A new report by the African Development Bank makes concrete proposals for the establishment of a monetary union in the Common Market for Eastern and Southern Africa region (COMESA).
In order to achieve greater macroeconomic convergence in the region, the "Facilitating Multilateral Fiscal Surveillance in the Monetary Union Context with Focus on the COMESA Region" study envisages a boost to fiscal surveillance at both regional and national levels.
"Fiscal convergence is essential to COMESA's macroeconomic convergence program, and is a bridge between monetary and trade integration programs," says Donald Kaberuka, President of the African Development Bank, in the report's foreword.
The report stands against the prevailing skepticism about the desirability of pursuing the objective of monetary unions in Africa, and hence the need for fiscal convergence and multilateral surveillance among regional economic communities' member countries.
Many have argued that Africa should concentrate its attention on more pragmatic matters of implementing domestic policy and institutional reforms and harmonizing regulatory and institutional structures to gain benefits, without incurring the costs that are attributable to a monetary union.
Skeptics also believe that these regional economic communities do not satisfy the preconditions for an Optimum Currency Area and therefore need not go through a fiscal convergence process.
However, the new AfDB report, while according priority to harmonization and domestic reforms, does not share this skepticism. It points out the progress made by COMESA in fostering harmonization and regional integration in the financial and trade sectors under its Monetary Harmonization Program. It also makes the case that in fact moving towards a monetary union may correct the very conditions the absence of which skeptics cite against the formation of monetary unions in Africa.
"Progress has been made in the implementation of COMESA Monetary Cooperation Program, as evidenced in the establishment of the free trade area, the regional payment system, reduced inflation and budget deficits, etc.," says the report. "However, much remains to be done particularly in the area of fiscal policy convergence that is pivotal for macroeconomic convergence. In this respect the Ministers of Finance, along with Governors of Central Banks, need to take direct responsibility and a proactive role. COMESA Secretariat also needs to be strengthened and provided with appropriate financial and technical resources, particularly in the related fields of institutional strengthening and capacity building, to fulfill the enhanced role envisaged for it under the proposed multilateral fiscal surveillance framework," adds the report.
"A major responsibility also lies with the national authorities to encourage national ownership of the multilateral fiscal surveillance framework, reinforce their national public finance management systems, and formulate their individual convergence programs," says Jian Zhang, Principal Economist, AfDB.
"Nevertheless, assuming that this report's recommendations relating to fiscal convergence and surveillance will encourage regional member countries of the African Development Bank to undertake fiscal reforms resulting in better fiscal outcomes at the country levels, the report would have served a valuable role in the short and medium term, even if monetary unions may be considered to be achieved only in an undefined future," argues Moono Mupotola, the AfDB Manager in charge of Regional Integration and Trade.
On the way forward, the study proposes a generic roadmap for fiscal convergence, and makes recommendations on the role of fiscal convergence in enhancing the complementarity between trade integration and monetary integration as well as ensuring that regional level convergence programs reflect national level situations. It also places great emphasis on the need to ensure both regional and national ownership of the convergence programs.
The study has been undertaken by the AfDB at the request of the COMESA Secretariat, which was seeking to understand how the fundamentals of macroeconomic management at the national level affect progress of the regional agenda.