Should Africa’s Dream of Monetary Union be kepttwnafrica.org/Mr. Atta-Mensah Power Point...
-
Upload
phungthuan -
Category
Documents
-
view
216 -
download
3
Transcript of Should Africa’s Dream of Monetary Union be kepttwnafrica.org/Mr. Atta-Mensah Power Point...
1
Should Africa’s Dream of Monetary Union be kept
Alive?
Joe Atta-MensahCapacity Development Division
ECA
May 2014
2
Presentation
• Introduction
• Africa’s Experience with Monetary Union.
• Theory of Monetary Union.
• Links between Monetary Union and Price Stability.
• Policy Mix
• Conclusion
3
Introduction
• African Nations are vigorously pursing an integration Agenda
• As part of their integration agenda, African regional economic
communities (RECs) have or are in the process of establishing
monetary unions.
• Monetary integration contributes significantly to deepening regional
integration, especially for RECs, which have objectives of creating
common markets.
• Regional economic cooperation in Africa dates as far back as the
beginning of the last century. The cooperation primarily focussed on
the facilitation of international trade and payments.
4
Introduction (2)
• International monetary arrangements have been experiencing
instability since the breakdown of the Bretton Woods agreements in
the early 1970s.
• In the 1980s global economies were faced with misalignment of the
major currencies. The decade also saw massive capital flight towards
the United States and other industrialized countries from the
developing world, particularly after the debt crises and the cutting-off
of new loans.
• the 1990s and the beginning of the 2000s also brought with it deep
financial crises in Asia, Argentina and Brazil. These challenges
contributed in depressing economic growth. It also brought home the
importance of macroeconomic stability.
5
Introduction (3)
• During the 1970s/1980s, developing countries have had to bear some costs
as their economies suffered immensely during the period.
• Low and declining share of world trade and the continent’s marginal
financial integration with the rest of the world, based on a share of GDP,
the average African country is far more open to trade than the average
developed country.
• Hence African countries are consequently more vulnerable to volatile shifts
in their terms of trade as well as shifts in exchange rates due to the need to
repay foreign borrowings in hard currency.
• This paper focuses on Africa's agenda of creating a monetary union as a
way of addressing macroeconomic instability with view of promoting
economic growth.
6
Africa’s experience with Monetary Union
• Monetary cooperation between different countries in Africa has been
going on for a long time.
• During the colonial period, French and British colonies had in place
common monetary arrangements.
• At the time, these arrangements were established to facilitate the
administration of the colonies and the collection of seigniorage, rather
than to promote exchange rate management and fiscal policy.
7
Africa’s experience with Monetary Union (2)
• The British and the French monetary cooperation arrangements were
not the same.
• The British currency boards were rooted in English central banking
and therefore performed functions similar to those of the Bank of
England.
• The French currency boards in the colonies followed the guidelines
and principles of French central banking. Hence, like the Banque de
France, the French currency boards lent significantly to the local
banking system as the currencies were backed by the French Treasury.
8
Africa’s experience with Monetary Union (3)
• During the colonial period, a number of monetary arrangements existed in the
Eastern and Southern Africa regions.
• In East Africa, a common currency area was established in 1919 for Kenya,
Uganda and Tanganyika (now Tanzania) with the creation of the East African
Currency Board (EACB).
• In 1936, Zanzibar joined the common currency area. During the Second World
War, the East African shilling was used as legal tender in Somaliland as well as
in parts of Ethiopia and Eritrea, and in 1951 Aden was included in the currency
area.
• A monetary system similar to that of East Africa was established for the
Federation of Southern Rhodesia (now Zimbabwe), Northern Rhodesia (now
Zambia) and Nyasaland (now Malawi). A Southern Rhodesia Currency Board
(SRCB) was established in 1938 by a colonial Act.
9
Africa’s experience with Monetary Union (4)
• South Africa, Basutoland (Lesotho), Bechuanaland (Botswana) and
Swaziland had their own currencies during colonial time. But after 1881,
the pound sterling became the standard currency in these countries and
remained in use until 1961.
• In 1974, the Rand Monetary Agreement (RMA) was signed and the rand
became the only legal tender in the RMA zone, which included Botswana,
Lesotho, South Africa and Swaziland. However, Botswana pulled out from
RMA in 1975.
• Political pressures caused most these monetary arrangements to be
dissolved after independence.
The Theory of Monetary Union
Mundell (19610 proposes four criteria for monetary union:
• Free movement of labour across member countries of the union. This
includes physical ability to travel (visas, workers' rights, etc.), lack of
cultural barriers to free movement (such as different languages) and
institutional arrangements.
• Open markets to ensure capital mobility as well as price and wage
flexibility across the Union. This is needed so that the market forces of
supply and demand automatically distribute money and goods to where
they are needed. It also ensures that asymmetric shocks could be
assimilated.
•
10
The Theory of Monetary Union (2)
• There is a risk sharing system such as an automatic fiscal transfer
mechanism to redistribute money to countries/areas/sectors of the Union
which have been adversely affected by the observance of the first two
assumptions. The transfers will generally be in the form of tax-revenue
redistribution to less developed areas of a country/region in the Union.
