VI. REGIONAL COOPERATION

VI. REGIONAL COOPERATION Southern African Development Community (SADC) In its Annual Report for the year ended August 2002, the SADC Secretariat gave an overview of the economic situation in the SADC region. Some of the issues highlighted therein are presented below. The SADC region continues to face enormous challenges, namely, poverty eradication, HIV/AIDS pandemic, sound macroeconomic management, good governance, democracy and globalisation. According to a study undertaken by the World Bank, approximately 40 per cent of the region s population, or 76 million people, live in extreme poverty. Six of the 14 SADC countries, namely, Lesotho, Malawi, Mozambique, Swaziland, Zambia and Zimbabwe face severe food shortages. This humanitarian crisis is the result of accumulated grain shortage and dependence on rain-fed arable agriculture. During the year ended August 2002, the SADC region hosted and spearheaded important international political events, the most important of which was the launching of the African Union (AU) and the adoption of the Protocol establishing the African Union Peace and Security Council. The AU is an African initiative that seeks to pursue the objectives of the Organisation for African Unity (OAU) Charter and the Abuja Treaty with a view to achieving unity, economic integration and sustainable development on the continent. The Constitutive Act of the AU came into force on 26 May 2001. SADC also played an important role in the conceptualisation, promotion and implementation of the New Partnership for Africa s Development (NEPAD), which is a strategic undertaking for accelerating Africa s political and economic development. The SADC region also hosted the International Conference on Racism and Xenophobia and the World Summit on Sustainable Development. In line with the directives given by the SADC Summit of Heads of State and Government at their meeting in Windhoek, Namibia, in March 2001, SADC proceeded with the restructuring process. The main areas of cooperation and integration are now grouped into four clusters according to their affinities, namely, Trade, Industry, Finance and Investment; Food, Agriculture and Natural Resources; Infrastructure and Services; and Social and Human Development and Special Programs. Various studies have been undertaken on the restructuring and some are still under way. One of these relates to the formulation of the Regional Indicative Strategic Development Plan (RISDP). The RISDP, whose objective is to deepen the integration agenda of SADC with a view to accelerating poverty eradication and other development goals, has been prepared by the SADC Secretariat as part of the exercise to restructure SADC. It provides a strategic direction to SADC programmes and activities and consists of a consistent and comprehensive programme of longterm economic and social policies. Besides reviewing SADC s main development policies, the RISDP provides SADC Member States, their institutions and policy makers with a coherent and comprehensive development agenda on social and economic policies over the next ten years. The RISDP also provides clear guidelines on SADC s approved social and economic priorities and policies and this enhances its effectiveness in discharging its facilitating and coordinating role. At their Summit in Luanda, Angola, in October 2002, the SADC Heads of State and Government signed the Protocol on Extradition, the Protocol on Mutual Legal Assistance in Criminal Matters, the Protocol on Forestry and the Agreement Amending the Protocol on the Tribunal. As of August 2002, twenty protocols have been developed, covering the major areas of cooperation and integration, and nine of them have entered into force and were being implemented. As of August 2002, the SADC Programme of Action (SPA) had a total of 404 projects estimated at US$6.1 billion, of which only about US$2.3 billion had been secured. The structuring exercise is partly intended to address this problem. In addition, the introduction of self-financing mechanisms, including the establishment of a regional development fund, is expected to address the sustainability of the SPA. During the year 2001, the macroeconomic performance of the SADC was not very encouraging. The GDP annual average growth rate dropped from 2.1 per cent in 2000 to 1.9 per cent in 2001 in sharp contrast to the average growth rate for Africa which increased from 3.5 per cent in 2000 to 4.3 per cent in 2001. Some SADC Member 84

