The West African Economic and Monetary Union (UEMOA), the Economic Community of West African States (ECOWAS), the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC), and the Central African Economic and Monetary Community (CEMAC) have established convergence targets for macroeconomic policies and for monetary, fiscal, and financial integration.
Box 6.1
Requirements for establishing an African central bank
Establishing a common central bank rests on several conditions:
• The successful integration of all African economies into the African Union.
• The existence of an African common currency, which implies that all African countries have fulfilled the conditions for the introduction of a single currency.
• Commitment to a fixed exchange rate system.
• Abolition of capital controls between countries.
• A framework for common foreign exchange operations and maintenance of an “African” foreign exchange reserve.
• Achievement of institutional arrangements and convergence criteria by all countries, includ-ing criteria for price stability, fiscal deficits, and government debt ratios.
• A detailed constitution clarifying its objectives and functions.
• Clarification of its role in conducting monetary policy, financial supervision, and lender of last resort functions.
• Details of the institutional arrangements for the system of central banks included in its con-stitution, with a special focus on the role of national central banks.
Since the design and implementation of a common monetary policy is likely to be the pri-mary function of an African central bank, the details of a common monetary policy strategy for the continent need to be worked out, covering appropriate instruments, policy targets, and policy objectives. Capacity building is also important, including strengthening country frameworks for collecting, compiling, and analyzing monetary and financial statistics, harmonizing formats for financial data, strengthening payment and settlement systems to facilitate the flow of capital across borders, harmonizing accounting rules and standards, and establishing efficient informa-tion and communicainforma-tion systems among nainforma-tional central banks.
To function properly an African central bank must be immune from political interference. The effectiveness and credibility of monetary policy also requires ensuring autonomy for the national central banks. National statutes will also need to accommodate the changing role of national cen-tral banks within a monetary union.
For a true African Union to emerge, with a common central bank, the multiple regional group-ings will need to merge. Although mergers pose substantial technical challenges, the biggest obstacles might be political. Creating an African Union with an African central bank is an enor-mous undertaking. Difficult choices lie ahead.
Source: Economic Commission for Africa, from official sources.
ARIA ch6 030904.qxp 6/1/04 1:13 PM Page 112
UEMOA and CEMAC, because of their long histories as monetary unions, have con-siderable experience with convergence of economic and monetary policies. They have been able to put in place the processes and procedures to achieve policy harmonization (box 6.2). Monetary and financial integration policies are the responsibility of com-munity authorities—comprising central bank officials and representatives of member states and the French treasury. The other regional economic communities are moving more slowly. ECOWAS adopted convergence policies in December 1999 (CEDEAO 2001a), COMESA in 1992 (COMESA 2000), and EAC in April 1997 (EAC 1998), all with the goal of coordinating and harmonizing national budgets as well as national macroeconomic and sectoral policies.
Box 6.2
Implications of monetary union for exchange rate arrangements in African regional economic communities
Monetary integration implies a medium- to long-term move towards forms of fixed exchange rates, with countries eventually adopting a common currency. However, exchange rate arrangements are currently fragmented.
CEMAC and UEMOA are monetary unions, with the CFA franc as the common currency.
Although formally differentiated, the common currencies are exchangeable between the two communities one for one and are convertible into the euro at a fixed exchange rate. In COMESA two countries (Namibia and Swaziland) are members of the Common Monetary Area, where the South African rand circulates freely as the common currency under a floating arrangement. Currencies in 12 other countries (Angola, Burundi, Egypt, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Rwanda, Sudan, Uganda, Zambia) have floating exchange rates (more or less managed). Zimbabwe has a crawling peg. Seychelles adopted a standard peg against a basket of currencies, and Djibouti has a currency board arrangement against a basket. Comoros, Democratic Republic of Congo, and Eritrea peg their currencies against a single currency. In EAC all three members (Kenya, Tanzania, and Uganda) have floating cur-rencies. Most of the non-UEMOA members of ECOWAS have floating exchange rates (The Gambia, Ghana, Liberia, Nigeria, Sierra Leone). Benin and Cape Verde have standard pegs against a single currency.
