CHAPTER 4: Macro Policy & Economic Convergence
4.3 Indicators of External Sector Performance and Convergence
Other components of the external sector of an economy also offer useful insight about subregional convergence when country outcomes are compared across the subregion. The ensuing sections consider the performance of the SADC subregion on current account
balances, international reserves, external debt stocks and official development assistance (or aid). It will be recalled that other elements of the external sector, such as foreign direct investment, were already considered elsewhere in chapter 3.
4.3.1 Current account balances in SADC
Current account balance is determined as the sum of net exports of goods and services, net income, and net current transfers (World Bank, 2011).The analysis of current account balances during 1990-2009 in SADC suggests that the subregion had broadly five groups of countries (Figure 4.6):
• The majority of countries (Mozambique, Seychelles, Zambia, Tanzania, Madagascar, and Malawi) managed consistent and significant average current account deficits of varying magnitudes for different time intervals, with Mozambique topping the list with an overall period (1990-2010) average current account deficit of 14.8 per cent of GDP. Although Zimbabwe is included in this group, its true picture is unclear due to unavailability of data. Countries in this group are predominantly vulnerable to external shocks due to a high dependence on a single or few export commodities with volatile prices.
• Angola was in a group of its own as a country with significant current account deficits in the initial parts of the reference period, which then markedly and progressively reduced the deficit and ultimately turned to a current account surplus in the closing interval (2006-2010). This performance is due to the revitalisation of the Angolan oil sector amidst increasing global demand for oil, thereby raking in more oil revenues.
Figure 4.6: SADC balance of payment (BOP), current account balances (% of GDP), 1991-201026
* Data from 1995-2010 missing; no data available for DRC; + data missing for 2010; Values in parenthesis are overall period averages for 1990-2010.
Source: constructed from Country Data Tables (Annex 1)
• Three countries (Mauritius, Swaziland and South Africa) kept consistently low average current account deficits for the time intervals. The current account deficits are largely due to the slowing pace of economic activity in Mauritius and South Africa in response to the global downturn over the latter part of the review period, with Swaziland’s external outlook closely linked to that of South Africa due to the close economic integration between the two countries.
• Lesotho was also in its own group as a country that would have possibly generally held current account surpluses throughout, had it not been for the massive spillages in the 1996-2000 intervals. The massive spillage on the current account during the 1996-2006 period was largely due to the impact of the Lesotho Highlands Water Project (LHWP) and the Muela hydro-electric project. According to country estimates, LHWP imports averaged more than 10 per cent of GNP per year. Imports also expanded on account of the increased economic activity and employment resulting from the project. In addition, transfer payments associated with the repatriation of earnings by foreign personnel employed on the project rose markedly. The
26 2011 updates on this variable in the WDI were not available at the time of preparing this report
completion of the Phase One LHWP and near completion of the hydro-electric project saw a contracting of the current account deficit after 1999.
• Finally, two countries (Namibia and Botswana) maintained consistent current account surpluses, marking the most favourable external positions in the SADC subregion in terms of their current accounts. This is consistent with the strong record of macroeconomic stability that these two countries have maintained historically. Both countries’ external accounts have been favoured by surging diamond exports, which contribute heavily to the external outlook of these two countries.
Overall for the subregion, the period 1991-2010 saw a very diverse picture with no obvi-ous pattern of convergence in the performance of balancing current accounts.
4.3.2 International reserves
International reserves are holdings of monetary gold27, special drawing rights, reserves of members held by the IMF, and holdings of foreign exchange under the control of monetary authorities (World Bank, 2011). A common way of easily understanding inter-national reserves is in terms of the number of months of import cover they represent (i.e how many months of imports they would pay for). Our analysis of international reserves during 1990-2010 in SADC follows this latter simple definition. The analysis finds indica-tive evidence of three broad categories of countries in the subregion (Figure 4.7):
• Firstly, in a group of its own was Botswana with an impressive record of international reserve management, with gross international reserves during 1990-2010 standing at an average equivalent to over 20.3 months of imports.
No other SADC country came even remotely close to the international reserves position of Botswana during the reference period.
• Secondly, four countries (Mauritius, Tanzania, Lesotho and Mozambique) held international reserves close to four months of import cover on average during 1990-2010.
• Finally, all the rest of the countries, making up the majority, held international reserve positions equivalent to between 1 month of imports (for Seychelles) to 2.7 months (Swaziland).
