REGIONAL VI COOPERATION SOUTHERN AFRICAN DEVELOPMENT COMMUNITY (SADC) The Southern African Development Community (SADC) was officially established on 17 August 1992 in Windhoek, Namibia. Mauritius joined the SADC on 28 August 1995 as the twelfth member and the first island-state of continental SADC. As at to date, the SADC regroups 14 member states, namely, Angola, Botswana, Democratic Republic of Congo (DRC), Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. The major objective of SADC is to eradicate poverty and increase the welfare of the people of its member states through regional cooperation and integration. Restructuring of the SADC In the initial setup of SADC, each member state was allocated a sector to coordinate. The Finance and Investment Sector was allocated to South Africa in 1995. This sector operated at two levels, namely, at the level of an independent Committee of Central Bank Governors (CCBG), which attended to monetary policy and financial issues in general within the SADC region, and at the level of the Committee of Treasury Officials, which attended to fiscal policy issues. Both Committees reported separately to the Committee of Ministers of Finance of the SADC. During the SADC Summit held in Namibia in March 2001, the SADC Heads of State approved the phasing out of the existing sectors and their clustering under four main directorates to be situated in Botswana, namely, the Directorate for Trade, Industry, Finance and Investment (TIFI); the Directorate for Food, Agriculture and Natural Resources (FANR); the Directorate for Infrastructure and Services (IS); and the Directorate for Social and Human Development and Special Programmes (SHDSP). In addition, the Committee of the Ministers for Finance would be replaced by an Integrated Committee of SADC Ministers responsible for economic development, namely, finance, investment, industry and trade. The TIFI and the FANR have already been established at the SADC Secretariat. The two other directorates, namely, IS and SHDSP, are expected to move to the SADC Secretariat in August and December 2002, respectively. The objectives of the TIFI are to: facilitate the implementation of the SADC Trade Protocol; facilitate the formulation and implementation of policies and strategies relevant to the attainment of market integration and for sustainable economic growth and development; promote the harmonisation of standards; attend to inter-regional and multilateral economic cooperation matters; undertake macroeconomic policy analysis and promote macroeconomic policy convergence; support member states in marketing exercises and investment promotion; initiate policies to promote industrial development, particularly Small and Medium Enterprises; promote the development of mining; promote functional, efficient and development-orientated financial sectors; promote and develop the application of science and technology to enhance competitiveness; promote the harmonisation of economic policies with gender development strategies and programmes. Until the Integrated Committee of Ministers is established, the CCBG will continue to operate as it used to and report to the Ministers of Finance. The thirteenth meeting of the CCBG was held in South Africa in September 2001 and the fourteenth meeting in Zambia in April 2002. The main issues that were discussed at the two meetings related to: (i) macroeconomic convergence; (ii) the restructuring of SADC and the position of the CCBG in the new structure; (iii) the role of the SADC in the New African Initiative (NAI), which has now been renamed the New Partnership for Africa's Development (NEPAD); (iv) the MoUs on exchange controls, national payments systems, legal and operational frameworks, and information technology and (v) progress on the various CCBG projects. Overview The SADC Secretariat, in its Annual Report for the year 2000-01, gave an overview of the situation in the SADC region. Some of the issues highlighted therein are presented below. (i) The aggregate economic growth rate accelerated from 1.8 per cent in 1999 to 3.4 per cent in 2000. However, this figure was still below the growth target of 6.0 per cent defined in the United Nations New Agenda for Development in Africa as the minimum growth rate required for sustainable economic development. To halve poverty in SADC by the year 2015, an average annual growth rate of almost 6.5 per cent is required for the region. South Africa, which is the largest economy, accounts for 75 per cent of the SADC GDP. The diversity among the fourteen SADC member states makes it difficult to have an overall view of the economic performance in the region as it includes economies ranging from least developed to more developed ones. Significant variation in economic growth, which has b een a characteristic throughout the 1990's, continued through 2000. The major factors influencing economic performance within the SADC include the overall international economy, domestic economic policies, the level of governance and the degree of politica l stability. The continued conflagration within the Democratic Republic of Congo (DRC) involving several SADC member states, the continued military campaign of UNITA in Angola and the worsening economic and political situation in Zimbabwe contributed to the need for a sober assessment of future growth prospects. (ii) Inflation rate in SADC has maintained its downward trend as more countries have focused their policies towards increased monetary discipline and a reduction of their budget deficits. The inflation rate among members of the Southern African Customs Union (SACU), namely, South Africa, Botswana, Lesotho, Namibia, and Swaziland was less than 10 per cent, same as in Mauritius, Seychelles and