This multiplicity of currencies and exchange rate arrangements makes a case for the estab-lishment of clearing mechanisms. ECOWAS and COMESA formally established clearinghouses to promote intracommunity trade with the use of local currencies against a background of exchange control dictated by the scarcity of hard currencies in most countries. Over time, how-ever, the reduction of controls and the move towards current account convertibility have sug-gested the need to restructure the clearinghouses by introducing new products and recasting their management along private, commercial lines. ECOWAS has transformed its clearinghouse into the West African Monetary Agency, which is responsible for the community’s monetary pol-icy, including harmonization of financial and banking policies.
Source: IMF 2001.
ARIA ch6 030904.qxp 6/1/04 1:13 PM Page 113
ECOWAS aims to establish an economic union among its members by creating a mon-etary union and adopting common economic, financial, social, and cultural policies.
ECOWAS members that are not members of UEMOA have agreed to harmonize their monetary and fiscal policies with those of UEMOA, with a view to establishing a mon-etary union in ECOWAS and preparing the ground for a possible merger with UEMOA. To accelerate the pace of integration, Ghana and Nigeria introduced a Fast-Track Initiative in 2000 to establish a second monetary zone in the region called the West African Monetary Zone (WAMZ), among The Gambia, Ghana, Guinea, Liberia, Nigeria, and Sierra Leone. WAMZ is meant to harmonize the macroeconomic policies of the countries so as to have a common currency in circulation.
ECOWAS expects to achieve monetary integration through the merger of UEMOA and WAMZ once WAMZ becomes a single monetary zone. The convergence program will be carried out by the Convergence Council, composed of ministers of finance and governors of central banks; the Technical Monitoring Committee, composed of direc-tors of research of central banks and senior ministry of finance officials; the West African Monetary Agency; and national Coordination Committees.
COMESA plans to become a full monetary union by 2024. Agreed convergence tar-gets are used to monitor progress in each member state, based on macroeconomic pol-icy, external debt, and adapted Maastricht Treaty criteria.
EAC adopted a macroeconomic framework in 1997 that includes a real GDP growth rate of at least 6% a year, single digit inflation, a sustainable level of current account deficits, fiscal deficit of less than 5%, gross foreign reserves equivalent to six months’
imports, national savings of at least 20% of GDP, market-determined exchange rates and interest rates, and debt reduction initiatives. The EAC Committee on Fiscal and Monetary Policies meets twice a year to evaluate compliance by member states. There are also pre- and post-budget consultations among ministers of finance to harmonize budget formulation and implementation.
How fast and how far have the various regional economic communities moved towards agreed macroeconomic and monetary convergence? The primary macroeconomic con-vergence criteria involve cutting inflation, external debt, and budget deficits (table 6.1).
Secondary benchmarks have been set for such variables as wage bills, public investment, tax revenue, and real exchange rate stability (see box 6.2 on exchange rate arrange-ments). For Africa as a whole the index for monetary and financial integration over 1994–99 indicates moderate performance, slightly exceeding GDP growth (figure 6.1;
see annex). But regional economic communities exhibit considerable variation relative to the overall trend and its components.
Inflation. Between 1994 and 2000 inflation fell in all the regional economic communi-ties considered (table 6.2). While the situation differs by region, overall achievements remain unsatisfactory—particularly in Central and Eastern Africa. Many countries The primary
macroeconomic convergence criteria involve cutting inflation, external debt, and budget deficits
ARIA ch6 030904.qxp 6/1/04 1:13 PM Page 114
tried to lower inflation by adopting stringent monetary policies and continuing finan-cial sector reforms such as deepening money markets and controlling the money sup-ply and government borrowing.
All countries in UEMOA achieved the community’s 3% inflation target for 2000 (except Guinea-Bissau, which joined in 1997), including seven countries that had double-digit inflation in 1994. The 1994 devaluation of the CFA franc explains the high inflation of the mid-1990s. Subsequently, rates started to fall as a result of the monetary and fiscal discipline imposed on members of the community.
