policy credibility. This is necessary for attraction of investments, which eventually
translates into economic growth as potential investors would only invest if they have full confidence
that they would get sufficient returns on their investments.
There are also costs involved in participating in a monetary union. By far the most often talked about
cost, is the loss of autonomy to manage monetary policy. Arguably, national autonomy over monetary
policy is supposed to give a country the maximum freedom and flexibility, through the use of various
monetary instruments such as interest rates and reserve requirements, to steer the economy in a
particular direction. Given that monetary policy is a key instrument of macroeconomic management,
the constraints imposed by a monetary union on the pursuit of country specific objectives may
therefore be viewed as constituting a hindrance to achieve country specific economic goals. This point
is important especially for SADC countries that are at different stages of development and with
different degree of financial and economic structures. Such diversity would make it difficult to sustain a
monetary union. Therefore, having a unitary monetary policy for the region would be a daunting task
especially given the fact that our countries have different shocks that may require different policy
responses.
Yet, financial globalization has taught us that the use of an independent monetary policy is severely
limited. With globalization, cross-border capital flow is inevitable and this makes independent
monetary policy ineffective especially for small developing countries. The logical conclusion is that
such countries will be better-off with a monetary union since they cannot, in any case, effectively
implement independent monetary policy.
Another cost associated with monetary union is that the ability of the government to conduct fiscal
policy is constrained by the limits collectively agreed and imposed in respect of budget deficit
financing. The imposition of limits on deficit financing is necessitated by the desire to prevent member
states to run large unsustainable deficits that could put upward pressure on interest rates and
exchange rates in the entire monetary union area. I would, however, want to believe that the restriction
on deficit financing is a benefit and not a cost, because it encourages prudence in fiscal management.
A monetary union will be more feasible among countries with open economies and strong trade links
with each other. Furthermore, a monetary union is likely to be successful if there is a significant degree
of economic convergence among the member countries in respect of some of the macroeconomic
variables. In the SADC region, empirical data indicates that the region does not meet all the criteria
suggested by the optimum currency area theory, neither is there convergence in most of the economic
variables. The process to establish a SADC monetary union will therefore be long because of the
macroeconomic convergence that must be established first.
The lack of convergence in key macroeconomic variables may suggest that the region is not yet ready
for a common currency. However, I must add that it may not be crucial to meet all the criteria prior to
the formation of a union. It is possible for member countries to agree to meet some of the criteria only
after the formation of the monetary union. Experience has also taught us that in the case of the
European Union, it was not only the economic argument that was the defining factor in the formation of
the monetary union, but also the political drive for unification. It is therefore important to have political
champions to promote the cause for a SADC monetary union. In the European example, Germany and
France were the political champions for their monetary integration.
Let me conclude by saying that, in general a monetary union is desirable as it is likely to promote
macro-economic stability and economic growth among member states. However, a monetary union
should not be seen as an end in itself but as part of a process for wider economic integration in the
region. To ensure a successful implementation of a SADC monetary union within the agreed
timeframe, it is important that member countries intensify and redouble their efforts towards the
realization of this noble objective. In particular, member countries would need to pursue appropriate
policy measures in order to satisfy the convergence criteria. Given the importance of the issue and the
sensitivities around it, it is crucial that the citizens of the member countries are properly informed of the
desirability of a monetary union.
A SADC monetary union will also have its unique challenges. Member countries should therefore
prepare themselves if they were to optimally benefit from the new arrangement. For example, member
countries would need to strategically position themselves such that they increase their share of intra
trade and investment within SADC and beyond. In the case of Namibia, we need to continue with the
diversification of the economy towards manufacturing and services. We also need to do more in terms
of concrete action plans to develop our human capital. This is a vital area where a lot has been said so
far, but there is little evidence that suggests that we are succeeding in building human capital that is
ready to compete effectively in the global economy.
Thank you for your attention.