## _wp07158 ## Source details **Canonical URL:** [_wp07158](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07158.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07158.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07158.pdf.json) --- ### Introduction and objectives of the CMA - The Trilateral Monetary Agreement among the governments of the Kingdom of Lesotho, the Kingdom of Swaziland, and the Republic of South Africa came into force on April 1, 1986, establishing the Common Monetary Area (CMA). - Article 2 (preamble) objectives: “the monetary arrangements should provide for the sustained economic development of the Common Monetary Area as a whole,” and “the arrangements should encourage the advancement of the less developed members of the Common Monetary Area and should afford to all parties equitable benefits arising from the maintenance and development of the Common Monetary Area as a whole.” - Key analytical questions addressed through end of fiscal year 2005/06: - Have the CMA arrangements facilitated the achievement of their growth and development objectives? - What are the key policy challenges facing member countries in an increasingly integrated world economic environment? - What are the main issues and possible options to address these challenges? ### Historical evolution and major milestones - Chronology (selected items): - 1910: Southern African Customs Union (SACU) arrangement became effective in 1910. - 1921: After establishment of the South African Reserve Bank (SARB), South African currency became effectively the sole medium of exchange and legal tender in South Africa, Bechuanaland (now Botswana), Lesotho, Namibia, and Swaziland. - 1961: The rand replaced the pound. - December 5, 1974: South Africa, Botswana, Lesotho, and Swaziland signed the Rand Monetary Area (RMA) treaty. - 1975: Botswana opted to withdraw from the RMA. - 1974: Swaziland introduced the lilangeni pegged at par to the rand. - January 1980: Lesotho established a central bank and issued the loti at one-to-one to the rand. - April 1986: CMA Trilateral Agreement signed; additional provisions on capital account, intra-CMA transfers, and seigniorage compensation. - 1989: CMA amended to remove certain exchange restrictions. - 1990: Namibia became independent. - 1992: Namibia joined the CMA; Multilateral Agreement replaced the Trilateral Agreement. - 1993: Namibia issued the Namibian dollar. - 2002: New SACU revenue-sharing formula had a development component. - 2003: Swaziland reauthorized use of the rand as legal tender alongside the lilangeni. ### Institutional framework and key provisions - Currency arrangements: - Article 2 (Multilateral) gives Lesotho, Namibia, and Swaziland the right to issue national currencies. - Local currencies are legal tender only in their own countries; the South African rand is legal tender throughout the CMA. - Bilateral agreements require LNS countries to permit authorized dealers to convert notes at par without restriction (subject to normal handling charges). - Reserve backing of local currency issuance: - Lesotho-South Africa and Namibia-South Africa bilateral agreements require Lesotho and Namibia central banks to maintain foreign reserves at least equivalent to total local currency issued. - Allowed reserve components include: central bank holdings of rand balances, rand currency in a Special Rand Deposit Account with the SARB, South African government stock (up to a certain proportion), and investments in the Corporation for Public Deposit in South Africa. - Movement of funds: - Article 3 provides that no restrictions can be imposed on fund transfers to or from any member country, except for member-prescribed investment or liquidity requirements applied as minimum local asset requirements. ### Selected economic and social indicators for CMA countries (2004-2005; exact figures) - Economic indicators (Nominal and rates preserved exactly): - Nominal GDP (millions of US dollars): Lesotho 1,348; Namibia 5,721; South Africa 214,989; Swaziland 2,351; CMA Total 224,410; Botswana 9,064. - Gross national income per capita (US dollars, Atlas method): Lesotho 740; Namibia 2,370; South Africa 3,630; Swaziland 1,660; CMA Total 4,340. - Gross national income per capita (PPP): Lesotho 3,100; Namibia 6,660; South Africa 10,130; Swaziland 4,850; CMA Total 8,370. - Real GDP growth rate (percent): Lesotho 1.7; Namibia 4.7; South Africa 4.8; Swaziland 2.0; Botswana 5.9. - Inflation (percent, period average): Lesotho 4.7; Namibia 3.3; South Africa 2.4; Swaziland 4.1; Botswana 9.5. - Fiscal balance (including grants; percent of GDP): Lesotho 7.2; Namibia -3.9; South Africa -1.3; Swaziland -4.3; Botswana 2.3. - Total government debt (percent of GDP): Lesotho 62.8; Namibia 32.4; South Africa 35.4; Swaziland 18.3; Botswana 10.7. - International reserves (months of imports): Lesotho 4.3; Namibia 1.7; South Africa 3.0; Swaziland 1.3; Botswana 18.4. - Current account balance (percent of GDP): Lesotho -3.0; Namibia 8.0; South Africa -3.8; Swaziland 0.0; Botswana 9.2. - Total exports (millions of US dollars): Lesotho 618; Namibia 1,738; South Africa 52,900; Swaziland 1,883; CMA Total 56,161; Botswana 3,638. - Social indicators: - Population (millions): Lesotho 2.2; Namibia 2.0; South Africa 45.8; Swaziland 1.15; CMA Total 51.1; Botswana 1.7. - Rural population (percent of total population): Lesotho 81.9; Namibia 67.0; South Africa 42.6; Swaziland 76.3; Botswana 48.0. - Life expectancy at birth (years): Lesotho 37.2; Namibia 40.3; South Africa 45.7; Swaziland 42.5; Botswana 38.0. - Mortality rate of infants (per 1,000 live births): Lesotho 79; Namibia 48; South Africa 53; Swaziland 105; Botswana 82. - HIV/AIDS prevalence rate (aged 15-49): Lesotho 28.9; Namibia 21.3; South Africa 15.6; Swaziland 38.8; Botswana 37.3. - Literacy rate (percent of population aged 15 and above): Lesotho 81.4; Namibia 83.3; South Africa 86.0; Swaziland 80.9; Botswana 78.9. - Human development indicator: Lesotho 149; Namibia 125; South Africa 120; Swaziland 147; Botswana 131. - Data notes: - Source: World Development Indicators, national authorities, and IMF staff estimates. - Lesotho data are for fiscal year (April-March). - Botswana is listed for comparison; data for 2004 unless otherwise noted. ### Access to South African capital, money markets, and foreign exchange rules - Access to South African capital and money markets: - LNS countries have access to South African capital and money markets only through prescribed investments or approved securities held by financial institutions in South Africa, subject to LNS prudential regulations and consultation with the South African government. - Issues have the same rating as South African municipal bonds and are subject to ceilings on shares of required minimum prescribed investments and approved securities. - In Namibia the limit applies to institutional investors (pension funds, insurance companies, medical aid schemes), but not to banking institutions. - Short-term money market and temporary credit: - No regular arrangements exist for taking up LNS treasury bills in South Africa. - CMA Agreement recognizes the right to bilateral negotiations for temporary central bank credit in special circumstances; facility has not been used so far. - Gold and foreign exchange transactions: - LNS countries authorize foreign transactions of local origin but exchange control regulations must be—in all material aspects—similar to South Africa’s (Article 5). - Residents must surrender gold and foreign exchange receipts to an authorized dealer; dealers sell to the national central bank but may hold minimum working balances. - No exchange restrictions on current international transactions for non-residents. - Compensation for forgone seigniorage: - Compensation formula equals the product of: - (i) two-thirds of the annual yield on the most recently issued long-term South African government stock, and - (ii) the volume of rand estimated to be in circulation in the member country concerned. - The ratio of two-thirds approximates the yield of a portfolio of reserve assets comprising both long-term and short-term maturities. ### Empirical findings on growth, convergence, and price integration - Growth and convergence: - Average annual GDP growth of the CMA: 1.1 percent in 1980-1992; 2.7 percent in 1993-2000; 3.7 percent in 2001-2005. - Per capita income convergence: gap between South Africa and Lesotho narrowed from over 80 percent of South African per capita income to about 70 percent by 2003. - Statistical analysis confirms convergence in per capita income in the last two decades; LNS countries achieved higher average annual growth in per capita GNI in 1994-2005 than in 1980-1993, but with higher standard deviations (notably Swaziland and Lesotho). - Trade openness and price linkages: - Openness (imports as percent of GDP, 2004-05): Lesotho over 90 percent of GDP; Swaziland about 75 percent of GDP; Namibia some 36 percent in 2004-05. - South Africa supplies on average 85 percent of LNS imports. - Principal components analysis: over 99 percent of the year-on-year movements of CPIs in CMA countries summarized by a single CMA-wide factor; country-specific factors account for at most 1 percent of total variation in 1980-2005. - Granger causality tests: inflation in smaller countries is Granger-caused by inflation in South Africa; no reverse causality. - Dynamic quarterly model (1980-2005): long-run proportional relationship between LNS price levels and South African prices; statistically significant negative convergence coefficients and substantial immediate adjustment of LNS prices to South African price changes. - Box 2 — Short-term adjustment and long-term convergence (quarterly data, 1980-2005): - Long-run equilibrium specification: log P_i* = α + saf * log P_saf (presentation as in source). - Short-term error correction (Equation (2)) and combined (Equation (3)) specified as in source. - Interpretation: β = immediate (same quarter) pass-through of