Table 6.1
Macroeconomic targets for selected regional economic communities in Africa
Criteria UEMOA ECOWAS COMESAa EAC CEMAC
Primary criteria
Inflation rate (%) ≤3 ≤10 (2000) <10 Single digit ≤3 (2002)
≤5 (2003)
Total debt (% of GDP) ≤70 (2002) na na na ≤70 (2004)
External debt payment arrears 0 na na na 0 (2004)
Domestic debt payment arrears 0 na na na 0 (2004)
Budget deficit (% of GDP) 0 ≤5 (2000) <10 <5 (1998) 0 (2004)
≤4 (2003) Deficit financed by central bank/
previous year’s fiscal revenue (%) ≤20 ≤10 ≤20 na ≤20
Foreign exchange reserves na ≥3 months of na Equivalent to na imports (2000) 6 months
≥6 months of of imports
imports (2003) Secondary criteria
Wage bill/tax revenue (%) ≤35 (2002) ≤35 na na ≤35
Public investment/tax
revenue (%) ≥20 (2002) ≥20 na na na
Current account (% of GDP) ≤5 (2002) na na na na
Tax revenue (% of GDP) ≥17 (2002) ≥20 na na na
Prohibition of new domestic arrears and liquidation of
existing arrears na Yes na na na
Real exchange rate stability na Yes na na na
Must maintain positive
real interest rates na Yes na na na
Capital spending (% of GDP) na ≥20 na na na
Gross domestic investment
(% of GDP) ≥20 na na na na
na is not applicable.
Note: Years in parentheses indicate when targets should be achieved. Targets with no years listed already have been achieved.
a. The criteria listed are those proposed in the 1995 review of the Monetary Harmonization Programme (COMESA 1995).
Criteria also include a 10% ceiling on broad money growth and a 20% ceiling on the ratio of debt service to export earn-ings. A 2001 report commissioned by the COMESA Secretariat (Harvey and others 2001) recommended further strength-ening of the criteria and associated ceilings and thresholds.
Source: Economic Commission for Africa, from official sources.
ARIA ch6 030904.qxp 6/1/04 1:13 PM Page 115
Most countries in ECOWAS achieved the community’s 10% inflation target for 2000, with the exceptions of Ghana (27.2%), Guinea-Bissau (22.6%), Nigeria (22%), and Sierra Leone (21.8%). For Nigeria and some others, high inflation can be explained by the increase in aggregate demand stemming from large fiscal transfers in a context of fiscal decentralization. However, Guinea-Bissau managed to significantly reduce its inflation rates, bringing it down to 3.3% in 2000.
Most COMESA countries were not able to achieve the community’s 10% inflation target. Angola and Democratic Republic of Congo, in particular, suffered from hyper-inflation because of accommodating monetary policies, exchange rate realignments, supply bottlenecks, public sector wage increases, and significant increases in food and transportation prices.
90 100 110 120 130
1999 1998
1997 1996
1995 1994
Source: Economic Commission for Africa, from official sources.
Figure 6.1
Money and financial integration index for Africa, 1994–98 (Index 1994 = 100)
Table 6.2
Inflation in selected regional economic communities in Africa, 1994–2000 (%)
Regional economic Simple
community Target 1994 1995 1996 1997 1998 1999 2000 average
UEMOA ≤3 29.7 14.6 9.4 7.4 3.1 1.0 1.2 9.5
ECOWAS ≤10 (2000) 23.1 20.0 12.5 8.9 4.1 6.0 4.9 11.3
COMESAa ≤10 21.6 20.9 20.1 11.6 10.6 11.3 11.8 15.4
EAC <10 24.4 15.8 11.0 13.3 12.3 5.5 6.4 12.7
CEMAC ≤3 (2002) 35.0 10.1 10.9 7.3 –8.4 12.0 22.9 12.8
a. Data do not include Angola and Democratic Republic of Congo.
Source: Economic Commission for Africa, from official sources.
