This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 PRETORIA 003967
SIPDIS
DEPT FOR AF/S; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
TREASURY FOR BCUSHMAN
DEPT PASS USTR FOR PCOLEMAN
E.O. 12958: N/A
TAGS: EFIN EINV ETRD PREL ECON SF
SUBJECT: SOUTH AFRICA: LOOKING AT A SINGLE SADC CURRENCY
1. Summary. In a series of public speeches and press
interviews over the course of the last six months, South
African Reserve Bank Governor Tito Mboweni has advanced the
prospect of a single currency for the Southern African
Development Community (SADC) by 2016. Mboweni sees South
Africa and Botswana playing a leading role in creating a
SADC monetary union. Mboweni wants participating SADC
member states to agree to strict macroeconomic targets aimed
at controlling inflation, reducing budget deficits, and
boosting economic growth. Currently, nine member states
have budget deficits as percentage of GDP lower than 5%;
eight maintain single digit inflation. While many
economists believe that a common currency would boost
regional economic growth, they also believe that success by
2016 is unlikely. End summary.
COMMON CURRENCY TARGETS SET
---------------------------
2. On several occasions over the past six months, South
African Reserve Bank Governor Tito Mboweni promoted the
notion a single currency by 2016 for the Southern African
Development Community (SADC). At a speaking engagement in
Johannesburg, he elaborated that the build-up to a single
currency would involve the establishment of a free trade
area in 2008, followed by the creation of a SADC customs
union in 2010, and a common market area in 2015. SADC, with
Madagascar as the latest addition, is a 14-state regional
bloc, also comprising Botswana, Angola, Lesotho, Swaziland,
Mauritius, Zimbabwe, Mozambique, Zambia, Namibia, the
Democratic Republic of Congo, Malawi, Tanzania, and South
Africa.
3. Mboweni said the build-up to a single currency would
require member states to subject themselves to strict
macroeconomic policies aimed at controlling inflation,
reducing budget deficits, and boosting economic growth.
Countries participating in a monetary union would be
required to maintain an inflation rate no higher than 3% and
a budget deficit no higher than 3% of GDP. The current SADC
inflation target is single-digit inflation by 2008, and less
than 5% by 2012. The current SADC target for budget
deficits is no more than 5% of GDP by 2008, and 3% plus or
minus 1% by 2012.
HOW DOES SADC STACK UP?
-----------------------
4. The newly-established SADC Committee of Central Bank
Governors, which is responsible for creating a convergence
framework, is meeting twice a year under Mboweni's
chairmanship. Several working groups are meeting more
regularly to deal with statistical, payment and settlement,
training, and legal challenges associated with the
integration process. Mboweni said he had met personally
with all SADC Finance Ministers to "sell the concept," but
that there were still varying expectations about the process
as well as the role of central banks, with some officials
still skeptical about the need for an independent monetary
authority.
5. SADC member states have some more work to do on
convergence. According to World Bank data, nine member
states had a budget deficit as percentage of GDP that was
lower than 5% in 2003. Angola, Malawi, Mauritius, Namibia
and Zambia had budget deficits as a percentage of GDP of
6.4%, 9.6%, 6.2%, 6.9% and 5.8%, respectively (budget
support from donors is included in these calculations). In
2004, eight SADC states had inflation rates of less than
10%. Six countries experienced double digit inflation,
including the Democratic Republic of Congo (10%), Zimbabwe
(381%), Zambia (18%), Mozambique (13%), Angola (45%), and
Malawi (11%).
SOUTH AFRICA AND BOTSWANA SHOULD LEAD
-------------------------------------
6. Mboweni believes that a single currency for the
region should be based on the South African rand and the
Botswanan pula because of the strength of the two regional
currencies. Swaziland, Namibia, and Lesotho had long linked
their currencies to the rand, through their Common Monetary
Agreement (CMA) with South Africa. Moreover, the rand is
the most highly traded African currency on the continent and
the pula is the most stable. [Note: The Botswana pula and
the South African rand traded on average at 4.69 Pula/$1 and
R6.45/$1 in 2004, stronger than in 2003 (4.96 Pula/$1 and
R7.56/$1). End Note.]
PROS, CONS, AND REALITY
-----------------------
7. Mboweni's vision is that goods, capital, and people
should be able to move among SADC countries without tedious
paperwork or costs associated with currency exchange. Many
economists believe that further SADC economic integration
would serve to boost economic growth in the region. In
terms of population, a unified SADC common market - with 226
million people -- would constitute the fifth-largest
emerging market after China, India, Indonesia, and Brazil.
8. A number of economists cast doubt on SADC integration.
Roelof Botha, Economic Advisor at PriceWaterhouseCoopers,
argues that a common currency would only succeed if there is
strong political will and economic discipline - but this is not
likely. Robert Bunyi, Head of Africa Research at Standard
Bank, believes that while integration is desirable, the
deadline of 2016 is hopelessly unrealistic. He notes that
economists are already skeptical about achieving a free trade
area by 2008, and that this forms the first stage in the build-
up to a single currency. Standard Bank Economist Henry Flint
believes that without a uniform regulatory environment and
similar economic environment, a single currency cannot be
launched. He warns that the divergence in country inflation
and economic growth has serious consequences for monetary
policy in the region. He also points out that there are large
disparities in the welfare of member country populations. For
this reason, monetary union should include only those countries
that have achieved similar levels of development. While Flint
acknowledges that excluding certain SADC member countries would
be difficult to do politically, he argues that failure to do so
would ruin the chance for success.
9. The reality of the situation is that South Africa
accounts for 71% of total SADC GDP and is the only regional
player that has large manufacturing and service industries.
The rest of SADC relies primarily on agriculture and mining.
The asymmetrical nature of SADC could adversely affect
regional economic integration because external shocks would
consistently hurt certain countries more severely than
others. Mandla Maleka, Chief Economist for Eskom, the
seventh largest electric utility in the world, believes that
it would be quite difficult for SADC to create a common
currency in just 10 years. Noting that it took Europe much
longer, he advises SADC to start weighting its currencies
into a single basket and monitoring its performance over
time to gauge the viability of launching a common currency
in 2016.
TEITELBAUM