South African inflation to country i; γ = error-correction (catch-up) coefficient. - Country-specific estimates (as reported): - Lesotho: coefficients and stats: 0.69 -0.09 0.83 -0.03; t statistics: (3.3) (-2.1) (7.5) (-2.1). - Namibia: coefficients and stats: 0.62 -0.03; t statistics: (5.6) (-2.6). - Swaziland: coefficients and stats: 0.66 -0.11 0.69 -0.02; t statistics: (2.1) (-2.3) (4.7) (-2.0). - Summary: estimated β ranges from 0.83 for Lesotho to 0.62 for Namibia; data frequency: quarterly data for 1980-2005. ### Inflation and exchange rate volatility - Average annual inflation declined in the CMA: 14.5 percent in 1980-1992; 7.7 percent in 1993-2000; 5.2 percent in 2001-2005 (Appendix I). - Average exchange rate volatility increased in the CMA in recent years. - Volatility in South African consumer prices partly reflects a more flexible rand vis-à-vis other major currencies; higher exchange rate volatility can pass quickly through to domestic prices in open LNS economies. ### Shocks, country cases, and sectoral impacts (Lesotho, Swaziland, Namibia) - Lesotho (1996–2005): - Multiple shocks included a sharp drop in workers’ remittances due to decline in mining jobs in South Africa. - Garment exports (mostly to US under AGOA) became main engine of growth and accounted for about 70 percent of total exports in 2002-2004. - Real exchange rate appreciation in 2002-2004 and elimination of textile quotas in January 2005 led to factory closures and loss of about 20 percent of jobs in the garment sector in second half of 2004/05. - Agricultural output declined due to a three-year drought and structural weaknesses. - Fiscal response: domestic tax revenue rose from 14.6 percent of GDP in 2002/03 to 17.8 percent in 2003/04; overall fiscal balance (including grants) in surplus since 2003/04; international reserves equivalent to over four months of imports as of end-2005/06. - Swaziland: - FDI inflows declined after South Africa democratized; real GDP growth fell from 3.6 percent in the 1990s to just over 2 percent since 2000. - Real appreciation since 2002 hurt sugar, wood pulp, and garments; removal of textile quotas in January 2005 led to significant job losses. - Despite additional SACU revenues, overall fiscal deficit widened in 2004/05-2005/06; government wage bill increased by almost 4 percentage points of GDP between 2003/04 and 2005/06. - Gross international reserves declined from 2.7 months of imports at end-2002 to 1.1 months at end-2005. - Namibia: - Appreciation of the Namibia dollar (in tandem with rand) hit fishing and commercial agriculture. - Diamonds and other minerals accounted for about 60 percent of total exports in 2004-05. - Deterioration of the terms of trade in 2003 lowered GDP growth and government revenue; fiscal deficit fell by close to 7 percentage points of GDP in two years to about 0.8 percent of GDP in 2005/06. - Import cover of official reserves remained below two months of imports by end-2005. ### Reserve adequacy: indicators, comparisons, and findings - Multiple reserve adequacy metrics recommended: import coverage, reserves-to-short-term external debt, reserves-to-base money, reserves-to-broad money, and fiscal/debt sustainability. - Benchmarks discussed include: 100 percent reserve coverage of short-term debt and three months of import cover. - Box 5 (selected entries, as in source): - Gross reserves/imports (Months of imports): - Lesotho: 5.0 4.3 3.8 4.5 4.1 - Namibia: 1.7 2.7 2.0 1.7 ... - Swaziland: 2.4 2.7 1.8 1.3 1.1 - Gross reserves/short-term external debt (Percent) (selected entries shown in source): - Lesotho: 55 43 48 36 45 24 82 6 - Namibia: 150 110 40 50 ... - Swaziland: 58 45 35 26 28 - Gross reserves/base money (Percent): - Lesotho: 946 706 582 499 442 - Namibia: 313 287 199 157 144 - Swaziland: 109 367 640 126 8294 - Gross reserves/broad money (Percent): - Lesotho: 232 160 131 118 126 - Namibia: 19 23 15 13 - Swaziland: 141 86 59 45 49 - Empirical highlight: recent data show reserves-to-short-term-debt ratio for Namibia is 50 percent, and for Swaziland is 28 percent. - Policy warning: high import-cover reserves alone do not guarantee stability (Argentina’s 2000 experience cited). ### Are shocks asymmetric? Terms of trade and output correlations - Terms of trade not well correlated across CMA countries (1980-2005); asymmetry arises from different export compositions: - South Africa: gold, platinum, iron ore composed some 60 percent of exports in 2004. - Lesotho: textile products accounted for 75 percent of exports in 2004-2005. - Namibia: diamonds and minerals dominate. - Swaziland: sugar prices important. - Table 4.1 (Terms of Trade Correlations, 1980-2005) — correlation coefficients (as presented): - Botswana / Lesotho / Namibia / South Africa / Swaziland - Botswana: 0.36 0.07 0.27 -0.20 - Lesotho: 0.36 -0.04 -0.01 -0.45 - Namibia: 0.07 -0.04 0.10 -0.02 - South Africa: 0.27 -0.01 0.10 0.08 - Swaziland: -0.20 -0.45 -0.02 0.08 - Correlations of underlying disturbances to real output per capita (1980-2003) indicate asymmetry: - Correlation matrix (Lesotho, Namibia, South Africa, Swaziland): - Lesotho: 1.00 - Namibia: -0.08 1.00 - South Africa: 0.09 0.08 1.00 - Swaziland: -0.05 -0.18 -0.46 1.00 - Asymptotic standard error used: 0.23. ### SACU revenue mechanism and importance for LNS countries - SACU receipts pooled and distributed quarterly per negotiated formula; 2002 agreement components: - Excise component: 85 percent of total excise duties collected (distributed proportional to GDP). - Development component: 15 percent of excise pool (allocated inversely to per capita GDP). - Size and importance: - SACU receipts to Lesotho amounted to 23 percent of GDP or more than half of government revenue in fiscal year 2004/05 (April-March). - Average SACU revenue accounted for 10-24 percent of GDP in LNS countries in 1995-2005. - In South Africa SACU revenue was below 1 percent of GDP; in Botswana about 5-8 percent of GDP in 1995-2005. - Countercyclicality: - Allocation of SACU revenues to LNS countries over last 10 years has not been clearly countercyclical; correlation between deviations from trend GDP growth and deviations from trend SACU transfers over 1995-2005 was very low and showed no uniform sign across the three countries. - When SACU revenues were allocated counter-cyclically they mitigated shocks (example: 2002 onward). ### Policy adjustment in South Africa and implications for CMA - South Africa: - Capital flows rose from below 5 percent of GDP in 1993-94 to 15-20 percent in 1997-99 and over 25 percent in 2003. - Fiscal consolidation: independent revenue authority, broadened tax base, cuts in personal and company tax rates, public sector borrowing requirement lowered to around 1 percent of GDP by 2002/03 from around 9 percent in 1993/94. - Monetary policy: moved to inflation targeting and free float; inflation target: 3 to 6 percent announced in 2000 to be achieved in 2002. - Official reserves (ratio to short-term debt) rose from 25 percent at end-1998 to around 180 percent by mid-2005. - Small CMA countries (LNS): - Peg at par to rand; large share of exports go outside CMA, so rand movements strongly affect competitiveness. - 2002-2004: nominal appreciation of rand against US dollar about 40 percent; resulted in a 13-25 percent real effective appreciation in LNS countries. - Fiscal policy is main macro stabilization tool; structural reforms needed to improve competitiveness and growth. ### Movement of skilled workers and labor/wage indicators - Anecdotal evidence of skilled worker flows from Lesotho and Swaziland to South Africa; South Africa’s 2002 Immigration Act (amended 2004) aims to ease import of skills; SADC Draft Protocol on Facilitation of Movement of Persons ratified by South Africa (once in force, expected to facilitate movement). - Table 3.5 (Monthly Minimum Wages in Manufacturing, 1990-2003) — selected figures: - 1990 / 1995 / 2000 / 2001 / 2002 / 2003 - Lesotho: 328 514 548 603 636 - Swaziland: 230 489 481 521 568 568 - South Africa 1: ...............650 - Lesotho (annual percent change row): 5.6 7.0 6.5 10.0 5.5 - Swaziland (annual percent change row): 32.5 20.0 -1.7 8.5 9.0 0.0 - South Africa 2 (annual percent change row): 16.9 11.8 9.2 9.1 8.0 6.7 - Memorandum Item: Botswana (In rands): 222 306 483 575 693 689 - Annual percent change (Botswana): 18.4 4.3 11.1 18.9 20.6 -0.6 - Notes from source on wages and tax regime: - Lesotho reduced company income tax from 35 percent to 25 percent in early 2006 (below South Africa and Swaziland 30 percent). - Individual income tax maximum rates: LNS countries 35 percent; South Africa 40 percent. - VAT rates: Namibia 15 percent; South Africa and Lesotho 14 percent; Swaziland still on general sales tax (14-25 percent) working towards VAT. ### Policy options, institutional choices, and transitional considerations - Consultations and representation: - LNS countries effectively “import” monetary and exchange rate policies from South Africa. - Governors of CMA central banks meet three or four times per year before SARB Monetary Policy Committee meetings; LNS countries have no formal role in SARB policy formulation. - Regional mechanisms and fiscal rules: - Explicit ceilings on fiscal deficits and total government debt are commonly used in other unions; CMA has not used explicit limits so far. - A rule-based fiscal framework could include a preventive arm (avoid excessive deficits), a dissuasive arm (ensure respect for limits), and corrective procedures. - Fiscal transfers: - SACU provides significant transfers; SADC efforts to achieve a customs union by 2010 raise issues of revenue distribution and institutions that could supersede SACU arrangements. - More effective use of pooled resources, particularly countercyclical transfers, could support adjustment. - Labor mobility and wage flexibility: - Measures to harmonize immigration practices, streamline work permits, and invest in human capital could improve adjustment to asymmetric shocks. - Moving toward a full monetary