ARIA ch6 030904.qxp 6/1/04 1:13 PM Page 116
All EAC countries controlled inflation, bringing the community’s double-digit inflation during 1994–98 down to single-digit levels in 1999 and 2000. Uganda had the best per-formance, with average inflation of 6.1% for the period 1994–2000, followed by Kenya at 13.2% and Tanzania at 18.7%. In CEMAC inflation rose in 2000 to a community aver-age of 22.9%, reflecting a surge in prices in Equatorial Guinea and Republic of Congo.
External debt. Some of the regional economic communities set a target value for total debt as a percentage of GDP. However, reliable and consistent data for domestic debt are not available for all the countries. So the discussion focuses on external debt (which represents the bulk of total debt for several countries).
Though all regional economic communities made steady progress on reducing exter-nal debt between 1994 and 2000—thanks to initiatives on debt cancellation and rescheduling—external debt ratios remain high and systematically above target levels set for the total debt ratio (table 6.3).
Performance varied considerably. In UEMOA only Burkina Faso had external debt below 70% of GDP between 1994 and 2000. In ECOWAS Burkina Faso and Cape Verde registered external debt of around 50% of GDP. The other ECOWAS countries had much higher debt ratios ranging from 73% for Benin to 381% for Guinea-Bissau.
The slowdown in growth associated with a sharp deterioration in terms of trade largely accounts for the unsatisfactory performance of countries in the region (for UEMOA countries in particular).
While COMESA has no official debt target, a 50% threshold on external debt has been recommended ( Jenkins and others 2001). Egypt, Eritrea, Mauritius, Seychelles, and Swaziland had external debt ratios below 50% of GDP. EAC countries registered steady improvements in their external debt, averaging 87% of GDP for 1994–2000, with Uganda hitting 44.1% in 2000. For several countries adverse international price shocks significantly reduced the value of exports in key sectors, contributing to a worsening in the balance of payments.
External debt ratios remain high and systematically above target levels set for the total debt ratio
Table 6.3
External debt in selected regional economic communities in Africa, 1994–2000 (% of GDP)
Regional economic Simple
community Target 1994 1995 1996 1997 1998 1999 2000 average
UEMOA ≤70 (2002) 134.2 134.8 130.1 118.3 135.8 125.8 113.7 127.5
ECOWAS a 117.7 119.3 113.3 106.4 118.0 111.9 106.6 113.3
COMESA ≤50b 110.5 108.6 102.7 99.0 100.6 91.2 87.7 100.0
EAC a 97.1 95.1 89.0 84.6 85.6 83.2 74.6 87.0
CEMAC ≤70 (2004) 131.4 128.2 117.1 103.1 100.9 96.7 88.1 109.4
a. Not specified.
b. Recommended rather than official target for external debt.
Source: Economic Commission for Africa, based on World Bank data.
ARIA ch6 030904.qxp 6/1/04 1:13 PM Page 117
In CEMAC Chad kept its external debt ratio constantly below the 70% total debt tar-get between 1994 and 2000. The trend for the other countries is also encouraging, par-ticularly for Central African Republic, Equatorial Guinea, and Gabon. Equatorial Guinea kept its debt burden under 70% of GDP between 1998 and 2000.
Budget deficits. Performance on budget deficits has been mixed. All UEMOA countries failed to achieve the community’s target for no budget deficits—a difficult goal in the face of high debt service. During 1994–2000 the average deficit in UEMOA countries was 3.7% of GDP (table 6.4). Deficits were lowest in Benin (0.3%) and Senegal (0.8%). Nearly all UEMOA members of ECOWAS met the ECOWAS budget deficit target of less than 5% in 2000, except The Gambia, Guinea, and Guinea-Bissau. In general, UEMOA coun-tries experienced strong financial consolidation between 1994 and 1997, followed by a marked slowdown in fiscal convergence and higher fiscal deficits between 1998 and 2000.
Both high spending levels (large stocks of outstanding debt imposed high interest pay-ments and the wage bill remained high in several countries) and generally low tax revenues (for most countries the tax revenues to GDP ratio remained below 17%) contributed.