Annual Report 2002-03 Regional Cooperation States, however, recorded impressive rates of economic growth, namely, Mozambique (13.9%) and Botswana (9.2%). In contrast, Seychelles, Democratic Republic of Congo (DRC) and Zimbabwe recorded negative growth rates of 1.9 per cent, 4.0 per cent and 8.6 per cent, respectively. The SADC average GNP per capita stood at US$1,887 for 2000. On a country-wise basis, GNP per capita ranged from US$9,920 in Seychelles to below US$350 for Angola, DRC, Malawi, Mozambique, Tanzania and Zambia. The high GNP per capita for Seychelles is explained by its small population of just over 80,000. This, however, tends to distort SADC s average GNP per capita. The average inflation rate for SADC fell slightly from 11.0 per cent in 2000 to 10.0 per cent in 2001. However, inflation was still very high in countries which have recently experienced or where there are ongoing armed or political conflicts, namely, Zimbabwe (74.5%), Angola (115%) and DRC (403.6%). During the period 1990-2000, most SADC countries were able to reduce their budget deficits. This improvement in their fiscal position is, to a large extent, explained by the better control of current and capital expenditures, tax administration reforms and privatisation of state-owned enterprises. With regard to current account balances for the period 1991-2000, SADC countries can be classified into three main categories: those which, on average, registered surpluses, namely, Botswana, Mauritius and Namibia; those which, on average, experienced a modest current account deficit of less than 5 per cent of GDP, namely, Seychelles, South Africa, Swaziland and Zimbabwe; and those with high and deteriorating current account deficits, namely, Angola, DRC, Lesotho, Malawi, Mozambique, Tanzania and Zambia. External debt remains a burden for most of the SADC countries. As at end of 1999, the stock of external debt in SADC countries stood at US$96 billion. Over the last two decades, external debt has more than doubled in Angola, DRC, Mozambique and Zimbabwe. Over the period 1992 to 2000, the debt burden represented 116 per cent of GDP in Tanzania, 124 per cent in Malawi, 173 per cent in Angola, 175 per cent in DRC, 202 per cent in Zambia and 238 per cent in Mozambique. The most important development in the Trade, Industry, Finance and Investment directorate is the implementation of the Trade Protocol, a process that started in September 2000. The objective of the SADC Trade Protocol is to create a Free Trade Area in which substantially all trade will be duty free by 2008. The liberalisation of country specific sensitive products is expected to be achieved by 2012. Major issues that will have to be discussed relate to rules of origin; market access for BLNS countries (Botswana, Lesotho, Namibia and Swaziland); customs cooperation; and sanitary and phytosanitary aspects. As of end-august 2002, 11 SADC Member States, namely, Botswana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania and Zambia were eligible for AGOA and have obtained visa approval to export textiles and clothing to the US under this initiative. Substantial progress has been made in the Finance and Investment sub-cluster, which currently has subcommittees on macroeconomic convergence; taxation; development finance; insurance, securities and non-banking financial authorities; and capital markets. With regard to macroeconomic stability, two Memorandum of Understandings (MoUs) have been developed and adopted, one on Macroeconomic Convergence and another on Cooperation in Taxation and Related Matters. The objective of the MoU on Macroeconomic Convergence is to establish a macroeconomic policy coordination framework to enhance macroeconomic stability in the SADC region. The convergence criteria center around stable rates of inflation, the ratio of the budget deficit to GDP, the ratio of the public debt to GDP and the balance and structure of the external account. The objective of the second MoU on Cooperation in Taxation and Related Matters is to foster cooperation on capacity building in the area of taxation. It seeks to harmonise tax regimes, promote the application and treatment of tax incentives and develop a dispute settlement mechanism. These MoUs are intended for incorporation into the final protocol for Finance and Investment that is being developed. The Committee of Central Bank Governors (CCBG) in SADC The Committee of Central Bank Governors in SADC (CCBG) was established in 1995 by the Ministers responsible for Finance and Investment. 85