union: - Potential benefits: greater credibility for small countries, elimination of devaluation risk, closure of room for LNS central banks to extend credits to domestic entities, possible centralized lender of last resort. - Drawbacks: major institutional change, seigniorage reallocation issues, political/cultural considerations. - Withdrawal from CMA: - Botswana’s 1975 withdrawal led to robust growth supported by diamonds, currency peg to a basket, persistent surpluses, and very large reserves. - LNS countries are in much weaker fiscal and reserve positions than Botswana; withdrawal would forfeit CMA benefits (zero transaction costs with rand, seigniorage compensation) and expose countries to greater volatility. - Interaction and transition: - Options are not mutually exclusive; enhanced consultation under existing arrangements could be a transitional step toward deeper integration. ### Key policy conclusions and priorities (summary) - Performance to end-2005: - Real GDP growth in the CMA accelerated over the last two decades. - Real income per capita (PPP) converged; the gap between South Africa and other members narrowed, though convergence slowed in last 10 years. - CMA arrangements facilitated regional integration in goods and financial markets; inflation and interest rates in CMA are lower than neighboring SADC countries. - Strong evidence of a de facto single monetary policy set by the South African Reserve Bank. - Main challenges: - External shocks impact CMA countries asymmetrically; small countries have sometimes responded with domestic-borrowing-financed fiscal deficits that lowered international reserves. - Key challenge: ensure timely and effective adjustment by member countries to asymmetric shocks to achieve growth and development objectives. - Policy priorities for small member countries: - Strengthen competitiveness through prudent fiscal policy. - Accelerate structural reforms to remove country-specific impediments. - Monitor reserve adequacy against multiple benchmarks and contain central bank net domestic assets to protect the exchange rate peg. - Consider institutional and fiscal mechanisms (including rule-based fiscal frameworks and better-targeted transfers) to improve adjustment capacity. - Dependence on South Africa: - Progress in regional integration and CMA effectiveness depends largely on South Africa as the engine of growth in the region. *Source: _wp07158 - Excerpts from the IMF paper “The Common Monetary Area in Southern Africa: Shocks, Adjustment, and Policy Options,” through end of fiscal year 2005/06.* ### 1. CMA and SACU: Major Events in History...................................................................9 ### 1. CMA and SACU: Major Events in History...................................................................9 ### Introduction and objectives of the CMA - The Trilateral Monetary Agreement among the governments of the Kingdom of Lesotho, the Kingdom of Swaziland, and the Republic of South Africa came into force on April 1, 1986, establishing the Common Monetary Area (CMA). - Article 2 (preamble) objectives: “the monetary arrangements should provide for the sustained economic development of the Common Monetary Area as a whole,” and “the arrangements should encourage the advancement of the less developed members of the Common Monetary Area and should afford to all parties equitable benefits arising from the maintenance and development of the Common Monetary Area as a whole.” - Key analytical questions addressed in the paper through end of fiscal year 2005/06: - Have the CMA arrangements facilitated the achievement of their growth and development objectives? - What are the key policy challenges facing member countries in an increasingly integrated world economic environment? - What are the main issues and possible options to address these challenges? ### CMA evolution and major historical events (chronology and milestones) - 1921: After establishment of the South African Reserve Bank (SARB), the South African currency (initially the pound, since 1961 the rand) became effectively the sole medium of exchange and legal tender in South Africa, Bechuanaland (now Botswana), Lesotho, Namibia, and Swaziland. - 1910: Southern African Customs Union (SACU) arrangement became effective in 1910. - 1961: The rand replaced the pound. - 1960s: Countries became independent (except Namibia). New SACU agreement reached on December 11, 1969; shares of the smaller members were determined based on a revenue-sharing formula, with the residual allocated to South Africa. - December 5, 1974: South Africa, Botswana, Lesotho, and Swaziland signed the Rand Monetary Area (RMA) treaty. - 1975: Botswana opted to withdraw from the RMA. - 1974: Swaziland set up its own monetary authority and introduced its national currency, the lilangeni, pegged at par to the rand. - January 1980: Lesotho established its own central bank and issued its national currency (loti) at a one-to-one rate to the rand. - April 1986: South Africa, Lesotho, and Swaziland signed the CMA Trilateral Agreement, replacing the RMA; additional provisions concerning capital account, intra-CMA fund transfers, and seigniorage compensation were made. Swaziland discontinued the use of rand as legal tender within its borders (later re-authorized in 2003). - 1989: CMA amended to remove exchange restrictions arising from limitations on conversion of balances upon termination of the agreement or withdrawal of one party. - 1990: Namibia became independent. - 1992: Namibia joined the CMA; the Multilateral Agreement replaced the Trilateral Agreement. - 1993: Namibia issued its national currency, the Namibian dollar. - 2002: New SACU revenue-sharing formula had a development component. - 2003: After 17 years, Swaziland reauthorized the use of the rand as legal tender alongside the lilangeni in the country. ### Institutional framework and key provisions - Currency arrangements: - Article 2 of the CMA (Multilateral) Agreement gives the three small member countries the right to issue national currencies. - Local currencies issued by Lesotho, Namibia, and Swaziland are legal tender only in their own countries. - The South African rand is legal tender throughout the CMA. - Bilateral agreements require LNS countries to permit authorized dealers within their territories to convert, at par, notes issued by their central banks or the SARB without restriction and subject only to normal handling charges. - Reserve requirements and backing of local currency issuance: - Under the Lesotho-South Africa and Namibia-South Africa bilateral agreements, the central banks of Lesotho and Namibia are required to maintain foreign reserves at least equivalent to the total amount of local currencies they issue. - Such reserves may comprise: central bank holdings of rand balances, rand currency in a Special Rand Deposit Account with the SARB, South African government stock (up to a certain proportion of total reserves), and investments in the Corporation for Public Deposit in South Africa. - Movement of funds within the CMA: - CMA Agreement (Article 3) provides that no restrictions can be imposed on the transfer of funds, whether for current or capital transactions, to or from any member country, except for member countries’ investment or liquidity requirements prescribed for financial institutions. - Investment and liquidity requirements are applied as minimum local asset requirements to address concerns that funds generated in the smaller members and deposited with local financial institutions tended to flow to South African capital markets. ### Selected economic and social indicators for CMA countries (2004-2005; exact figures preserved) - Memo. Item columns: Lesotho, Namibia, South Africa, Swaziland, CMA Total, Botswana (listed for comparison) - Economic Indicators: - Nominal GDP (millions of US dollars): Lesotho 1,348; Namibia 5,721; South Africa 214,989; Swaziland 2,351; CMA Total 224,410; Botswana 9,064. - Gross national income per capita (US dollars, Atlas method): Lesotho 740; Namibia 2,370; South Africa 3,630; Swaziland 1,660; CMA (average) ...; CMA Total 4,340. - Gross national income per capita (PPP): Lesotho 3,100; Namibia 6,660; South Africa 10,130; Swaziland 4,850; CMA (average) ...; CMA Total 8,370. - Real GDP growth rate (percent): Lesotho 1.7; Namibia 4.7; South Africa 4.8; Swaziland 2.0; CMA (average) ...; Botswana 5.9. - Inflation (percent, period average): Lesotho 4.7; Namibia 3.3; South Africa 2.4; Swaziland 4.1; CMA (average) ...; Botswana 9.5. - Fiscal balance (including grants; percent of GDP): Lesotho 7.2; Namibia -3.9; South Africa -1.3; Swaziland -4.3; CMA (average) ...; Botswana 2.3. - Total government debt (percent of GDP): Lesotho 62.8; Namibia 32.4; South Africa 35.4; Swaziland 18.3; CMA (average) ...; Botswana 10.7. - International reserves (months of imports): Lesotho 4.3; Namibia 1.7; South Africa 3.0; Swaziland 1.3; CMA (average) ...; Botswana 18.4. - Current account balance (percent of GDP): Lesotho -3.0; Namibia 8.0; South Africa -3.8; Swaziland 0.0; CMA (average) ...; Botswana 9.2. - Total exports (millions of US dollars): Lesotho 618; Namibia 1,738; South Africa 52,900; Swaziland 1,883; CMA Total 56,161; Botswana 3,638. - Social Indicators: - Population (millions): Lesotho 2.2; Namibia 2.0; South Africa 45.8; Swaziland 1.15; CMA Total 51.1; Botswana 1.7. - Rural population (percent of total population): Lesotho 81.9; Namibia 67.0; South Africa 42.6; Swaziland 76.3; CMA (average) ...; Botswana 48.0. - Life expectancy at birth (years): Lesotho 37.2; Namibia 40.3; South Africa 45.7; Swaziland 42.5; CMA (average) ...; Botswana 38.0. - Mortality rate of infants (per 1,000 live births): Lesotho 79; Namibia 48; South Africa 53; Swaziland 105; CMA (average) ...; Botswana 82. - HIV/AIDS prevalence rate (aged 15-49): Lesotho 28.9; Namibia 21.3; South Africa 15.6; Swaziland 38.8; CMA (average) ...; Botswana 37.3. - Literacy rate (percent of population aged 15 and above): Lesotho 