Mr. Stals looks at the future of financial co-operation in Southern Africa
Speech by the Governor of the South African Reserve Bank, Dr. Chris Stals, at a conference on
Southern Africa: Resources, Investment and Trade, arranged by Forum Southern Africa Limited
in London on 10/7/97.
1. The reintegration of South Africa in the world economy
Good progress has been made over the past four years with the reintegration of
South Africa in the world economy. The political and social changes introduced in South Africa
paved the way for the removal of international economic punitive actions that partly isolated the
country's economy from the rest of the world during the ten years preceding the fully
democratic election of a Government of National Unity in April 1994.
Even before the election took place, the rest of the world gave its support to the
moves towards democracy by lifting sanctions, boycotts, disinvestment campaigns and trade
restrictions. Since 1994, the following major changes took place in South Africa's international
economic relations:
(i) South Africa became a full participating member again in various
multinational institutions such as the World Bank, the International Monetary Fund, the United
Nations and the African Development Bank.
(ii) Agreements were entered into with the World Trade Organisation for a
substantial revision over a five year period in the protective import tariff structure, and certain
discriminatory export subsidies were removed.
(iii) Exchange controls were substantially relaxed to introduce full convertibility
for current account transactions, to remove all exchange controls applicable to non-residents and
gradually to lift the remaining exchange controls applicable to the outward investment of capital
by South African residents.
(iv) An extensive liberalisation programme of the South African financial markets
included major changes in the capital market, e.g. to allow for foreign and corporate ownership
of stock broking members of the Johannesburg Stock Exchange, and the opening up of the South
African banking sector for foreign competition. There are now 17 foreign banks with branches
and subsidiaries in South Africa, and about 60 foreign banks with representative offices.
(v) A number of new bilateral, regional and international economic co-operation
agreements were entered into, such as the Southern African Development Community (SADC)
and the arrangements with the European Union for closer economic co-operation.
These changes have had a material effect on South Africa's international
economic relations and are reflected in a very visible way in the South African balance of
payments. Over the three years 1991 to 1993, the current account of the balance of payments
showed a surplus of US $5.8 billion, and the capital account a net outflow of $7.1 billion. The
official foreign reserves therefore declined by $1.3 billion. When the new Government came
into power in April 1994, the country had virtually no official foreign reserves left.
Over the past three years, that is from 1994 to 1996, the current account of the
balance of payments showed an accumulated deficit of $5.1 billion. During this period, a net
capital inflow of $7.4 billion, enabled the Reserve Bank to replenish the exhausted foreign
reserves gradually. At the end of June 1997, the Bank held an amount of $4.9 billion in reserves,
which was still relatively low (sufficient cover for 7 weeks' imports), but nevertheless much
better than four years ago.
The balance of payments developments merely reflected the changes in total gross
domestic economic activity. The average rate of change in gross domestic product over the three
years 1991 to 1993 showed a decline of 0.6 per cent, compared to an average rate of increase of
3.1 per cent over the next three years. The average rate of change in gross domestic expenditure
changed from a decline of 0.3 per cent per annum from 1991 to 1993, to 4.9 per cent growth
over the next three years.
2. South Africa's role in Southern Africa
The developments over the past few years enabled South Africa to take on a more
active part in the economic development of the Southern African region. Economic co-operation
in Southern Africa has been formalised through the Southern African Development Community
Treaty of August 1992, which incorporated the following goals:
* To achieve development and economic growth, 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 the 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, and
* 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.
South Africa has been given the task to manage the Finance and Investment
Sector of SADC, and the South African Reserve Bank was given the important role to
co-ordinate the functions of the central banks of the twelve member states in the promotion of
the SADC objectives. For this purpose, a Committee of Governors of Central Banks of SADC
was created, with a small secretariat in the South African Reserve Bank, and a research unit to
provide assistance to the Governors' Committee.
In drafting its mission statement, the Committee of Governors 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 first laying an appropriate foundation in the form of an
effective institutional framework for the financial system in each country. More ambitious
schemes for the harmonisation or integration of macroeconomic monetary policies can be
considered at a later stage, i.e., once central banks, competitive private banking sectors and
financial markets have been established on a firmer basis, and are functioning effectively in most
of the participating countries.
In its work programme, the Committee of Governors has made good progress
with the following projects:
* The development of a monetary and financial statistical data base, captured in
the computer of the Reserve Bank in Pretoria, with the intention of providing
real-time on-line access to the information to all participating central banks;
* The development of an information bank on the policies, structures and
functions of the 12 SADC central banks;
* The harmonisation of the development of national payment, clearing and
settlement systems within each one of the twelve SADC countries, and the
eventual provision for a network of cross-border settlements in the region;
* The co-ordination of exchange controls, and the gradual removal of exchange
controls, in the region. South Africa is now relaxing its exchange controls still
applicable to foreign capital investment by South African residents in respect of
investments in other SADC countries faster than for the rest of the world;
* The co-ordination of training of officials of all SADC central banks. 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.
* There is also a more ambitious training programme provided through the
Macroeconomic and Financial Management Institute (MEFMI), with its
headquarters in Harare. The objective of MEFMI is to assist Governments
(Treasuries) and central banks to develop internal capacity for macroeconomic
management;
* 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 prudential financial requirements, and regular auditing of
banking institutions. A joint effort is also being made to take the necessary steps
against illegal banking activities in the region, such as money laundering and
pyramid schemes.
* The forum for closer co-operation amongst the central banks of the region has
now been firmly established. The work of the Committee, apart from
consolidating the projects so far undertaken, will now be extended to the level of
the private banking sector, and of the development of financial and capital
markets in the common interest of the region as a whole.
3. Economic challenges for South Africa
South Africa now finds itself in the challenging situation that, in one direction, its
financial markets are rapidly being integrated in the global financial system, and in the other
direction it is becoming more and more part of the difficult process of supporting and
stimulating economic development in the Southern African region. At the same time, daunting
problems still remain unsolved in the internal economy of the country. The new Government has
had remarkable success over the past few years in the implementation of disciplined fiscal and
monetary policies, and has gained confidence from investors and business people in its
determination to apply sound economic policies in general.
Little progress, however, has been made in solving one of the most urgent
problems of the South African economy, and that is to create sufficient jobs for the growing
population. Total employment in the country is now hardly more than what it was at the
beginning of the nineties.
South Africa's economic policies must, at this stage, maintain good balance
between the process of globalisation, the satisfaction of the dire basic needs of the domestic
population, and the desire to assist in the economic development of the region. In a holistic
approach, these various objectives are not in conflict with each other, but are in many respects
supplementary. Successful participation in the global financial markets will lead to a larger
inflow of foreign investment capital into South Africa, that will enable the country to do more
for the upliftment of its own people, and for the development of the region. But this will subject
all the macroeconomic initiatives of the country to the disciplines of the global investment
community. These disciplines, tested by world-wide experience, amply reward successes, but
severely punish failures.
With its economic policies of the past few years, South Africa has already proved
that it is determined to stand up to this challenge. The process of economic liberalisation and
integration into the global markets must continue; economic co-operation in Southern Africa,
and with countries further North in Africa, will be extended; the implementation of the
Government's Reconstruction and Development Programme, and the Strategy for Growth,
Employment and Redistribution, will be pursued with vigour and determination.
The task ahead is not an easy one. South Africa, and Africa, will need all the
assistance it can get from the rest of the world. There is growing optimism that, in the early
years of the 21st century, Africa will succeed in its concerted efforts to improve the living
conditions of all the people of our Continent.