All the economies represented in Figure 4.8 held their most impressive international re-serves positions during the 2005-2009 interval, except Botswana and Seychelles which were the countries at the two extremes of the international reserves performance spectrum.
This suggests a general and at least mildly convergent trend towards modest holdings in international reserves across SADC. This is a positive outcome for the subregion, because even a modest holding of reserves will act as an insurance device against sudden reversals in capital inflows, thereby sustaining efforts towards achievements in human development conferred by the presence of these capital inflows.
27 The gold component of these reserves is valued at year-end (December 31) in London prices ($386.75 per ounce in 1995 and $1,087.50 per ounce in 2009).
Figure 4.7: Gross international reserves in SADC (in months of imports equivalent), 1990-2011
+ +Data missing for 2010 and 2011; + Data missing for 2011; *Data for one interval missing; ** data for three intervals missing; no data available for DRC;
Values in parenthesis are overall period averages for 1990-2010 Source: constructed from Country Data Tables (Annex 1)
4.3.3 External debt stability
The stock of external debt is another important indicator of countries’ external economic positions. Management of external debt (and domestic debt) is housed under the subre-gional policy framework of the 2006 SADC Protocol on Finance and Investment, which recognises the importance of maintaining prudent fiscal stances for purposes of achiev-ing macroeconomic convergence. The protocol promotes formulation of transparent and consistent fiscal policies through the avoidance of large fiscal deficits, monetisation of deficits and high or rising ratios of public debt to GDP, in order to achieve higher degrees of convergence.
The analysis that ensues compares external debt stocks as a proportion of GDP for each of the SADC countries during 1991-2011 (Figure 4.8). During the reference period, there are countries that had huge external debt burdens, notably DRC, Zambia, Angola, Mo-zambique, Malawi and, to a lesser extent, Tanzania, Seychelles and Zimbabwe. On the other hand, two countries (Lesotho and Madagascar) had moderate and perhaps
man-ageable debt levels during the period. Finally, four countries (Swaziland, South Africa, Botswana and Mauritius) held modest to very small debt stocks relative to their GDPs.
An important observation relates specifically to countries that experienced heavy debt burdens during the reference period. This observation is that these countries made tre-mendous progress in reducing their debt burdens, especially by the final interval of the full reference period. The dramatic declines in the debts stocks of Zambia, Angola, Mo-zambique, Malawi and Tanzania are clear evidence of this. Underpinning this progress were the global debt-reduction initiatives, namely the Heavily Indebted Poor Countries (HIPC) initiative and the Multilateral Debt Reduction Initiative (MDRI).
Figure 4.8: External debt stocks (% of GDP), 1991-201128
No data available for Namibia; Values in parenthesis are overall period averages for 1991-2011 Source: constructed from Country Data Tables (Annex 1)
Only three countries had worrying debt profiles in the last five-year period. These were DRC and Seychelles which each had a debt stock larger than 100 per cent of its GDP, and Zimbabwe, which saw an expansion in its debt stock in the final interval of the refer-ence period. However, by the end of the review period DRC had reduced its debt stock 28 2011 updates on this variable in the WDI were not available at the time of preparing this report
to less than 40 per cent of GDP and was expected to reach completion point and access debt relief from creditors, in accordance with the HIPC Initiative and MDRI. With the exception of Seychelles, which has been increasing its debt stock since 2006, the SADC subregion in general has seen great improvements in debt profiles for countries that were in debt crisis or at risk of it. On the other hand, countries with low debt levels maintained their low levels. In a very cursory sense therefore the SADC subregion has converged to-wards generally lower levels of external debt stocks. It thus envisaged that more resources that were initially going to service external debt would be channelled towards attaining goals in human development.
4.3.4 Official development assistance
Finally, among the external sector indicators, the study considered official development as-sistance (ODA) or aid to the SADC subregion. While aid is vital in assisting the subregion achieve progress on targets of human development, a heavy dependency on this aid raises issues of sustainability and ownership of the whole process towards attainment of human developmental goals. Figure 4.9 presents the summary picture of aid outlays to the SADC subregion during 1991-2010.
The main picture seems to be that one group of countries (Mozambique, Malawi, Zambia, Tanzania, DRC, and to a somewhat lesser extent, Madagascar and Lesotho) was quite heavily dependent on donor aid during the period. The rest of the countries held relatively low aid-dependency positions, particularly the more advanced subregional economies (South Africa, Mauritius, and Botswana).