During the year 2002-03, the activities of the CCBG were characterised by a more pronounced involvement in the various initiatives taken at the continental level and which are consistent with the SADC programmes. The CCBG has shown strong support for the African Action Plan and the various projects that fall under the NEPAD programme to eradicate poverty and underdevelopment in Africa. At the CCBG meeting in Angola in April 2003, a representative of the NEPAD Secretariat made a presentation on the objectives of the NEPAD. Consensus was reached on the areas where the CCBG could assist the NEPAD in achieving its main objectives. These would include, inter alia, the development of sustainable funding methods for the African Peer Review Mechanism. Governors agreed to take the lead in all monetary and financial matters. The CCBG has also been participating actively in the Consultative Workshops held in member states to discuss the RISDP. The past year has also been a time of reflection for the CCBG on the best way to position itself in the new SADC structure so as to ensure that the work of the committee is pursued to achieve financial regional integration. In view of the CCBG s ability to initiate and implement its own regional programmes and activities and its willingness to use its own financial resources, Governors have indicated that it would be appropriate for the CCBG to operate in terms of the principle of subsidiarity and report directly to the Integrated Committee of Ministers. Significant progress has been made on the various projects to reform and liberalise our banking and financial systems so as to make them more secure and dynamic. As a step towards regional monetary co-operation, the CCBG has made a lot of progress in the harmonisation of the National Payments Systems. Resulting from the development of combined business and technical specifications for regionally suitable Real Time Gross Settlement (RTGS) principles, a number of central banks in the region have succeeded in the implementation of the RTGS Systems in their respective national payment systems. Another major development in this area has been the drafting of the Model National Payment System Act by a team of legal experts from the SADC central banks. The Model Act will be discussed at forthcoming meetings of the project team. Moreover, the disbursement of the grant from the World Bank International Development Fund would allow the project team to pursue its work programme. In the area of Information and Communication Technology, the Bank Supervision Application (BSA) solution, which aims at developing information systems for the support of harmonised bank supervision processes in SADC central banks, has been finalised and successfully demonstrated to bank supervisors at a project review meeting held in South Africa during January 2003. The BSA solution has been implemented at Banco de Moçambique for the User Acceptance Testing. Participating central banks have been invited to sign the BSA Agreement on a bilateral basis. The CCBG has approved the MoUs on Cooperation and Co-ordination of Exchange Control Policies in SADC, Payment, Clearing and Settlement System in SADC Countries and Co-operation in the Area of Information and Communication Technology. After a lengthy consultative process, the MoU on exchange control will be submitted to the SADC Ministers of Finance and Investment for their consideration. The Steering Committee on Legal and Operational Frameworks of SADC central banks is currently working on the MoU on Harmonisation of Legal and Operational Frameworks of SADC Central Banks so as to take care of the concerns expressed by the SADC Ministers of Finance and Investment and the CCBG. This committee has made significant progress in drafting a Model Central Bank Legislation indicating key elements of commonality as well as areas where a concerted effort needs to be taken in a move towards closer convergence. One of the items that ranks high on the agenda of the CCBG is the promotion of microbusiness in the region. With the assistance of the International Labour Organisation, the CCBG initiated a project to gather information on the status of micro-finance in the SADC region. The first phase of the project, which consisted of setting up national micro-finance focal points, devising a questionnaire to collect data, developing a standard framework for the analysis of the data collected and preparing a report on the data collected, has been completed. The second phase, which will focus on the provision of technical assistance to SADC 86

Annual Report 2002-03 Regional Cooperation central banks in the monitoring of micro-finance activities, would start as soon as funding is obtained. Since the inception of the CCBG, the East and Southern Africa (ESAF) Banking Supervisors Group has been reporting on its banking supervision activities at the Governors meetings. However, with the increase in the number of stakeholders in the financial system which is growing in scope and sophistication, the increasing complexity of money laundering activities and the need to instil public confidence in the system, the CCBG has decided that it should be at the forefront of bank supervision in SADC. Accordingly, the CCBG has decided to establish its own subcommittee to deal with the supervision of banks. In this respect, a process of consultation is to be initiated with the non-sadc ESAF Members so as to ensure a smooth transition to the CCBG bank supervisory group. Globally, the issue of money laundering is getting