In COMESA deficits over the period 1994–2000 averaged 5.7% of GDP, and most members achieved the target deficit of less than 10% of GDP, except Democratic Republic of Congo (14.5%), Eritrea (18.9%), and Seychelles (10.2%). For these three countries the cause appears to have been weaknesses on both the revenue and the expenditure sides. Tax revenues are generally low because of inefficiencies in tax leg-islation and collection, worsened in the case of Democratic Republic of Congo by the combination of hyperinflation and nonindexation of taxes. Capital expenditures (in Eritrea and Seychelles) and sovereign and security expenditures (in Democratic Republic of Congo) were the main causes of high spending, together with inadequate systems of expenditure controls. Angola’s average deficit was above the target, but it hit the target in 2000 by cutting its deficit to 7.9% in 2000. EAC countries, particu-larly Kenya, performed very well in reducing budget deficits.
Most countries in CEMAC are on track to meet the zero budget deficit target set for 2004. Equatorial Guinea and Gabon have already achieved the target.
Table 6.4
Budget deficits in selected regional economic communities, 1994–2000 (% of GDP)
Regional economic Simple
community Target 1994 1995 1996 1997 1998 1999 2000 average
UEMOA 0 5.7 3.2 2.8 3.7 3.5 3.6 3.4 3.7
ECOWAS ≤5 (2000) 6.3 5.0 4.5 4.8 5.1 5.3 3.6 4.9
COMESA <10 8.2 7.2 6.0 4.7 5.0 5.1 4.0 5.7
EAC <5 (1998) 2.4 3.1 2.1 0.6 0.5 1.7 1.3 1.7
CEMAC 0 (2004) 7.4 3.9 3.1 1.6 2.4 1.5 3.8 2.3
Source: Economic Commission for Africa, from official sources.
ARIA ch6 030904.qxp 6/1/04 1:13 PM Page 118
Thus Africa’s regional economic communities did better at controlling inflation and budget deficits than at reducing external debt (table 6.5). But UEMOA and CEMAC—monetary unions that are more advanced than the other regional economic communities in macroeconomic policy convergence—did not perform significantly better than other communities. Even though UEMOA and CEMAC have better poli-cies and institutions for macroeconomic convergence, they have had difficulty meeting targets for inflation, external debt, and budget deficits.
Other macroeconomic indicators. Secondary macroeconomic benchmarks can also be used to assess performance in achieving macroeconomic stability and convergence.
Other variables include the wage bill, public investment, capital expenditure, current account, tax revenue, domestic arrears, exchange rate stability, and the real interest rate (see table 6.1 and statistical table 10).
• Wage bill.All UEMOA, ECOWAS, and CEMAC members met the target for the wage bill—though the target was low (less than 35% of tax revenue).
• Interest rates.In UEMOA and CEMAC interest rates are regulated by common monetary authorities. In both communities real interest rates were positive in 1994–2000. ECOWAS members failed to achieve positive real interest rates.
• Tax revenue.Among UEMOA members only Côte d’Ivoire achieved the target for tax revenue of 17% of GDP. No ECOWAS member met the community’s tar-get for tax revenue of 20% of GDP, though Côte d’Ivoire and Nigeria performed well—probably because they have numerous financial institutions or because of their commodity production.
• Gross domestic savings and investment. Savings and investment were low in UEMOA. These results are not surprising, considering the low per capita incomes and small number of banks in these countries.
• Capital spending.In ECOWAS Côte d’Ivoire, Sierra Leone, and Togo failed to achieve the community’s target for capital spending of 20% or more of GDP. All ECOWAS members performed well on allocations to capital spending.
Africa’s regional economic communities did better at controlling inflation and budget deficits than at reducing external debt
Table 6.5
Regional economic communities’ performance in inflation, budget deficits, and external debt from selected regional economic communities, 1994–2000
Regional economic Inflation Budget deficit External debt
community rate (%) (% of GDP) (% of GDP)
UEMOA 9.5 3.7 127.5
ECOWAS 11.3 4.9 113.3
COMESA 15.4 5.7 100.0
EAC 12.7 1.7 87.0
CEMAC 12.8 2.3 108.8
Note: Simple averages.
Source: Economic Commission for Africa, from official sources.
ARIA ch6 030904.qxp 6/1/04 1:13 PM Page 119