Tanzania. Mozambique experienced an increase in its inflation rate as a consequence of difficulties caused by floods, while in Malawi and Zambia, the inflation rate exceeded 10 per cent. The level of inflation remained very high in countries affected by civil strife, namely, Angola and the DRC. In 2000, the inflatio n rate exceeded 500 per cent in DRC. It was 325 per cent in Angola and 55 per cent in Zimbabwe. (iii) The budget deficit as a percentage of GDP was 5 per cent for eight out of the 14 member states with South Africa registering a budget deficit of 1.2 per cent o f GDP. (iv) The existence of a group of SADC economies with low inflation rates and low budget deficits is positive, as these are the main determinants for attracting foreign direct investment. However, it is estimated that the SADC region has been receiving only 1 per cent of total world foreign direct investment despite the enormous investment opportunities and natural resources available within the region. A net inflow of foreign capital is essential if the SADC is to achieve a higher growth rate. The level of domestic savings in the region is not considered sufficient to sustain higher growth rates. (v) One of the key challenges facing the region is the issue of external debt. According to the African Development Indicators for 2001, the total external debt o f the SADC stood at US$80,295 million at the end of 1999. The countries that recorded the highest debt levels, in nominal terms, were South Africa, the DRC, Angola, Mozambique, Tanzania and Zambia. The following countries, namely, Angola, the DRC, Malawi, Mozambique, Tanzania and Zambia, which are classified as severely indebted low- income countries, are eligible for assistance under the Highly Indebted Poor Countries (HIPC) Initiative of the IMF. This debt overhang has an adverse impact on investment and economic growth in the region. Since the external debt is mainly owed by the state, debt service payments limit the ability of government to invest in physical infrastructure and human resource as well as to increase growth- enhancing expenditure in education and health. (vi) The SADC Free Trade Area was officially launched in September 2000. This represented a pivotal step towards the shared vision of creating a single economic space through deeper economic integration that provides for the free movement of factors of production that will foster economic growth and reduce the level of poverty in the region. There are many opportunities arising from the Cotonou Agreement and the African Growth and Opportunity Act (AGOA) for increasing the region’s share of world trade and investment. (vii) The AIDS pandemic represents a serious threat to the SADC region with surveys showing that, depending on the country, between 20 and 36 per cent of pregnant women are HIV positive. Deaths from AIDS will increase mortality rates and reduce the aggregate life expectancy. AIDS will have a profound impact on SADC economies. Specifically, it will reduce GDP growth, exacerbate the fight to reduce poverty (as dependency ratios increase), worsen economic inequality and reduce the available labour supply. (viii) The SADC region experienced heavy rains in February and March 2001 with floods in Mozambique and this had an adverse impact on its economic performance. In Swaziland, heavy rains in the south of the country reduced sugar production. The restructuring of the commercial agriculture sector in Zimbabwe is expected to result in a reduction in the production of cash crops for export and in a shortfall in foreign exchange earnings. (ix) A survey that was reported in the World Investment Report 2000 showed that the following industries, namely, tourism; transport and storage; telecommunications; mining and quarrying; metals and metal products; motor vehicles; food and beverages; pharmaceutical and chemical products; and agriculture, have significant potential for increased investment in the SADC region over the next three years. (x) The incidence of poverty, measured as the minimum level of consumption expenditure per head, was very high in the SADC region. In its 1999-00 Annual Report, the SADC Secretariat noted that poverty in Zambia was estimated to exceed 70 per cent (xi) of its population and in Mozambique it was estimated at 69 per cent. In Malawi, it was estimated at 60 per cent and in Lesotho and Botswana, at almost half of the population. In South Africa, it was estimated at 56 per cent in 1996. COMMON MARKET FOR EASTERN AND SOUTHERN AFRICA (COMESA) The Common Market for Eastern and Southern Africa (COMESA) was set up in 1994, replacing the Preferential Trade Area for Eastern and Southern Africa States (PTA), which was established in 1981. The ultimate goal of the COMESA is to create, through the development of trade and investment, a fully integrated and internationally competitive and unified region in which goods, services, capital and persons move freely. The primary means for achieving trade development is trade liberalisation and the adoption of market-oriented policies, which impact favourably on the allocative efficiency of the economies of the member states, thereby resulting in trade creatio n, expansion, investment rationalisation and production integration. The current members of the COMESA are: Angola, Burundi, Comoros, the Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. The Seventh Meeting of the Committee of the Central Bank Governors of the COMESA was held from 5 to 6 April 2002 in Ezulwini, Swaziland. It was preceded by the Seventh Meeting of the COMESA Financial and Monetary Co-operation Committee of Experts from 3 to 4 April 2002. The following issues were highlighted at the meeting of Central Bank Governors of the COMESA. COMESA