increasingly alarming. Conscious of the impact that money laundering can have on SADC economies and on the urgent need to address the issue, there is a lot of groundwork that has been done for the holding of a workshop, with the collaboration of all the other stakeholders involved in the fight against money laundering. The CCBG has also formed close ties with the SADC Banking Association and the SADC Committee of Stock Exchanges (COSSE), which regularly report on their activities to the CCBG. In the past year, the SADC Banking Association focused on the development of norms of good banking practice and piloted a capacity building initiative for publicprivate partnerships in infrastructure finance in Mozambique. Once completed, it will be rolled out to the remaining member countries over 5 years. One of the main tasks of COSSE during the year was the drafting of the multilateral MoU for Stock Exchanges in SADC, which, inter alia, sets out the objectives and aims of the committee. 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 (PTA) for Eastern and Southern Africa States, 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 creation, 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 Fifteenth Meeting of the Council of Ministers was held from 13 to 15 March 2003 in Khartoum, Sudan. Representatives of COMESA member states, of a number of COMESA institutions, of other co-operating institutions and regional organisations attended the Meeting. As a regional organisation, COMESA needs to address the key issues of peace and stability, food security, investment, jobs, access to health and education and a safe environment to live in. Many countries in COMESA were facing food shortages arising out of drought and diseases, such as HIV/AIDS and malaria, continued to ravage the region. However, it was noted that a number of member states, previously afflicted by civil wars, were moving towards peace. The theme for the Summit was COMESA: Towards a Customs Union. The Secretary General of COMESA, Mr. Erastus, J. O. Mwencha, MBS, reminded the meeting that Article 45 of the Treaty provided for the establishment of a Customs Union, ten years from the setting up of the COMESA. Based on the Treaty provisions, the Customs Union should be launched in December 2004. He also requested member States to comply with the deadline set by the Authority for indicating their time frames for joining the Free Trade Area (FTA). He requested non-fta member States to express their concerns to the Council so that the Bureau could undertake further consultations. On the Customs Union, the Secretary General stated that the Secretariat would continue to provide technical support to member states through their National Working Groups. He reported that work on the 87

Customs Tariff Nomenclature had been completed and the draft harmonised customs legislation had been prepared and would be considered by the technical committees. He appealed to member states to continue working together, so as to achieve the goal of establishing a Customs Union by the target date, which would send a powerful signal to investors that COMESA had embraced deeper regional integration. The Secretary General also observed that co-operation with European Union continued to grow. Under the 9 th European Development Fund, an Inter Regional Co-ordinating Committee (IRCC) had been established comprising COMESA, EAC, IGAD, IOC and SADC. He also reported on the strong partnerships COMESA had with other bilateral and multilateral institutions. The Council noted that Burundi and Rwanda would join the FTA in January 2004. The Council was informed that the World Bank had expressed its willingness to support COMESA (Non-SADC) member states in modernising their national payment systems, along the lines of the assistance being currently provided to SADC member states under the SADC Payments System Programme. The Council noted that, at the 2002 COMESA Summit in Addis Ababa, twelve COMESA Member states signed the COMESA Fund Protocol. However, no country has, as yet, ratified the protocol. The COMESA Fund has two components, namely, the COMESA Infrastructure Fund and the COMESA Adjustment Facility. The Secretariat has also been developing the COMESA Fund Adjustment Facility. This has been done by developing a regional integration surveillance mechanism, which should act as a trigger mechanism for budgetary support. If a COMESA country wishes to continue with an economic liberalisation policy, it should not be constrained by short-term budgetary shortfalls. If, for example, a country wishes to reduce tariffs as part of a trade policy reform programme, it should not be constrained to do so as a result of a shortterm loss of revenue, which may be experienced after tariffs are reduced, but before the effects of other fiscal adjustments become apparent. Reports by