Grandiose plans are drawn up as Zimbabwe crashes
IT WAS SAD to read a recent speech by Reserve Bank deputy governor XP Guma posted on the Bank’s website. Sad because the speech – about African monetary integration – was made as the Zimbabwean economy went further into meltdown. The speech shows that Guma is in deep denial.
It was all about how Africa had agreed to build this big economy with a single currency by 2015 and the convergence of economic indicators across the continent. The plan is for African countries to meet certain criteria – among others on inflation, budget deficits, economic growth and foreign debt. The targets are to be met in stages. Once they have all been met, there will be a single African central bank and, like the Eurozone, a single currency. The plan has been made in terms of the Abuja treaty.
Guma said that, for Africa as a whole, the following criteria would have to be met by 2008: a budget deficit as a percentage of gross domestic product (GDP) of not more than 5%; central bank credit to government not exceeding 10% of the previous year’s tax revenue; inflation in single digits; foreign exchange reserves that cover at least three months’ imports; reduction of current account deficits to “sustainable” levels; debt reduction to “sustainable” levels; and achieving and maintaining a “high and sustainable” rate of growth in real GDP.
This all has to happen by next year. Clearly, it’s so much pie in the sky.
Take Zimbabwe. An article on FT.com says that Zimbabwe in December revealed a budget deficit for 2006 of Z$824bn (US$3,3bn). This represents a massive 43% of GDP and is more than double the 18,7% figure estimated in the middle of last year. It’s laughable to continue with a target of 5% of GDP for African budget deficits for next year while these are the kinds of figures that are the reality.
A fascinating aspect of Zimbabwean Finance Minister Herbert Murerwa’s presentation in December last year is the fact that he didn’t provide a figure for overall GDP growth for 2006. This is standard procedure everywhere else. Murerwa claimed, however, that the economy was beginning to recover. But the International Monetary Fund estimates that the Zimbabwean economy contracted by 4,7% last year. Again, it seems rather pathetic to cling on to a target of “high and sustainable” GDP growth by 2008 when a prominent African country is in such deep decline.
Then there’s inflation. Zimbabwe’s inflation rate hit a new record of 1 729,9% in February from 1 593,6% in January. At those levels of inflation – the highest in the world – the economy becomes completely dysfunctional. The month-on-month inflation rate was 37,8%.
Guma, with a straight face, stated that the target inflation rate for African countries was single-digit inflation in 2008. Not a word from him on the inflation explosion taking place on SA’s doorstep. No, just a recital of the “observance” of the macroeconomic indicators by 2008. All part of the second stage of monetary integration in Africa, spanning 2004-2009.
The fourth and final stage of African monetary integration would see the launch of the African central bank and the introduction and circulation of the common African currency in 2015. Guma said a transitional period during which sub-regional currencies would operate alongside the African currency was envisaged.
Astonishingly, he added: “As the programme has progressed, so adjustments have been made, and the current statement of the programme envisages completion by 2015; not 2021 as in the original thinking.”
What’s even more strange is that the SADC programme envisages the establishment of a regional central bank in 2016 and the launching of a regional currency for the SADC by 2018. These targets don’t make sense if full African monetary union is the target by 2015. It seems the SADC targets haven’t been updated and Guma just went with the old ones, even though the programme then no longer makes sense.
The telling part of the speech comes at the end, when Guma said there were questions that policymakers would have to consider. “They include the following: Should we continue down this path? Do the programmes have realistic time frames? Are they on target? Fortunately, I don’t have to wrestle with them: and any assessment by me would be not only discourteous but also presumptuous.”
This is such a cop-out. Why does the deputy Governor of the Reserve Bank feel he can’t address the obvious questions that arise out of the plans for monetary union in Africa? It’s his duty to wrestle with major questions in a speech of this nature. People are spending time drawing up grandiose plans while Zimbabwe is imploding.
Doesn’t wrestle with
the questions. XP Guma