US embassy cable - 05PRETORIA3967

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