81.4; Namibia 83.3; South Africa 86.0; Swaziland 80.9; CMA (average) ...; Botswana 78.9. - Human development indicator: Lesotho 149; Namibia 125; South Africa 120; Swaziland 147; CMA (average) ...; Botswana 131. - Data notes: - Source: World Development Indicators, national authorities, and IMF staff estimates. - Lesotho data are for fiscal year (April-March). - Botswana is not a member of the CMA but is listed for comparison purposes. - Data for 2004 unless otherwise noted. - All World Development Indicators data are as of 2003 unless otherwise indicated. - Literacy data as of 2002 (except Lesotho, which is as of 2001). ### Key contextual observations drawn from the historical and institutional review - The CMA has roots in a de facto currency union dating back to the early 20th century and was formalized through successive agreements: the RMA (1974) and CMA Multilateral Agreement (1992 with Namibia). - LNS countries (Lesotho, Namibia, Swaziland) issue national currencies pegged at par to the rand and accept obligations under bilateral agreements regarding reserve backing and convertibility. - The SACU (established in 1910) and CMA monetary arrangements have been closely associated, with SACU revenue-sharing arrangements evolving over time but not always designed to complement CMA monetary arrangements. - Despite formal parity arrangements and freedom of fund transfers within the CMA, small members maintain domestic regulatory measures (investment and liquidity requirements) to retain some domestic savings for local development. *Source: _wp07158 - 1. CMA and SACU: Major Events in History (excerpts) from the IMF paper “The Common Monetary Area in Southern Africa: Shocks, Adjustment, and Policy Options,” through end of fiscal year 2005/06.* ### 11. Access to South African Financial Markets. The CMA Agreement provides for the ### 11. Access to South African Financial Markets. The CMA Agreement provides for the ### Access to South African Capital and Money Markets - The CMA Agreement provides for the three small member countries to have access to the South African capital and money markets, but only through prescribed investments or approved securities that can be held by financial institutions in South Africa, in accordance with prudential regulations in the LNS countries. - The terms and timing of such issues are subject to consultation and agreement with the South African government, and the issues have the same rating as South African municipal bonds. - Access to the South African capital market is made subject to a ceiling in terms of a share in the required minimum amount that such institutions hold as prescribed investments and approved securities. In Namibia, the limit applies to institutional investors, such as pension funds, insurance companies, and medical aid schemes, but not to banking institutions. ### Short-term Money Market and Temporary Credit - There are no regular arrangements for the taking up in South Africa of treasury bills issued by the LNS countries. - The CMA Agreement recognizes the right of the other member countries, in special circumstances, to enter into bilateral negotiations with South Africa to obtain temporary central bank credit. - This borrowing facility has not been used so far. ### Gold and Foreign Exchange Transactions - The LNS countries have the right to authorize foreign transactions of local origin, and are responsible for doing so, but the CMA Agreement (Article 5) requires their exchange control regulations to be—in all material aspects—similar to those in effect in South Africa. - Gold and foreign exchange receipts of residents are subject to a surrender requirement. Under such a requirement, a member country’s residents have to surrender their gold and foreign exchange receipts to an authorized dealer appointed by that country; authorized dealers are required to sell the gold and foreign exchange they purchase to the national central bank, although they may maintain minimum working balances within limits determined by the central bank. - There are no exchange restrictions on current international transactions for non-residents. ### Compensation Payments for Forgone Seigniorage - Because the rand is legal tender in all CMA countries (but the currencies of the three small CMA members are not legal tender in South Africa), South Africa compensates them for forgone seigniorage. - Compensation is based on a formula equal to the product of: - (i) two-thirds of the annual yield on the most recently issued long-term South African government stock, and - (ii) the volume of rand estimated to be in circulation in the member country concerned. - The ratio of two-thirds was established on the assumption that it approximated the yield of a portfolio of reserve assets comprising both long-term and short-term maturities, assuming that the average yield would be less than the full long-term yield. ### Consultation, Dispute Resolution, and Institutional Arrangements - A commission with one representative from each member country (and advisors as needed) was established to facilitate implementation of the CMA Agreement. - The commission holds regular consultations—at least once a year—with the aim of reconciling the interests of member countries on common issues pertaining to monetary and foreign exchange policies; it also convenes at other times at the request of a member country. - Article 9 of the CMA Agreement provides for the establishment of a tribunal to arbitrate disputes that might arise between member countries regarding the interpretation or application of the agreement. ### Comparison with Other Monetary Unions — Key Features and Distinctions - Dominance of a single large country: South Africa accounts for over 90 percent of the CMA’s GDP, trade, and population. - The CMA is not a full monetary union: - No common central bank, no common pool of reserves, and no regional surveillance of domestic, particularly fiscal and structural policies. - National currencies circulate in small countries, but there is a de facto common currency—the currency of the core country, South Africa. - Under current parity arrangements, national currencies of the small countries and the rand are perfect substitutes; there is no transaction cost in conversion. - Currency-board-like characteristics: - Domestic currency issues are required to be fully backed by foreign reserves. - Unlike a typical currency board, there is no legal restriction prohibiting the central bank of a small member country from acquiring domestic assets. - Small member countries have not made an irrevocable commitment to keep a given parity. - There is no arrangement that member countries provide mutual support if the exchange rate peg comes under pressure. - Institutional and economic integration: - The CMA is based on a free trade area with very high capital mobility; such an area long preceded the CMA. - The CMA is more similar to the euro area than to some other African monetary unions in that it has free trade and a high degree of capital mobility within the region. - There is no formal mechanism for fiscal transfers to cushion the impact of asymmetric shocks on member states. ### Empirical Findings on Growth, Convergence, and Price Integration - GDP growth and per capita income: - The average annual GDP growth rate of the CMA rose from 1.1 percent in 1980-1992 to 2.7 percent in 1993-2000 and 3.7 percent in 2001-2005. - Growth performance varies across CMA countries; South Africa’s post-apartheid reintegration boosted its growth, while Lesotho and Swaziland experienced adjustment costs and diversion of foreign direct investment. - Per capita income convergence: - Real per capita income (PPP) convergence occurred over the last two decades: the gap between South Africa and Lesotho narrowed from over 80 percent of South African per capita income to about 70 percent by 2003. - The income gaps between South Africa and Namibia and Swaziland also reduced, though convergence slowed recently as South Africa accelerated while some others faltered (e.g., Swaziland). - Statistical analysis of growth rates of gross national income per capita (Atlas method) confirms convergence in per capita income in the last two decades; all three small countries achieved higher average annual growth in per capita GNI in 1994-2005 than in 1980-1993, but with higher standard deviations, especially for Swaziland and Lesotho. - Trade openness and price linkages: - LNS countries are highly open: imports amounted to over 90 percent of GDP in Lesotho, about 75 percent of GDP in Swaziland, and some 36 percent in Namibia in 2004-05. - South Africa provides on average 85 percent of the LNS countries’ imports; imports from South Africa are free from tariffs and virtually all other trade barriers, and there are virtually no transaction costs for currency conversion. - Consumer price indexes (CPI) across CMA countries reveal a common trend: - Principal components analysis shows that over 99 percent of the year-on-year movements of CPIs in CMA countries can be summarized by a single, CMA-wide factor; country-specific factors account for at most 1 percent of total variation in 1980-2005. - Granger causality tests confirm that inflation in the smaller countries is Granger-caused by inflation in South Africa; there is no reverse causality. - A dynamic price adjustment model (quarterly data, 1980-2005) finds a long-run proportional relationship between LNS price levels and South African prices, with statistically significant negative convergence coefficients for all three small countries and substantial immediate adjustment of LNS prices to changes in South African prices—evidence of highly integrated goods markets within the CMA. - Inflation and exchange rate volatility: - Average annual inflation rates for 1996-2005 suggest the CMA, anchored by South Africa, had lower inflation than neighboring SADC countries; average inflation was less volatile in 1996-2000 but volatility increased in 2001-2005. - Average exchange