Transcript The New Partnership for Africa’s Development (NEPAD) and

TOWARDS A FRAMEWORK FOR
FINANCIAL INTEGRATION:
LESSONS, ISSUES AND OPTIONS FOR NORTH
AFRICA
Dr. Michael I. Mah’moud
Lead Financial Economist
African Development Bank
Forum on Trade in North Africa
Marrakech, February, 2007
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Objectives of the Presentation
• Review progress and obstacles towards
financial integration in North Africa
• Show
the
need
for
appropriate
strategy/framework
• Flag options and issues in the design of the
framework
• Discuss possible implications for trade
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I. The African Monetary Cooperation
Program
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The African Monetary Cooperation Program involves
adoption of measures progressively and in stages to
culminate in the establishment of single African
currency in 2021
After establishment of Committee of Governors in
Stage 1, Stages 2-4, the preparatory stages, seek to
harmonize macroeconomic policies, promote
convergence, and reduce imbalances
Stages 5&6, the transitional stages concern adoption
of the exchange rate system and the necessary
infrastructure towards establishment of the single
currency and common central bank
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I. The North African Monetary
Cooperation Program
Stage II (2004-2008) has 3 sets of criteria
Primary Criteria
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Overall budget deficit (excluding grants)/GDP<
10% .
Annual inflation rate < 9%.
Central Bank credit to finance budget deficit <10%
of previous year’s tax revenue.
External reserves as months of imports ≥ 3 months.
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I. The North African Monetary
Cooperation Program
Secondary Criteria
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Elimination of debt arrears and non-accumulation of new arrears.
Maintenance of real exchange rate stability .
Maintenance of positive real interest rates.
National saving / GDP ≥ 15 %.
Public investment financed by domestic resources / tax revenue ≥ 20%.
External and domestic debt / GDP ≤ 100%.
Other Criteria
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Modernization and harmonization of payment systems.
Adoption of international standards on banking and financial supervision.
Liberalization of remaining exchange controls to promote capital movements
Promotion of cooperation among all financial regulators in the sub-region
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Progress and obstacles
Good progress on monetary cooperation program
• Budget criteria: met by all countries, except Egypt and Mauritania
• Inflation: all countries, except Mauritania (12.5%) achieved <9%
• Central bank financing of gov’t: not used in Algeria, Egypt, Libya,
Tunisia and Mauritania (since 2004), but rose 11% in Sudan
• External Reserves: Missed by Sudan and Mauritania; more than met
in other countries
• Qualitative measures in secondary and other criteria also being
implemented – generally N. Africa does not suffer externallygenerated imbalances as in other sub-regions
Major challenge: limited progress on wider regional integration (eg.
harmonization of trade regulations and interconnection of payments
systems) to support progress on financial integration.
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Single indicator/target versus Multiindicator/target
• Coordination involves choice of indicators and targets -type and number already decided in context of the
AMCP;
• The type of indicators normally depend on the objectives
and stage of coordination – convergence in
macroeconomic environment, preparation towards
irrevocably-fixed exchange rates;
• Number of indicators – single or multi-indicators should
depend on stage and purpose of coordination
• Single indicators -avoid over-coordination, give
economic operators one clear signal of direction, but can
weaken surveillance on other important variables
• Multi-indicators – authorities pay attention to a set of
important variables, and reduces chances of false signals
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Rules versus Discretion
• Coordination towards financial integration likely to
involve issues in the setting of monetary policy
instruments (int rates and exch rates);
• Instrument setting source of long and continuing debate
on rules vs discretion
• Case for rules – reflects success in managing existing
monetary unions; decreased need for frequent
coordination; viable mechanism for imposing discipline
on economic policymaking; helps predictability in policy
direction and facilitates private sector response
• Case for discretion – not yet monetary union; constrains
adaptability to changes in economic environment, which
can be significant in African environments (external
shocks and structural rigidities)
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Rigid versus Flexible
Policy Coordination
• Budgetary and monetary policy coordination normally
useful in financial integration arrangements;
• Undisciplined budgetary policies and wrong fine-tuning
can have unfavourable national and international
spillover effects;
• However, domestic discipline – official or market-based
normally weak, while external donor restraints based on
conditionalities;
• Community or peer group surveillance could be plausible
but, in face of inter-country differences, absence of
mechanisms for transfers or reserve pooling may make
rigid rules problematic;
• In transitional stages rules possible, but should rules be
in form of ceilings or specified bands, hard or soft target
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zones?
