Macroeconomic Policy Convergence, Financial and Monetary Integration

Monetary Integration is crucial in regional economic integration. Strong monetary integration is required if regional integration objectives go beyond free trade agreements or customs unions to a truly unified common market. Different levels of monetary integration impose different constraints on the macro-economic policies of participants.

   The transition towards a monetary union can be gradual or fast. The gradual strategy involves a long transition of macroeconomic convergence amongst prospective members and the development of institutions. Macroeconomic Convergence criteria, generally defined as upper or lower bounds for macroeconomic variables, are intended to guide the economic policy of future members inthe transition period - thence macroeconomic convergence is not defined in terms of symmetry or asymmetry of shocks across countries.

	Macroeconomic Policy Convergence, Financial and Monetary Integration Efforts in RECs
	Arab Maghreb Union (AMU)
	Community of the Sahel-Saharan States (CEN-SAD)
	Common Market for East and Southern Africa (COMESA
	East African Community (EAC)
	Economic Community of Central African States (ECCAS)
	Economic Community of West African States (ECOWAS)
	Intergovernmental Authority on Development (IGAD)
	Southern Africa Development Community (SADC)

Requirements for Establishing an African Central Bank

Establishing a common central bank rests on several conditions:

• The successful integration of all African economies into the African Union
• The existence of an African common currency, which implies that all African countries have fulfilled the conditions for the introduction of a single African currency.
• Commitment to a fixed exchange rate system
• Abolition of capital controls between countries.
• A framework for common foreign exchange operations and maintenance of an "African" foreign exchange reserve
• Achievement of institutional arrangements and convergence criteria by all countires, including criteria for price stability, fiscal deficits and government bad debt ratios
• A detailed constitution clarifying its objectives and functions.
• Clarification of its role in conducting monetary policy, financial supervision and lender of last resort functions
• Details of the institutional arrangement for the system of central banks included in its constitution, with special focus on the role of national central banks.

Source: ARIA I, page 112, Box 6.1

   Since the design and implementation of a common monetary policy is likely to be the primary function of an African Central bank,the details of a common monetary policy strategy for the continent need to be worked out, covering appropriate instruments,policy targets and policy objectives.

The Abuja Treaty of 1991 also calls for the setting up of an African Investment Bank as well as an African Monetary Fund in addition to the African Central Bank(by 2028)

Click here to download a copy of the publication below,  ARIA III - Towards Monetary and Financial Integration in Africa

Capacity building is also important,includign strenghtening country frameowrks for collecting, compiling and analyzing monetary and financial statistics, harmonizing formats for financial data, strengthening payment and settlement systems to facilitate the flow of Capital across borders, harmonizing accounting rules and standards and establishing efficient information and communication systems among national cetral banks.

   To function properly an African central bank must be immune to political interference. The effectiveness and credibility of monetary policy also requires ensuring autonomy for the national central banks. Nationalstatutes will also need  to accomodate the changing role of national cetral banks within a monetary union.

   For a true African Union to emerge, with a common central bank,the multiple regional groupings will need to merge. Although mergers pose substantial technical challenges, the biggest obstacles might be political.    

   Creating an African Union with an African central bank is clearly an enormous undertaking.