rate volatility, measured by the standard deviation of monthly changes in the log level of real effective exchange rates, also increased in the CMA. - Volatility in South African consumer prices in recent years may partly reflect a more flexible exchange rate of the rand vis-à-vis other major currencies; higher exchange rate volatility may pass through relatively quickly to domestic prices in the more open LNS economies. *Source: _wp07158 - 11. Access to South African Financial Markets. The CMA Agreement provides for the* ### Box 2. Short-Term Adjustment and Long-Term Convergence of Consumer Prices in CMA ### Box 2. Short-Term Adjustment and Long-Term Convergence of Consumer Prices in CMA Countries ### Long-run equilibrium specification and short-term dynamics - Long-run price relationship (as specified in the source): - saf i PPloglog * +=α (Equation (1)) - where log P i * is the natural logarithm of long-run price level in country i, i=Lesotho, Namibia, and Swaziland, and log P saf represents the price level in South Africa. - Short-term "error correction" specification: - 1 * )log(logloglog − −+Δ=Δ iisafi PPPPγβ (Equation (2)) - Combined long-run and short-run equation: - 1 )log(logloglog − −+Δ+=Δ safisafi PPPPγβα (Equation (3)) - Interpretation of coefficients: - β captures the immediate (same quarter) response of inflation in country i to changes in South African inflation. - γ represents the extent of catching-up to the long-run equilibrium price relationship (Engle and Granger, 1987). If γ=0, there is no long-run price convergence. ### Data and estimation context - Data frequency and period: - Quarterly data from 1980 to 2005. - Relationship to prior work: - Results extend Honohan (1992), which was based on 1973-1988 data and did not include Namibia. ### Estimation results and key findings - General findings: - The results provide clear evidence of long-run price convergence in the CMA. - The immediate (same quarter) pass-through from South African inflation to that of the LNS countries is large. - The estimated error correction coefficient, γ, has the right sign and is statistically significant, as indicated by the relevant t-statistics. - Country-specific estimates (estimation results of inflation adjustment dynamics): - Lesotho: - Coefficients and statistics as reported: 0.69 -0.09 0.83 -0.03 - t statistics in parenthesis: (3.3) (-2.1) (7.5) (-2.1) - Namibia: - Coefficients and statistics as reported: 0.62 -0.03 - t statistics in parenthesis: (5.6) (-2.6) - Swaziland: - Coefficients and statistics as reported: 0.66 -0.11 0.69 -0.02 - t statistics in parenthesis: (2.1) (-2.3) (4.7) (-2.0) - Summary numeric statements from the source: - The estimated coefficient β ranges from 0.83 for Lesotho to 0.62 for Namibia. - The estimation uses quarterly data for 1980-2005. *Source: National authorities, and IMF staff estimates.* ### 36. There is anecdotal evidence on the movement of skilled workers from the small ### _wp07158 - 36. There is anecdotal evidence on the movement of skilled workers from the small ### Movement of Skilled Workers - Anecdotal evidence indicates movement of skilled workers from Lesotho and Swaziland to South Africa. - Flows may have increased as growth accelerated in South Africa, in part reflecting changes in South Africa’s immigration policy: - The 2002 Immigration Act (as amended in 2004) aims to ease the import of skills from outside the country. - South Africa has ratified a SADC Draft Protocol on the Facilitation of Movement of Persons; once in force, the Protocol should make it easier for skilled people from the rest of SADC to work in South Africa and vice-versa. - Skill specializations cited (source footnote): Lesotho workers known to be skilled shaft sinkers; Swazi mine workers described as excellent machinists. ### Labor and Minimum Wage Indicators - Table 3.5 (Monthly Minimum Wages in the Manufacturing Sector, 1990-2003) reported figures as in source: - 1990 / 1995 / 2000 / 2001 / 2002 / 2003 - Lesotho: 328 514 548 603 636 - Swaziland: 230 489 481 521 568 568 - South Africa 1: ...............650 - Lesotho (annual percent change row): 5.6 7.0 6.5 10.0 5.5 - Swaziland (annual percent change row): 32.5 20.0 -1.7 8.5 9.0 0.0 - South Africa 2 (annual percent change row): 16.9 11.8 9.2 9.1 8.0 6.7 - Memorandum Item: Botswana 3 (In rands): 222 306 483 575 693 689 - Annual percent change (Botswana): 18.4 4.3 11.1 18.9 20.6 -0.6 - Notes from source: - 1 Minimum wage for agricultural workers in areas where average household income is below R24,000 per year. - 2 Annual percent change in the remuneration per worker index in the non agriculture sectors – maintained by the South African Reserve Bank. - 3 Hourly wage converted into monthly wage assuming a 40-hour week. - Source: National authorities and IMF staff estimates. ### Tax and Regulatory Regime (CMA countries) - Corporate tax and individual income tax: - Lesotho reduced company income tax from 35 percent to 25 percent in early 2006, bringing it below the 30 percent rate in South Africa and Swaziland. - Special rates maintained for priority activities (e.g., mining) and, for smaller countries, manufacturing. - Individual income tax: LNS countries apply a maximum rate of 35 percent; South Africa applies a somewhat higher maximum rate of 40 percent. - Value added tax (VAT) and sales tax: - Namibia: VAT of 15 percent operational. - South Africa and Lesotho: VAT rate is 14 percent. - Swaziland: has not yet replaced general sales tax (14-25 percent) with a VAT but is working towards introduction of a VAT. - External taxes and trade: - CMA members share common external taxes; import tariffs and excise duties are collected through the SACU system. - Swaziland maintains an export levy on sugar. - Investment incentives and procedures: - Countries grant capital allowances; some allow deduction of training expenses. - Countries provided tax holidays, publicly funded factory shells, and in some cases “export processing zones” (e.g., in Namibia). - Trade and industrial licensing, customs clearance procedures, and visa requirements vary across countries and could be streamlined to improve the investment climate, especially in the LNS countries. ### Are Shocks Asymmetric? (Terms of Trade and Output) - Terms of trade not well correlated across CMA countries (1980-2005); asymmetry stems from differences in export composition and non-coincident commodity price movements. - South Africa: gold, platinum, iron ore and related products composed some 60 percent of South Africa’s exports in 2004; prices surged since late 1990s. - Lesotho: textile products accounted for 75 percent of Lesotho’s exports in 2004-2005; textile prices drifted downward, weakening Lesotho’s terms of trade. - Namibia: terms of trade heavily influenced by diamonds and other minerals. - Swaziland: sugar prices important. - Table 4.1 (Terms of Trade Correlations, 1980-2005) – correlation coefficients of the annual percent changes in the terms of trade index: - Botswana / Lesotho / Namibia / South Africa / Swaziland - Botswana: 0.36 0.07 0.27 -0.20 - Lesotho: 0.36 -0.04 -0.01 -0.45 - Namibia: 0.07 -0.04 0.10 -0.02 - South Africa: 0.27 -0.01 0.10 0.08 - Swaziland: -0.20 -0.45 -0.02 0.08 - Econometric assessment of shocks to real output per capita (1980-2003) using a three-step procedure (ADF tests, regression on first differences to extract residuals μt, correlation of residuals): - Results confirm shocks hitting CMA economies have asymmetric effects. - CMA Countries: Correlation of Underlying Disturbances, 1980-2003: - Lesotho / Namibia / South Africa / Swaziland - Lesotho: 1.00 - Namibia: -0.08 1.00 - South Africa: 0.09 0.08 1.00 - Swaziland: -0.05 -0.18 -0.46 1.00 - Interpretation: positive and significant correlations would indicate symmetric shocks; negative or insignificant correlations indicate asymmetry. Computed asymptotic standard error used: 0.23. ### Role of SACU Revenue - SACU revenue mechanism: - All customs and excise duties collected by SACU members are pooled in South Africa’s Consolidated Revenue Fund and distributed quarterly per a negotiated revenue-sharing formula. - The 2002 agreement gave the small members a majority share of total customs revenue. - The agreement includes an excise component (85 percent of total excise duties collected by SACU countries) and a development component (15 percent of the excise pool). - Excise component distributed in proportion to each country’s GDP; development component allocates share inversely to per capita GDP. - Size and importance for LNS countries: - SACU receipts to Lesotho amounted to 23 percent of GDP or more than half of government revenue in fiscal year 2004/05 (April-March). - Average SACU revenue accounted for 10-24 percent of GDP in the LNS countries in 1995-2005. - In South Africa SACU revenue was below 1 percent of GDP; in Botswana about 5-8 percent of GDP in 1995-2005. - SACU receipts are in South African rand and are important for LNS balance of payments. - Countercyclicality and recent behavior: - Allocation of SACU revenues to LNS countries in the last 10 years has not been clearly countercyclical. - Correlation between (deviation from trend) GDP growth and (deviation from trend) SACU transfers to LNS countries over 1995-2005 was very low and showed no uniform sign across the three countries. - In episodes when SACU revenues were allocated counter-cyclically they mitigated shocks (example: 2002 onward when real GDP growth declined in Lesotho and Swaziland while picking up in South Africa; total SACU revenue moved in tandem with South Africa’s business cycle). - The fiscal transfer mechanism could become less important for LNS countries should SACU and trading partners (EU and US) conclude free trade agreements. ### Policy Adjustment in South Africa - External developments and integration: - Removal of economic sanctions in early 1990s increased integration, with gross capital inflows and outflows rising from below 5 percent of GDP in 1993-94 to 15-20 