Lee-Roy Chetty
Lee-Roy Chetty

Macroeconomic convergence within the SADC region

Since its evolution from the Southern Africa Development Co-ordination Conference (SADCC) into the Southern Africa Development Community (SADC), the Southern African regional formation has targeted gradually deepening its integration, starting with the creation of a free trade area in the coming decade.

In addition to this free trade area, further goals such as the achievement of a planned common market by 2015, a monetary union by 2016 and a single currency by 2018 remains incredibly ambitious by SADC, with many economic and political commentators agreeing that these plans are not realistically obtainable in the near- to medium-term future.

However, a more pertinent challenge relevant to policymakers is whether the macroeconomic convergence framework formulated within the context of the Regional Indicative Strategic Development Plan (RISDP) launched in August 2004 can still be achieved.

In order for the RISDP to come to fruition, five key macroeconomic indicators have been identified. These include the rate of inflation, the ratio of the budget deficit to GDP, the ratio of public and publicly guaranteed debt to GDP, and the current account balance and its structure.

Currently, Southern Africa countries are characterised by significant differences in tariffs, inflation rates, exchange rates, debt-to-GDP ratios, monetary growth, deepening of financial markets and institutions and other vital macroeconomic indicators required to foster economic integration.

While the Southern Africa region growth performance ranks it third among Africa’s five regions, its growth has recovered to the pre-crisis growth levels, with the exception of Swaziland. In general, low-income countries in the region, except Zimbabwe and Madagascar, achieved higher average GDP growth compared to the middle-income countries over the period 2007 – 2011.

Nations within the Southern African region registered mixed economic growth performances in 2011. While the economies of Mozambique, Zambia and Botswana grew by 6 percent or more, Swaziland and Madagascar recorded growth of less than 1 percent. The political crisis in Madagascar continues to weigh down economic activity, whereas in Swaziland the fiscal crisis reduced both consumption and investment expenditures as the government was not successful in mobilising financing resources. At 3.5 percent, the region’s aggregate growth remained unchanged from the previous year, reflecting the negative impact of the Eurozone debt crisis due to its importance as a major trade destination. While uncertainty on growth in the Eurozone remains, the Southern Africa region is expected to recover to around 4 percent and 4.5 percent in 2012 and 2013 respectively.

In addition, Botswana has shown remarkable performance since independence in 1966. After three decades of high and sustained growth in real per capita income it graduated to a middle-income country in 1997, gradually meeting levels similar to our country, South Africa. Currently, Botswana is classified as an upper middle-income economy. Mauritius and Namibia have also performed relatively well in terms of growth and consequently achieved upper middle-income country status. In all the three countries, growth has been sustained through prudent economic policies, relatively efficient and capable institutions and good governance.

Average macroeconomic performance at the country level for the last five years give a mixed picture on progress towards achieving macroeconomic convergence on the basis of the 2012 targets in the SADC region. The Southern African regional block is ranked for each of the five variables included in the convergence criteria, namely inflation, current account, fiscal balances, government debt and foreign exchange reserves. Three groups of countries are identified – the high performers, moderate performers, and poor performers. While noting the hyperinflation prior to 2009, Zimbabwe is the only country that is observed to have met the 5 percent target on inflation after its adoption of the multi-currency regime.

The Southern African Customs Union (SACU) countries and Mauritius were moderate performers while the rest are categorised as poor performers. The Common Monetary Area (CMA) countries – South Africa, Namibia, Lesotho and Swaziland – however, are an exception. Inflation rates in these countries has not only showed a consistent tendency of convergence towards the CMA mean inflation rate but also have consistently remained below the Southern Africa mean rate for nearly three decades.

The current monetary policy regime in South Africa has served the CMA well. Sustenance of low inflation, however, can be guaranteed only if the dominant economy does not relax its target as the smaller economies inflation levels tend to gravitate towards that of South Africa. With respect to public debt, all countries in the sub-region have performed relatively well. Only Zimbabwe fails in meeting the target of less than 60 percent of GDP, with Botswana, Madagascar, Namibia, Swaziland and Zambia being the high performers while the rest are moderate performers. The political crisis coupled with poor economic management and the uncertainty surrounding the policy direction under the government of national unity has not helped in normalising the economic environment in Zimbabwe. Current efforts to secure debt relief for the country could help in re-channeling resources from debt servicing to development financing.

On average, the Southern African region has performed relatively well over the last five years towards achieving the targets for fiscal deficits and international reserves. A combination of improved economic management capacity and higher commodity prices partly explain this outcome. Only Mozambique and Zimbabwe performed poorly with respect to the targets on the fiscal deficit and international reserves respectively.

While the global financial crisis severely affected the resource-rich countries, most countries in the SADC region have managed to recover although the uncertainty arising from the Eurozone is threatening the achievement of the targets for 2012.

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