Clearing House The COMESA Clearing House is currently involved with two main projects, namely, the African Commerce Exchange (ACE) and the Regional Payment and Settlement System (REPSS). ACE is expected to provide COMESA members with the following benefits: (i) a reduction in costs, improved automation and management of risk; (ii) a secure and reliable telecommunications system; (iii) an increase in electronic cross-border and cross-sectoral trade; (iv) a positive environment for foreign investors and trade; (v) a highway for the region’s payment system, which will in turn enable reduced settlement periods. ACE's SWIFT Bureau services have been introduced in Kenya, Tanzania, Mozambique, Botswana, Namibia and South Africa. During the year, following discussions held with the COMESA Clearing House, the International Finance Corporation (IFC) of the World Bank Group has approved equity participation in the ACE for approximately US$700,000. At their last meeting, the COMESA Central Bank Governors decided that the ACE should be urged to speed up the work of rolling out SWIFT services in its other member states and to conduct road shows on its new initiative regarding debit/credit processing. The REPSS was formerly known as the COMESA Payment and Settlement System (COMPASS). The advent of market economies and floating exchange rates led to the COMESA Clearing House, a private sector regional payment system (COMPASS), being replaced by a central bank system (REPSS). Participants in the REPSS will be invoiced in their home currency, and once the conditions of trade have been met, the transfer of funds is made in the importer's currency but converted to that of the exporter, at the agreed rate, by the latter's central bank. The export proceeds are then credited to the exporter's account at a commercial bank on, as far as possible, the same day. REPSS would have to conform to the core principles for Specifically Important Payment Systems, particularly to the principles relating to financial risks. With regard to exchange rate risks, it was expected that the REPSS would eliminate losses a nd gains while transacting in regional currencies by not permitting intra-day changes to the exchange rates and by converting the net end-of-day positions of each country to an aggregate amount referenced against the US dollar at that day's exchange rates. The balance carried over to the next day would be reconverted to the local currency at that day's exchange rate. Thus, exchange rate risks to central banks would be avoided. Discussions were held during the period July to October 2001 with central banks, international, regional and local banks, and the Chambers of Commerce in several COMESA and SADC countries. The Governors, at their last meeting, decided that, in designing the system, any inherent risk should be fully addressed and brought to a minimum by conforming to the core principles and applying other available instruments. In this respect, the Bureau of COMESA Central Bank Governors should oversee the process, guide the project and spearhead the mobilisation of funds from donors and other sources for the design of the approved regional payments system. First Meeting of Bank Supervisors At the Fourth Summit of the COMESA Authority of Heads of State and Government, which took place in Nairobi, Kenya, in May 1999, it was decided that heads of banking supervision units should meet at least once a year to review and exchange ideas on banking supervision and make necessary recommendations. Accordingly, the First Meeting of Bank Supervisors was held in Lusaka, Zambia, from 27 April to 1 May 2001. The Governors stressed the importance of safety and soundness of financial intermediaries in the wake of increased financial liberalisation and competition, and the need for all COMESA countries to improve bank supervision and regulation following initiatives to strengthen prudential regulation and supervision, bank governance, and market discipline. At their last meeting, the Governors agreed that in order to have a harmonised approach to bank supervision, a subcommittee should be set up to make proposals on the harmonisation of bank supervision and regulation. In this respect, the COMESA Secretariat will provide the necessary assistance and together, they will review Bank Supervision and Regulation Systems in COMESA; assess compliance with the 25 core principles for effective Banking Supervision developed by the Basel Committee on Banking Supervision and propose a harmonised approach to banking supervision for the COMESA region. The subcommittee should carry out a list of tasks over the short, medium and long-term. The Governors also recommended that a technical group be formed to review experiences on deposit insurance in different parts of the world. Moreover, plans must be initiated for the creation of deposit insurance/cross-border deposit insurance that suits the specific conditions of individual countries. Monetary Harmonisation Programme A phased monetary harmonisation programme was adopted by the Authority of Heads of State and Government in 1992 that would culminate in a monetary union for the COMESA region by 2025. The stages of the monetary harmonisation programme are as follows: (i) Stage One 1992-1996: Consolidation of existing instruments of monetary cooperation and implementation of policy measures aimed at achieving macroeconomic convergence; (ii) Stage Two 1997-2000: Implementation of limited currency convertibility and informal exchange rate union; (iii) Stage Three 2000-2024: Formal exchange union and co-ordination of economic policies by a common monetary institution; and (iv) Stage Four 2025: Full monetary union involving the use of one common currency issued by a common