percent in 1997-99 and over 25 percent in 2003. - World prices for key export commodities trended upward in recent years, affecting South Africa’s equilibrium real exchange rate. - Macroeconomic stabilization measures: - Fiscal policy: efforts to strengthen public finances, including setting up an independent revenue authority to improve tax collection and broadening the tax base which allowed cuts in personal and company income tax rates. - Social spending increased at a measured pace with greater transparency and accountability in expenditure management. - 1998/99: government limited civil service wage increases to below contractual provisions; teams were sent to provincial and municipal finance departments to improve monitoring and control of spending. - Public sector borrowing requirement lowered to around 1 percent of GDP by 2002/03 from a peak of around 9 percent in 1993/94. - Fiscal adjustment supported measures to reduce inflation and lower the real interest rate, stimulating domestic investment. - Monetary policy and exchange rate regime: - South African Reserve Bank moved from a pegged exchange rate to inflation targeting and free float of the rand. - Inflation target: 3 to 6 percent announced in 2000, to be achieved in 2002. - In 2001 the SARB let the exchange rate adjust during heavy exchange rate pressures and confined itself to foreign exchange purchases to wind down the SARB’s open forward position; later started to rebuild international reserves. - Official reserves, as a ratio to short-term debt, rose from 25 percent at end-1998 to around 180 percent by mid-2005. - Exchange rate flexibility helped cope with terms of trade changes and strong capital inflows; rand appreciated vis-à-vis the US dollar in 2002-2004, inflation remained within the 3-6 percent target band, Johannesburg stock exchange rose, and exports and real GDP grew strongly. ### Policy Adjustment in Small CMA Countries (LNS) - Common currency arrangement and external competitiveness: - Lesotho, Namibia, and Swaziland peg their currency to the rand at par; significant part of their exports go to markets outside the CMA, so rand movements greatly affect competitiveness. - During 2002-2004: - Nominal appreciation of the rand against the US dollar was about 40 percent. - Resulted in a 13-25 percent real effective appreciation in the LNS countries. - Other shocks and policy tools: - Terms of trade movements varied across countries due to differing production and trade structures. - Small countries faced additional shocks such as persistent drought affecting Lesotho and Swaziland. - With CMA providing a common framework for monetary and exchange rate policies, fiscal policy is the main macroeconomic stabilization tool for small CMA countries. - Structural reforms are necessary to improve external competitiveness and achieve sustainable growth. *Source: Excerpts from IMF working paper _wp07158 (selected pages provided).* ### 50. In the case of Lesotho, multiple shocks, including a sharp drop in workers’ ### _wp07158 - 50. In the case of Lesotho, multiple shocks, including a sharp drop in workers’ ### Shocks and sectoral impacts in Lesotho (1996–2005) - Multiple shocks weakened economic performance in 1996-2000, including a sharp drop in workers’ remittances relative to GDP due to the decline in mining jobs in South Africa. - Without a large investment from South Africa in the Lesotho Highlands Water Project, output decline would have been steeper. - Since 2000, garment exports, mostly to the United States under the US African Growth and Opportunity Act, became the main engine of growth and accounted for about 70 percent of total exports in 2002-2004. - Real exchange rate appreciation in 2002-2004 and the elimination of textile quotas by industrial countries in January 2005 battered manufacturing (including garments) and related activities. - Effects were particularly pronounced in the garment sector in the second half of 2004/05, resulting in factory closures and the loss of about 20 percent of jobs in the sector. - Agricultural output declined due to a three-year drought and structural weaknesses including soil erosion, water shortages in the lowlands, and a lack of agro-financing. ### Fiscal response and key fiscal indicators (Lesotho) - Lesotho implemented a prudent fiscal policy in response to severe shocks to its textile sector. - Domestic (non-SACU) revenue collection improved with the launch of the Lesotho Revenue Authority despite the slowdown in economic activity. - Domestic tax revenue relative to GDP rose from 14.6 percent in 2002/03 to 17.8 percent in 2003/04. The decline in 2004/05 was due mainly to the external shocks. - Current expenditures, particularly salaries and wages, were contained. - Upon receiving additional SACU revenues in 2004/05-2005/06, the government saved part of the receipts and prepaid high interest external debt. - The overall fiscal balance (including grants) has been in surplus in the last three years since 2003/04. - With the strengthening of the fiscal position, the government reduced the public debt-to-GDP ratio. - The country maintained a relatively high level of international reserves, equivalent to over four months of imports as of end-2005/06. ### Swaziland: deterioration and vulnerabilities - Swaziland lost attractiveness to foreign investors after South Africa democratized in 1994; FDI inflows declined and real GDP growth fell from 3.6 percent in the 1990s to just over 2 percent since 2000. - Prolonged drought affected agricultural output in recent years. - Real appreciation of the lilangeni since 2002 hurt main exports (sugar, wood pulp, and garments) and manufacturing activities. - Removal of textile quotas since January 2005 led to significant job losses in the garment sector. - Despite large additional SACU revenues, the overall fiscal deficit widened in 2004/05-2005/06, driven by sharp increases in the wage bill and other spending. - The government wage bill increased by almost 4 percentage points of GDP between 2003/04 and 2005/06. - Deficits were financed by running down external reserves and accumulating domestic arrears. - Gross international reserves declined from 2.7 months of imports at end-2002 to 1.1 months at end-2005, the lowest level among CMA members. - Other reserve adequacy indicators (ratio to short-term debt or to broad money) also deteriorated. ### Namibia: commodity windfall and low reserve coverage - Appreciation of the Namibia dollar, in tandem with the rand, hit fishing and commercial agriculture sectors. - Strong growth in production and exports of diamonds and other minerals offset negative effects; diamonds and other minerals accounted for about 60 percent of total exports in 2004-05. - Deterioration of the terms of trade in 2003 lowered GDP growth and government revenue, contributing to a widening of the fiscal deficit and worsening the government’s net position at the central bank, leading to a decline in official reserves. - With a large windfall in SACU receipts and increased diamond royalties, the Namibian government sharply reduced its fiscal deficit. - The deficit fell by close to 7 percentage points of GDP in two years to about 0.8 percent of GDP in 2005/06. - Between end-2002 and end-2005, the central bank acquired domestic assets by extending credits to commercial banks faster than the increase in the monetary base. - Namibia enjoyed record exports, strong external current account surpluses, and moderate inflation, but continued capital outflows to South African financial markets kept international reserves low relative to imports and short-term debt. - The import cover of official reserves declined between 2002-2004 and remained below two months of imports by end-2005. ### CMA lessons and policy implications - The CMA facilitates cross-border trade and capital flows, provides a framework for monetary policy, and helps maintain price stability; the policy credibility of the SARB lowers inflation expectations in the LNS countries. - The existing CMA arrangements provide incentives, but no assurances, for fiscal discipline: - LNS governments have no access to SARB monetary financing. - National currency issued by the central bank must be fully backed by foreign exchange reserves. - Unsustainable fiscal trends could still develop and member countries could embark on divergent adjustment paths in response to shocks. - Under the current exchange rate arrangement, fiscal deficits financed primarily by domestic borrowing carry the risk of worsening the international reserve position in small member countries because a significant part of official reserves has a counterpart in government deposits and domestic financing could raise central bank net domestic assets beyond domestic money demand. - Demand for national currencies in LNS countries depends on public confidence in the exchange rate parity arrangement; containing central banks’ net domestic assets, including credits to the private sector, is essential to align domestic money supply with money demand and protect official reserves. - The CMA monetary arrangement by itself does not lead to higher growth performance; growth divergence can result from asymmetric shocks and country-specific structural weaknesses, requiring reforms to remove structural impediments. ### Reserve adequacy: indicators, country comparisons, and Box 5 highlights - Reserve adequacy should be assessed using multiple metrics: import coverage, reserves-to-short-term external debt, reserves-to-base money, and reserves-to-broad money, alongside fiscal and debt sustainability. - Benchmarks discussed include 100 percent reserve coverage of short-term debt and three months of import cover. - Box 5: Small CMA Countries: Reserve Adequacy Ratios (selected entries) - Gross reserves/imports (Months of imports) - Lesotho: 5.0 4.3 3.8 4.5 4.1 - Namibia: 1.7 2.7 2.0 1.7 ... - Swaziland: 2.4 2.7 1.8 1.3 1.1 - Gross reserves/short-term external debt (Percent) - Lesotho: 55 43 48 36 45 24 82 6 (table