a number of COMESA Institutions ensued, with some of the important ones mentioned hereafter: (i) PTA Bank The PTA Bank continued to promote the integration of the economies of member States through provision of finance and technical assistance. For the year 2002, the PTA Bank approved COM$41.2 million under project finance and COM$61.2 million under trade finance. In both cases the approvals showed substantial increases over the previous year. On financial performance, total income increased from COM$11.02 million to COM$12.23 million. The PTA Bank requested members of COMESA which had not joined the PTA Bank to do so as soon as possible. (ii) PTA Reinsurance Company (ZEP-Re) For the year 2002, the PTA Re-Insurance Company (ZEP-Re) wrote a premium income of COM$15.5 million, marking a 32 per cent growth from 2001. Membership rose to 30 in 2002 with four new shareholders admitted in 2002. (iii) COMESA Clearing House The Council noted that work on the Regional Payment and Settlement System (REPSS), was progressing as approved by the Council at its Fourteenth Meeting, in the following areas: (a) Setting up and Maintenance of a Trust Fund; (b) Legal Environment; (c) Business Process Analysis; (d) Paper Process; and (e) Setting up of National Workshop Groups. An update on the introduction of the African Commerce Exchange (ACE) services in member states for the connection of central banks and commercial banks on the SWIFT Network was also provided. (iv) African Trade Insurance (ATI) Agency The Council noted that the ATI had started operations in April 2002 to provide political and credit risk cover on trade and financial transactions. The Council recalled ATI s benefits and the new developments on product diversification. The new products include non-payment cover for government and non-government buyers, working capital finance guarantee and foreign direct investment insurance. The Council also noted that Madagascar has recently 88

Annual Report 2002-03 Regional Cooperation signed the ATI Agreement bringing the number of participating States to eight. The PTA Bank and ZEP- Re are set to become the third and fourth corporate shareholders in the Agency following Gerling-NCM and COMESA. To support membership in ATI, the World Bank has indicated its willingness to extend financial assistance to new, eligible member countries for the purpose of providing underwriting capacity. Other Issues The Council noted that United States Agency for International Development (USAID) was pleased to be a partner of COMESA in the promotion of economic development and regional trade integration in Eastern and Southern Africa. It was reported that since 1998, USAID s assistance to COMESA had focused on five areas: regional trade development, public-private sector business partnerships, regional telecommunications policy harmonisation, institutional strengthening, and governance and conflict resolution. To promote trade capacity building in sub-saharan Africa, President Bush announced the Trade for African Development and Enterprise Initiative that has led to the opening of three Regional Hubs for Global Competitiveness in Accra, Gaborone, and Nairobi. The representative of the Government of India, who was also attending the Summit, indicated that his government had decided to strengthen cooperation programmes with COMESA. In this respect, the Government of India had made available a line of credit of over US$200 million through NEPAD. The Council also noted that through the Exim Bank of India, a US$25 million was made available to the PTA Bank. The Council further noted that the Government of India was willing to share its experience with COMESA member states in agriculture, technology transfer and health, among others. African Development Bank (AfDB) has so far provided funding totalling about US$4.6 million to COMESA. The Council noted that the AfDB current direct support to COMESA was a US$1.5 million grant for public procurement reforms. Regional Payment and Settlement System COMESA Clearing House embarked on the development of a payment system known as Regional Payment and Settlement System (REPSS) to improve the flow and settlement of cross-border payment transactions among financial institutions for the benefit of importers and exporters in the various member countries. The objectives of the proposed system are to increase competition among the banks, improve financing services, lower costs to compete payment commitments, promote the expansion of trade among member countries and improve final funds availability to the exporter. Several meetings have been held to discuss various technical topics relating to the project. At the fourth meeting of the Committee of International Payments Experts from COMESA Central Banks held on 14 and 15 October 2002 in Harare, Zimbabwe, two types of payment systems that could