• The economic structures of the economies of the Union should be similar.
The need for this criterion is to ensure that the countries face similar
vulnerability to asymmetric shocks or have the same business cycle. This
allows the shared central bank to promote growth in downturns and to
contain inflation in booms. Should countries in a currency union have
idiosyncratic business cycles, then optimal monetary policy may diverge
and union participants may be made worse off under a joint central bank.
11
The Theory of Monetary Union (3)
• Kenan (1963) expanded on Mundell’s work by concluding that countries
with highly diversified economies are good candidates for the formation of
a monetary union. This is because economic diversification helps countries
to adjust rapidly to negative external shocks quickly than economies that
are not diversified.
• McKinnon (1963) added to Mundell’s model by arguing that highly open
economies also good candidates for a monetary union since a common
currency is very important for their stability and prosperity. McKinnon
points out that monetary union is beneficial to open economies because it
reduces the uncertainty associated to exchange rate fluctuations,
particularly for the purpose of trade.
12
Convergence Criteria
• Its inflation rate is not more than 1.5 per cent higher than the average of the
three lowest inflation rates among the EU member States
• Its long-term interest rate is not more than 2 per cent higher than the
average observed in these three low-inflation countries
• It has joined the exchange rate mechanism of the EMS and has not
experienced a devaluation during the two years preceding the entrance into
the union
13
Convergence Criteria (2)
• Its government budget deficit is not higher than 3 per cent of its GDP (if it
is, it should be declining continuously and substantially and come close to
the 3 per cent norm, or alternatively, the deviation from the reference value
(3 per cent) should be exceptional and temporary and remain close to the
reference value (Art. 104c (a))
• Its government debt should not exceed 60 per cent of GDP (if it does, it
should diminish sufficiently and approach the reference value (60 per cent)
at a satisfactory pace.
14
Monetary policy in a monetary union
• The central bank of the union should be independent and the clear objective
of price stability. To fulfil this mandate effectively, the central bank of the
union and the national central banks of member states should be free of
from political interference.
• The central bank of the union must ensure that longer-term inflation
expectations have been firmly anchored at levels consistent with the
definition of price stability (or agreed inflation target).
• The protocol governing the setting up of the monetary union should
prohibit monetary financing of public deficits.
15
Monetary policy in a monetary union (2)
• Monetary policy should be separated from fiscal policy. In this regard, the
central bank shall conduct monetary policy, while member states shall
support the general economic policies in the union with the view of
achieving harmonious, balanced and sustainable development of economic
activities, including a high level of employment, sustainable growth.
• The general mandate to support general economic policies should be
carried out without compromising the primary objective of price stability.
In this regard the central bank of the union should not be given any further
“secondary objectives” of other economic policies.
• The central bank should use an interest rate as its instrument for the
conduct of monetary policy for the union. In this regard, it is very
important financial and capital markets are deepened in the area.
16
Fiscal policy in a monetary union
• The protocol establishing the union should have clear budgetary rules as a
disciplinary mechanism in order to safeguard sound public finances within
single countries and also to limit negative externalities for the union as a
whole.
• Excessive budget deficits must be avoided by member states. In this regard,
there should be a ‘non bail-out clause’ rule in the protocol or Treaty
establishing the union such that either the union or national governments
can take on liabilities for the debts incurred by an individual Member State.
This should help to limit the risk that governments shift part of the burden
of high government debt to their partners in the union. In addition this
measure would prevent bad fiscal policies in one country does not lead to
higher risk premia for debt in the union as a whole.
17
Fiscal policy in a monetary union (2)
• To ensure long-term debt sustainability and sound management of public
finances of member states in the union, the framework for fiscal policy
should have ceilings for deficit and debt-to-GDP ratio for member states.
(For example in the Euro area they have a 3% deficit ceiling and a 60%
reference value for the debt-to-GDP ratio.)
• The central bank should use an interest rate as its instrument for the
conduct of monetary policy for the union. In this regard, it is very
important financial and capital markets are deepened in the area.
18
Conclusion
• In creating an African Monetary Union (AMU) is important appropriate
rules and institutions are designed. Perhaps AMU could be founded on
four pillars: financial union, fiscal union and economic union. The
sustainability of the monetary union means that there are:
1. strong institutions to supervise and stabilize the single financial
market;
2. strong institutions to guide fiscal policies; and
3. strong institutions to coordinate economic policy, guarantee
competitiveness and encourage sustainable growth.
19
Conclusion (2)
• Africa's dream of a monetary union is achievable. This vision can be
realized. The challenges that will be faced along the path leading to the
creation of an African single currency should strengthen our resolve and
to adopt measures to mitigate the challenges so that the current multiple
currencies on the continent are replaced by one single currency.
• The central bank should use an interest rate as its instrument for the
conduct of monetary policy for the union. In this regard, it is very
important that financial and capital markets are deepened in the area.
20
21
Thank You