entries shown in source) - Namibia: 150 110 40 50 ... - Swaziland: 58 45 35 26 28 - Gross reserves/base money (Percent) - Lesotho: 946 706 582 499 442 - Namibia: 313 287 199 157 144 - Swaziland: 109 367 640 126 8294 - Gross reserves/broad money (Percent) - Lesotho: 232 160 131 118 126 - Namibia: 19 23 15 13 - Swaziland: 141 86 59 45 49 - Empirical findings highlighted: - Recent data show reserves to short-term debt ratio for Namibia is 50 percent, and for Swaziland is 28 percent. - Argentina’s 2000 experience illustrates that high import-cover reserves alone do not guarantee stability; prudent fiscal policy is crucial to maintaining a pegged exchange rate regime. ### Key policy challenges and priorities - Maintaining adequate reserves is a central challenge for small CMA member countries under current arrangements; relying solely on reserve coverage of base money is not adequate in the CMA context. - Policy priorities include: - Implementing prudent fiscal policy to avoid reserve erosion. - Monitoring reserve adequacy against multiple benchmarks (imports, short-term debt, broad money) and considering fiscal and debt sustainability. - Containing central bank net domestic assets to align domestic money supply with money demand and protect the exchange rate peg. - Pursuing structural reforms to address country-specific weaknesses and reduce asymmetric vulnerability to external shocks. - Regional trade and financial integration developments (including within SADC) may require modifications to CMA institutional and policy arrangements to minimize adjustment costs and promote “sustained economic development of the CMA as a whole” and “equitable benefits” to all CMA members. *Source: National authorities and IMF staff estimates.* ### 61. CMA countries are facing a number of issues and policy options as they strive to ### _wp07158 - 61. CMA countries are facing a number of issues and policy options as they strive to ### Consultations on monetary and exchange rate policies under the existing arrangements - LNS countries effectively "import" monetary and exchange rate policies from South Africa. - Governors of CMA central banks meet three or four time per year, right before the SARB’s Monetary Policy Committee meetings. - LNS countries have no formal role in the formulation of the monetary and exchange rate policies that affect their countries. - Granting LNS countries a formal role in SARB deliberations may not yield net benefits and may be difficult given existing institutional arrangements. - Enhanced consultation under current arrangements has limitations in dealing with severe asymmetric shocks. - Under a weighted voting structure, the predominant country would ultimately prevail where interests diverge. ### Regional mechanisms to facilitate fiscal adjustment and structural reforms - Close macroeconomic policy coordination is central to most existing monetary unions. - Explicit ceilings on fiscal deficits and total government debt are commonly used as convergence criteria or part of a fiscal code of conduct. - In the CMA, explicit limits on fiscal deficit and public debt have not been used so far. - As asymmetric shocks become more severe, the lack of regional surveillance on fiscal and structural policies becomes more apparent. - Under current arrangements, unsustainable fiscal policy could lead to large loss of reserves, a break of the exchange rate peg, and possibly financial turmoil in small member countries. - A rule-based fiscal framework could be an effective discipline device, particularly for small member countries subject to greater macroeconomic volatility. - Such a framework could include: - a preventive arm focusing on avoidance of excessive deficits; - a dissuasive arm ensuring respect for agreed limits (e.g., on budget deficit relative to GDP, expenditure growth, or public debt to GDP ratio); - procedures calling for corrective policies within a defined time frame if a deficit is deemed excessive. - Fiscal deficit and public debt targets have already been explicitly proposed and discussed by SADC members, including the CMA countries, for achieving macroeconomic convergence in the SADC. ### Fiscal transfers - Significant fiscal transfers already occur across CMA countries under the SACU arrangements. - SADC efforts to achieve a customs union by 2010 raise issues of SADC revenue distribution arrangements and institutions, which would supersede the SACU revenue sharing mechanism. - More effective use of pooled resources, particularly countercyclical transfers, could support economic adjustment and stabilization in a monetary union. - Suggestions exist to link allocation of pooled resources to economic development (e.g., enhance productive and trade capacity of poorest member states). - Complexity arises from differences in membership in the CMA, SACU and SADC; informed discussions are needed. ### Labor mobility and wage flexibility - Flexible labor markets facilitate regional integration and adjustment to asymmetric shocks. - The region has a long history of labor mobility, but further liberalization must contend with high unemployment. - Practical measures discussed and potentially implementable relatively quickly (once consensus is reached): - harmonize immigration practices (e.g., standardizing immigration forms, streamlining visa requirements, improving immigration facilities); - streamline and simplify regulations on labor entry, work permits, and other requirements. - Encouraging wage negotiation parties to consider productivity and terms of trade developments can help overcome labor market and wage rigidities. - Concerted efforts on human capital investment, labor training and skill-enhancing programs could expand employment opportunities, including for skilled labor in LNS countries. ### Moving toward a full monetary union - This option could involve adoption of a single currency, foreign exchange reserves pooling, and creation of a common monetary authority with clear responsibility for monetary policy for the entire CMA. - Main benefits compared with current arrangements: - greater credibility of monetary policy in small countries; - elimination of the possibility of devaluation by small member countries; - closure of remaining room for LNS central banks to extend credits to domestic entities; - possible stronger institutional capacity of a common central bank and a centralized lender of last resort. - Drawbacks and considerations: - major institutional change with political and legal ramifications; - allocation of seigniorage under a full monetary union could make LNS countries gain or lose relative to current arrangements; - for South Africa, more responsibilities might follow given its central role. - A common lender of last resort could significantly increase liquid funds for emergency support and enable a more integrated regulatory and supervisory framework. - Cultural/political considerations: a national currency may embody national pride. ### Withdrawal from the CMA - Botswana withdrew in 1975; it achieved robust growth aided by diamonds, a currency peg to a basket, persistent budget surpluses, and very large foreign exchange reserves (equivalent to a multiple of broad money or more than a year of imports). - LNS countries are in much weaker fiscal and reserves positions relative to Botswana’s circumstances. - Opting out would imply loss of CMA-related benefits such as zero transaction costs for currency exchange with the rand and compensation payments for forgone seigniorage (though forgone seigniorage could be offset by seigniorage from an exclusive national currency). - Opting out would expose LNS countries to a more volatile world environment. - Given extensive trade and financial ties with South Africa, there may be no credible alternative monetary anchor (other than the rand) for the LNS countries at present. ### Interaction of options and transitional considerations - The issues are not mutually exclusive; a full monetary union would further regional integration and yield additional credibility benefits. - A single currency alone will not significantly increase CMA effectiveness in response to asymmetric shocks unless accompanied by increased market flexibility and macroeconomic policy coordination and cooperation. - Enhancing consultations on monetary and exchange rate policies under existing arrangements could be a transitional step toward a full monetary union. ### Conclusion: assessment and policy priorities - The study assesses the CMA experience against its two stated goals: promote sustained growth in the CMA as a whole and facilitate economic development in less developed member countries. - Available data through end-2005 show: - real GDP growth in the CMA as a whole has accelerated over the last two decades; - real income per capita, in purchasing power parity terms, has converged (the gap between South Africa and other member countries narrowed), though this convergence has slowed over the last 10 years. - CMA arrangements have facilitated regional integration in goods and financial markets; inflation and interest rates in the CMA are lower than in neighboring SADC countries. - There is strong evidence of a de facto single monetary policy throughout the CMA, set by the South Africa Reserve Bank. - Labor market integration is weaker, despite extensive cross-border labor mobility. - Empirical analysis confirms external shocks impact CMA countries asymmetrically; small countries have sometimes responded with fiscal deficits financed through domestic borrowing, lowering international reserves. - Key challenge: ensure timely and effective adjustment by member countries in response to asymmetric shocks to achieve growth and development objectives. - Policy focus for small member countries: strengthen competitiveness through prudent fiscal policy and accelerated structural reforms. - Progress in regional integration and CMA effectiveness depends, to a large extent, on South Africa as the engine of growth in the region. *Source: _wp07158 - 61. 