Figure 4.9: Aid, official development assistance (ODA) (% GDP)29
Values in parenthesis are overall period averages for 1991-2010 Source: constructed from Country Data Tables (Annex 1)
It was interesting that all the highly aid-dependent economies markedly reduced their dependency by the final interval of the reference period, except for DRC, which increased its aid dependency. On the other hand, Zimbabwe was the only country among the coun-tries showing low aid dependency to witness an increasing trend of dependency in the final interval.
From the foregoing, it would seem that a reasonable amount of economic convergence has been taking place in a number of areas in SADC. This depicts a slight improvement compared to the period prior to 1995, as observed in previous studies on macroeconomic convergence in Africa and particularly in SADC.30 However, there are some areas where, clearly, convergence simply has not taken place. Moreover, where this has been achieved, it is not clear how far this convergence can be attributed to the arrangements under SADC such as SADC protocols and strategies. This is firstly because many of the protocols are only just being formulated and have not been fully applied (such as the 2006 Protocol on Finance and Investment). Secondly, the protocols and strategies related to macroeconomic stability and progress appear to have few if any explicit principles or strategies for foster-29 At the time of preparing this report, the source of this information, the World Development
Indica-tors (WDI), did not have 2011 updates on this variable
30 ECA (1995), Macro-Economic Convergence in the Southern African Development Community (SADC): With Special Emphasis on Monetary and Financial Integration, and ECA (2007), Macro-economic Convergence in East and Southern Africa 1980-2007.
ing macroeconomic convergence for its own sake. Increasing the pace of convergence will therefore require some amount of re-thinking and re-formulating of SADC’s macro policies, frameworks and strategies. This is because the divergences in the macroeconom-ic aspects, whmacroeconom-ich have been highlighted in this chapter, fetter human development and therefore deeper integration of the subregion. It is important to note that some of the major symptoms of the recent eurozone crisis, which threatened the existence of the entire zone, were visible through divergences in key macro aspects, as highlighted in this chapter.
The starting point for the SADC subregion therefore is to buy into and build on the track record that has already been achieved in the area of negotiating and establishing trade agreements as a useful avenue for restructuring macroeconomic policies.
4.4 Conclusions and recommendations
This chapter focused on economic convergence, drawing on key macroeconomic and sec-tor-specific policy issues related to convergence outcomes. This focus was chosen because the gaps between member States’ incomes and other macroeconomic performance need to be seen to converge over time in order to achieve the SADC objective of equitable and balanced development of member States. Below is a summary of chapter findings
Generally SADC member States appear to have achieved a reasonable degree of economic convergence in terms of real GDP per capita, with per capita GDP following similar upward trends across the majority of countries. Only two notable countries have experi-enced wider per capita GDP divergence from the rest of the subregion. Less divergence in income-level indicators such as GDP per capita and less disparities in human-develop-ment indicators do promote the progress towards deeper integration of the subregional economy. Thus, for countries that have been trailing and particularly for those that have experienced steady deterioration in their real per capita GDP, close and detailed consider-ations will have to be made concerning the political, social, economic and demographic factors that have led to these circumstances.
Except for a few notable countries, the income and export performance levels of SADC member States seem to converge, albeit at relatively low levels compared to other econo-mies of the world. The apparent inability of those SADC member States to make signifi-cant gains in trade-based growth has much to do with their low levels of export sophistica-tion. In this regard, subregional and market integration strategies and efforts that support trade expansion and sophistication will have to be intensified if the subregion is to achieve its export promotion and expansion ambitions.
Overall for the subregion, the period 1991-2010 saw a very diverse picture with no ob-vious pattern of convergence in current account balances. However, except for the two countries at the two opposite extreme ends of the scale, all other countries held their most impressive international reserves positions during the 2005-2009 intervals, suggesting general convergence towards modest holdings of international reserves.
From a cursory perspective, the SADC subregion has converged towards generally lower levels of external debt stocks (implying more resources that were initially going to service external debt would be channelled towards attaining goals in human development). This however does not rule of the needs for subregional debt management policies, as there is much scope for further cooperation.
Regional integration can lead to equitable and balanced development of member States when gaps between member States’ incomes and other macroeconomic outturns need to be seen to converge over time. For the SADC subregion, macroeconomic convergence, where present, has occurred at low levels, suggesting a re-thinking and possible re-for-mulation of SADC’s macro policies, frameworks and strategies to increase the pace of convergence for balanced and equitable human development.