central bank. At their last meeting, the Governors noted that on the basis of the adopted macroeconomic convergence criteria, a number of countries have made progress towards convergence, but some of them needed to make greater effort in a number of areas, particularly regarding fiscal deficits. Regarding the implementation of limited currency convertibility, that is, the trading of national currencies of member states, it was noted that only a few countries have been trading COMESA national currencies. In this respect, Governors requested the COMESA Secretariat to prepare guidelines on this topic for submission to member countries. It was noted that since the COMESA attained the status of a Free Trade Area on 31 October 2000 and was scheduled to become a Customs Union with a Common External Tariff (CET) in 2004, it was necessary that member states take urgent measures to promote greater monetary integration of the region in order to facilitate the achievement of a fully integrated and internationally competitive region in which goods, services, capital and persons would move freely. It was also noted that there was need for greater exchange rate cooperation by member states and that the implementation of an exchange rate union would provide such needed exchange rate cooperation besides creating an appropriate environment for ushering in a full monetary union. In this respect, it was proposed that a group of experts be formed to develop a COMESA exchange rate mechanism. Accordingly, a task force of experts from the central banks of Comoros, Egypt, Mauritius, Rwanda, Swaziland, Uganda and Zambia has been set up by the Governors, at their last meeting, to prepare detailed operational modalities and an action plan for the implementation of the COMESA formal exchange rate union. The Governors recalled that the COMESA monetary harmonisation programme, comprising fiscal policy, monetary policy, external sector management and development policy, was designed to endow the integration efforts with the required monetary infrastructure to liberalise factor mobility and to enable economic adjustment in member states to be effected less painfully through price changes rather than through changes in real output and employment under conditions of price rigidity. It was pointed out that the mere pursuit of macroeconomic stability with public spending on social services would not enable member states to achieve their goal of poverty reduction. Any effective and meaningful poverty reduction needed to be founded on accelerated economic growth, resulting in particular from structural transformation and economic diversification, savings and investment growth, export growth, and international competitiveness. The Governors recommended that member states adopt growth-oriented economic policies by increasing public spending on basic education and health; paying sufficient attention to vocational training, tertiary education and technological infrastructure; developing and maintaining physical infrastructure; providing export performance-based incentives; redouble efforts to mobilise savings and public revenues; and promote investment, amongst others. Preparations towards the COMESA Customs Union The Governors noted that Article 45 of the COMESA Treaty provided for the establishment of a Customs Union among member states, ten years from the entry into force of the Treaty. The committee was informed that the COMESA had adopted a Common External Tariff (CET) with four tariff bands and rates of 0%, 5%, 15% and 30% for capital goods, raw materials, intermediate goods, and final consumer goods, respectively. In addition, work was under way to finalise a Common Tariff Nomenclature at an eight-digit level and categorisation of goods into capital goods, raw materials, intermediate goods and final consumer goods, and on harmonised customs procedures and customs legislation. However, the following issues need to be addressed if a customs union was to be realised by 8 December 2004: the levels of member states' tariffs on goods from non-COMESA countries, the number of member states' tariff bands, and the member states' tariff bindings under the World Trade Organisation (WTO) framework. The Governors recommended that member states with Most Favoured Nation (MFN) tariff rates higher than the 30% maximum tariff under the COMESA Customs Union should present their future plans to apply the COMESA CET so as to reach 40% maximum by 31 December 2003 and ultimately 30% by 8 December 2004. Moreover, member states with more than four tariff bands should reform their customs tariff structure and reduce their tariff bands to four by the end of 2003. Also, the COMESA Secretariat should examine member states' tariff bindings under the WTO framework to determine whether the COMESA CET would be consistent with WTO rules and propose appropriate recommendations. COMESA Free Trade Area (FTA) Nine member states, namely, Djibouti, Egypt, Kenya, Madagascar, Malawi, Mauritius, Sudan, Zambia and Zimbabwe formed part of the COMESA Free Trade Area on 31 October 2000, the date on which it was launched, and since that date no other member state had joined the FTA. A preliminary assessment of the FTA indicated an encouraging trend in the growth of intra-regional trade. Despite this, some implementation problems relating to the Rules of Origin have been noted. At their last meeting, the Governors urged member states of the COMESA, that have not done so, to join the FTA. COMESA Fund The proposed COMESA Fund would comprise two different funds, namely, a Budgetary Support Facility and an Infrastructure Fund. The Budgetary Support component was necessary to assist countries in the region to further liberalise their economies in terms