consummate cross-border payments, that is, netting (bilateral and/or multilateral) system or a Real Time Gross Settlement (RTGS) basis were examined. The multilateral netting system requires only a modest amount of liquidity but defer funds availability to the beneficiary until after the settlement has been completed. Further, the inability of any one participant to complete its share of the settlement can have a significant impact if there are no proper safeguards established beforehand. The RTGS system requires more liquidity but assures that beneficiaries may access their funds immediately upon advice of the transaction. Further, with RTGS system, central banks may provide an intra-day liquidity facility to prevent any gridlock. All payments in local currencies will be converted to a settlement currency, based on a fixed daily rate, for transfer between countries. The imbalances in the settlement currency will be settled on a daily basis through a settlement agent. The Committee of International Payment Experts also agreed that work needs to be undertaken in the following areas: Setting up of a Trust Fund To ensure timely completion of daily settlements in the event of an inability of some participants to settle. The Secretariat will, in this context, prepare a report on the setting up and utilisation of a Trust Fund for collaterisation that will be used as safeguard. Legal environment The general legal infrastructure (laws on contracts, payments, securities, banking, insolvency) as well as specific statutes and 89

agreements, like payment system rules will need to be examined for each country. Issues relating to finality of transfers, use of collateral, legality of multilateral netting, bank failures and the zero hour rule, the legal status of electronic signatures and the drafting of model legislation for cross-border payments and settlement will have to be addressed. Member Central Banks were contacted to provide the COMESA Clearing House with information relating to their legal environment. A checklist compiled by the Clearing House for use by the central banks was circulated. Business Process The Consultants who prepared the Comparative Study on RTGS and Multilateral Netting Systems would work out detailed business process, including the types of messaging to be used, costing and cost recoveries, the methodology to be used, the timing of the project, project execution and risk. At the fifth meeting of the Committee of the International Payment Experts from COMESA Central Banks held on 28 and 29 April 2003 in Harare, Zimbabwe, the major deliberations of the meeting focused on the following areas: Process and transaction flows under REPSS. The current deal making between an exporter and an importer including the contractual arrangements and payment terms would remain the same. However, as an alternative to using correspondent banks to complete the financial transaction, which is considered to be time consuming and expensive, COMESA is proposing, as a second option, to use an intercountry credit transfer system for clearing and settling cross border payments. The proposed system would involve commercial and central banks of the importers and exporters respective countries. Letter of Credit must be drawn in the currency of the exporter at all times and must indicate that settlement is to be effected over the REPSS. the Letter of Credit have been met, forward a message to the commercial bank (Importer) requesting them to initiate payment in terms of the Letter of Credit for the amount of the drawing. The Central Bank (Importer) will receive a payment/settlement instruction from the commercial bank (Importer) requesting payment/settlement over the National Payment System advising details of the beneficiary Central Bank (Exporter) and commercial bank (Exporter) and that payment/settlement is to be processed over REPSS. COMESA Clearing House will receive a payment/settlement message from the Central Bank (Importer) requesting payment /settlement over REPSS in favour of Central Bank (Exporter). Management of risks in REPSS. Risks in payment systems arise from many sources and require banks participating in a payment system to move beyond the boundaries of conventional thinking and to put in place structures, which take a holistic view of risk and its management. Legal issues. A degree of uniformity in each participant country s legal framework covering electronic payment and settlement is essential. Other issues that were discussed are: Setting up of National Workshop Groups. User requirements documents. Setting up of a Trust Fund or other alternatives. The roles and responsibilities of commercial banks, central banks and COMESA Clearing House with regard to processing and settlement of transactions. The commercial bank (Exporter) will, after ensuring that all conditions for a drawing under 90