Regular versus Periodic Reviews
• Coordination enhanced by regular, ongoing reviews;
• multi-period bargaining expands opportunities for policy
bargaining and phasing, and may have total welfare effects
exceeding that of single, once-for-all adjustment;
• phasing enhances implementation, while agreements reached
in rush or in response to crisis may not reflect all constraints
(preset and prospective) of member countries;
• Regular reviews would require surveillance mechanisms to
monitor and appraise performance, and committees to
encourage or enforce compliance – through moral suasion,
incentives and/or sanctions;
• Present arrangements do not give RECs or committees
enforcement powers – no financial clout, cost/benefit
considerations;
• Coordination committees correctly involves central bank
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governors
Hegemonic versus Symmetric
Arrangements
• Direction of coordination may be dominated by one
country or group (hegemonic) or influenced by all
participating members (symmetric)
• Symmetric system can enhance ownership and engender
political acceptability
• Hegemonic system may have attraction where an
organized group already exists (not case in N. Africa) or
association with another group desired
• Conditions for successful hegemonic system include:
(i) leader’s unblemished record for economic stability,
(ii) leader’s dominance in trade and/or finance, and (iii)
leader’s readiness to accept implied responsibilities
• Member’s may consider extent of interdependence, and
available financial support,
• A blend arrangement, as in the cfa zone, also possible 11
Single track/speed versus Multitrack/speed
• Some countries may have difficulties adopting the group
pace because of economic or political constraints, but
integrating programs cannot adopt pace of slowest
moving members
• Current AMCP considers inter-country differences by
adopting program in 6 stages, with some stages being
accommodatingly long; but it has implementation risks
• Grouping for different speeds may reflect existence of
optimum currency areas, but this also recalls need for
political acceptance of complementary actions
• N. Africa can fulfill conditions for optimum currency
area provided complementary actions can be adopted
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Exchange Rate Arrangement versus
Full Monetary Union
 Full monetary or financial integration has advantages:
• price stability to improve efficiency in resource allocation
reduced exch rate variability and transaction costs and
increased credibility in policy direction can facilitate
intra group investment flows
• pooling of exchange reserves may generate saving in real
resources to the extent that members are subject to
unsynchronized fluctuations in BOPs, and creation of
union does not lead to relaxation of monetary policy
 But, full monetary union also has costs, mainly loss of
sovereignty over monetary policy and loss of instrument
in monetary policy formulation
 Other options include forms of exchange rate unions –
informal or formal
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Financial Integration and Trade
• Volatility in quantity and prices (exchange rates and
interest rates) have adverse effects on the real sector
• Excessive volatility can constrain ability of governments
and private sector operators to enter into new binding
commitments
• It is difficult for developing countries to hedge large and
prolonged nominal fluctuations
• Financial integration reduces likelihood of protectionism
• If accompanied by financial support, integration
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arrangements can provide cushions against shocks
Relevance of financial integration in
North Africa
 Financial integration useful in supporting wider economic
integration
 Integration most relevant in tackling region’s challenges, including
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low share in world output;
Low investments/GDP ratio;
Low share in the intra-African and world trade; and
A fragile financial system.
 North Africa can create a market of 130 million consumers for
efficiency gains and attraction of foreign investments
 Complementarity index estimated at 21%, while intra-regional
trade = 45% of continental GDP and 40% of its trading activities
 Longer term progress in financial integration requires
establishment of institutional arrangements as in other sub-regions
and the adoption of appropriate framework
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End
Thank you for your kind attention.
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