of their regional and multilateral trade regimes and in terms of their overall macroeconomic environment. The Infrastructure Fund will allow countries to improve their infrastructure so that investors can take advantage of the more liberalised environment. The COMESA Infrastructure Fund will be made up of two different funds, namely, the Base Fund and the General Fund. The Base Fund would be a fund holding contributions from participating member states of the COMESA and the General Fund would hold contributions from donor and other financing agenc ies, and would be the fund leveraged by the Base Fund. The Governors accepted in principle the establishment of the COMESA Fund and recommended that the Fund be mandatory and integrated into the NEPAD, and the catalytic nature of the Infrastructure Fund and the public/private partnership facility be highlighted in the Protocol. Moreover, there was general consensus that both the Base Fund and the General Fund be determined using proportional voting. Activities of Eastern and Southern African Trade and Development Bank (PTA Bank) The PTA Bank has undergone a restructuring process in 2001 with the aim of enhancing corporate governance so that it can play a more prominent role in the market. The aim was to yield substantial cost savings through the deployment of an effective organisational structure, the redefinition of core business strategies, and the realignment of internal business practices and processes. Despite the unfavourable economic environment prevailing in member states, and also the impact of the restructuring exercise, the Bank was able to finance operations totalling to UAPTA86.9 million in 2001, consisting of UAPTA26.9 million and UAPTA60.0 million for project finance and trade finance, respectively. The Governors, at their last meeting, recommended that all COMESA member states also become a member of the Bank. Activities of African Trade Insurance Agency (ATIA) The aim of the ATIA is to address the problem of high risk perception in Africa. The ATIA is currently geared towards underwriting policies and is also planning to undertake a carefully designed membership expansion programme that is intended to give it a truly Pan- African image and increase the development impact of the project. ATIA is also open to international development financial institutions, regional economic organisations and private corporations duly established or registered under the law of any state. The Governors recommended COMESA member states that are not yet members of ATIA to join the Agency. Activities of PTA Re-Insurance Company (ZEP-RE) The PTA Re- insurance Company has continued with its marketing efforts aimed at increasing its share of the reinsurance business both within and outside the COMESA region. The company is currently underwriting business in 29 countries, including non-COMESA member states. ZEP-RE's first regional office was opened in Khartoum, Sudan, on 17 February 2002 in order to strengthen its presence in the North African region. The Governors noted that in the underwriting year 2000 the company registered a premium income of COM$10,579,914 and made a profit of COM$500,000, thus facilitating the declaration of a dividend to its shareholders. In 2001, the premium rose to COM$11,730,325, an increase of COM$1,150,411 compared to 2000. The paid-up capital has increased from COM$7,154,155 in April 2001 to stand at COM$8,477,524 in April 2002. The Governors were informed that the ZEP-Re received additional share capital contributions from the Government of Kenya, Rwanda and Zambia, and from the Eastern and Southern African Trade and Development Bank. Also, Burundi Insurance Corporation and United Insurance Company of Sudan became new members of the company. The Governors recommended that member states, that are neither members nor participating in the activities of the company, should do so in accordance with past Council decisions and member states should take up more shares to strengthen its capital base. Activities of the COMESA Bankers' Association The meeting was informed that the Association has e xperienced a decline in membership and an increase in the failure of members to pay their contributions over the years. It was pointed out that the Association found it necessary to move away from being a product-driven organisation to a demand-driven one, where its stakeholders dictate the services they require. The new vision of the Association is to be the leading source of information and advocacy for the banking industry in the COMESA region. The new mission is to offer a forum for the exchange of information and statistics related to the banking community within the region and to strengthen the relationship between the Association and all organisations concerned with banking and financial activities of the region. The Association held a host of activities in 2001-02, among which seminars, courses and workshops. The Governors recommended that national bankers associations should assist in persuading banks in their respective regions to pay their outstanding subscriptions to enable the COMESA Bankers' Association to implement its programme of activities. They should also encourage banks to join the COMESA Bankers' Association in order to strengthen its financial capacity and to reap benefits from the various training programmes. In addition, central banks should communicate to the Association their strategies to modernise their national payment systems. The New Partnership for Africa's Development (NEPAD) In 2001, an important development concerning the African region was the setting up of the New Partnership for Africa's Development (NEPAD). Key issues and sectoral priorities of the NEPAD are outlined in Box 2.