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By M.B. Canzoneri, V. Grilli, and P.R. Masson (Cambridge, England: Cambridge University Press). - Tjirongo, Meshack T., 1995, “Short-Term Stabilizaton Versus Long-Term Price Stability: Evaluating Namibia’s Membership of the Common Monetary Area,” Center for the Study of African Economies, Institute of Economics and Statistics, WPS/95-18 (Oxford: University of Oxford). - USAID, 2005, The Swaziland Investor Roadmap, Gaborone, Botswana, Regional Center for Southern Africa, U.S. Agency for International Development. - Van der Merwe, E. J., 1996, “Exchange Rate Policies in South Africa: Recent Experience and Prospects,” Occassional Paper of the South African Reserve Bank No. 9 (Pretoria: South: African Reseve Bank). - World Bank, 2004, “Lesotho—Financial Sector Review,” Financial Sector Division, Africa Region (Washington: World Bank). - World Bank, 2005, “Lesotho—An Assessment of the Investment Climate,” Africa Private Sector Group (Washington: World Bank) - WTO, 2003, “Trade Policy Review, Southern African Customs Union, Report by the Secretariat,” WT/TPR/S/114 (Geneva: World Trade Organization). - Zaidi, Iqbal, 2004, “External Competitiveness, Exchange Rate Flexibility, and the Monetary Policy Framework,” in Botswana: Selected Issues and Statistical Appendix (Washington: International Monetary Fund). ### Appendix I — Regional comparison of economic performance (summary findings) - While the CMA has consistently had a lower growth rate than other parts of sub-Saharan Africa, its average real growth rate has accelerated faster than that of comparator regions (see Table A1.1.). The growth rate of the CMA has more than tripled over the last twenty-five years, narrowing the gap in average growth rate between the CMA and other sub-Saharan African regions. - Average inflation has declined substantially, from 14.5 percent in 1980-1992 to 7.7 percent in 1993-2000 and 3.7 percent in 2001-2005. As a result, the inflation differential between the CMA and the CFA zone declined significantly. This declining trend in CMA inflation reflects the successful implementation of inflation targeting in South Africa. - Though the fiscal deficit in the CMA has declined in recent years, it is still higher than in comparator regions. On the other hand, external debt is substantially lower than that of other sub-Saharan African regions. - Business environment and regulatory regime: CMA countries fare relatively well compared with other sub-Saharan African countries. According to the economic freedom index published by the Heritage Foundation, South Africa ranks higher than the OECD average on trade policy, wages and prices, and government intervention in the economy. Lesotho’s trade policy also scores better than both the sub-Saharan African and OECD averages. Namibia ranks higher than the regional average on several indicators, including regulation, banking and finance, and capital flows and foreign investment, but falls below the regional average with respect to fiscal burden of government and government intervention in the economy. The Heritage Foundation also ranked Swaziland as having greater economic freedom than its sub-Saharan African counterparts. - One of the greatest structural challenges facing CMA countries is the HIV/AIDS epidemic. They are among the countries with the highest prevalence rate of HIV/AIDS in the world. The epidemic can have serious macroeconomic implications through its effect on, among other things, labor force participation, skills accumulation, and domestic savings. Key statistics from Table A1.1. (1980-2005; exact values preserved) - Real GDP growth: - Common Monetary Area: 1.1 2.7 3.8 - CFA Franc Zone: 2.4 4.1 6.0 - Sub-Saharan Africa excluding CMA: 2.2 3.0 5.1 - Inflation: - Common Monetary Area: 14.5 7.7 5.2 - CFA Franc Zone: 5.1 6.8 2.8 - Sub-Saharan Africa excluding CMA: 29.5 48.0 18.2 - Fiscal balance (including grants): - Common Monetary Area: -3.9 -3.9 -1.5 - CFA Franc Zone: -4.7 -2.8 0.3 - Sub-Saharan Africa excluding CMA: -5.7 -3.9 -1.1 - Exports: - Common Monetary Area: 28.6 25.7 34.9 - CFA Franc Zone: 30.0 32.2 38.8 - Sub-Saharan Africa excluding CMA: 24.3 32.8 38.7 - External debt: - Common Monetary Area: 25.7 25.2 26.1 - CFA Franc Zone: ... 87.6 68.9 - Sub-Saharan Africa excluding CMA: ... 82.9 66.5 - Notes: - Source: IMF staff estimates. - Data are based on a weighted average of member country's real GDP. - CMA average is based on South Africa and Lesotho data through 1984; South Africa, Lesotho, and Swaziland through 1997; and all CMA countries thereafter. - CFA Franc Zone and sub-Saharan Africa data start in 1995. ### Appendix II — Principal component analysis of price convergence in the CMA (findings and results) Testing approach and interpretation: - Principal component analysis (PCA) was applied to log CPI series of CMA member countries to identify common factors explaining covariance in CPI series. - The CPI data matrix P = [Pij] with variance-covariance (or correlation) matrix R was analyzed to obtain eigenvalues λk and eigenvectors vk; principal components defined as C = P V. Main PCA findings: - Annual data results (Sample: 1980–2005; Observations: 26): - Eigenvalue (PC 1): 0.466 - Eigenvalue (PC 2): 0.000 - Eigenvalue (PC 3): 0.000 - Eigenvalue (PC 4): 0.000 - Variance proportion: 0.999 0.001 0.000 0.000 - Cumulative proportion: 0.999 0.999 1.000 1.000 - Eigenvectors (Vector 1 weights on annual data): - LNLESOTHO: 0.52 - LNNAMIBIA: 0.49 - LNSOUTHAF: 0.49 - LNSWAZILAND: 0.49 - Interpretation: More than 99 percent of the total variation in the prices in the CMA countries are explained by a single common factor. South Africa, Namibia, and Swaziland have the same weight (0.49) while Lesotho has a slightly higher weight (0.52). - Quarterly data results (Sample (adjusted): 1981Q1–2005Q3; Observations: 89 after adjustments): - Eigenvectors (Vector 1 weights on quarterly data): - LESOTHO: 0.32 - NAMIBIA: 0.51 - SOUTH AFRICA: 0.72 - SWAZILAND: 0.35 - Interpretation: South Africa has the highest weight (0.72) in the first principal component series for quarterly data. Graphical and qualitative interpretation: - Figure A2.1. (1980–2005) shows the first principal component series closely tracking actual CPI for each CMA country with long-run convergence in prices, especially after 1993. The gap between derived and actual series narrows over time, though the differential appears to have widened slightly in recent years. Overall result: strong evidence of long-run price convergence among CMA members. Causality tests (Granger causality; Sample: 1980Q1–2005Q3; Lags: 4) - South Africa and Lesotho: - Null hypothesis: D(LOGZAF) does not Granger-cause D(LOGLES) — Obs 98, F-Statistic 4.8, Probability 0.0 - Null hypothesis: D(LOGLES) does not Granger-cause D(LOGZAF) — F-Statistic 0.7, Probability 0.6 - Interpretation: South African inflation Granger-causes Lesotho inflation; reverse causality rejected. - South Africa and Namibia: - Null hypothesis: D(LOGZAF) does not Granger-cause D(LOGNAM) — Obs 98, F-Statistic 3.2, Probability 0.0 - Null hypothesis: D(LOGNAM) does not Granger-cause D(LOGZAF) — F-Statistic 0.4, Probability 0.8 - Interpretation: South African inflation Granger-causes Namibian inflation; reverse causality rejected. - South Africa and Swaziland: - Null hypothesis: D(LOGZAF) does not Granger-cause D(LOGSWZ) — Obs 98, F-Statistic 2.2, Probability 0.1 - Null hypothesis: D(LOGSWZ) does not Granger-cause D(LOGZAF) — F-Statistic 2.5, Probability 0.1 - Interpretation: Granger causality runs from South Africa to Swaziland, but reverse causality cannot be rejected (both directions not clearly rejectable at conventional significance levels). Analytical implications and policy-relevant conclusions: - The PCA results indicate a dominant common price factor across CMA countries, consistent with strong price commonality and long-run convergence. - Given South Africa’s economic dominance and the PCA/Granger results, inflation developments in South Africa are a primary driver of inflation in Lesotho and Namibia; the relationship with Swaziland is less one-sided. - These findings support policy considerations that pay close attention to South African inflation dynamics when assessing price stability and inflation-targeting outcomes across CMA members, and suggest that smaller CMA members have limited independent control over inflation outcomes. *Italic: Source — _wp07158 - References (IMF PDF)._* ### 9. In summary, the results from the principal component analysis strongly support a long-run ### _wp07158 - 9. In summary, the results from the principal component analysis strongly support a long-run ### Summary findings: price convergence and causality - Principal component analysis strongly support a long-run price convergence among the CMA countries. - Granger causality tests confirm that inflation in the smaller CMA countries is Granger-caused by inflation in South Africa. ### Appendix III — CMA Countries: Comparative Tax Rates and Incentives (selected items) - Company income tax - Lesotho: 25 percent; special rates for manufac-turing, mining, and nonresident companies. - Namibia: 35 percent; special rates for diamond, nondiamond, and manufacturers. - South Africa: 30 percent; Secondary tax on companies: 12.5 percent Special rates for gold mining, oil extraction, long-term insurance tax, and small enterprises. - Swaziland: 30 percent. Companies granted development approval order: 10 percent. - Individual income tax (progressive) - Lesotho: Minimum: 0 percent Maximum: 35 percent - Namibia: Minimum: 0 percent Maximum: 35 percent - South Africa: Minimum: 0 percent Maximum: 40 percent - Swaziland: Minimum: 0 percent Maximum: 33 percent - Tax on nonresidential shareholders - Lesotho: 10 percent of amount of dividend. - Namibia: 12.5 percent for companies incorporated in SACU countries. - Property tax - Lesotho: 0.25 percent on residential property. 2 percent on commercial property. 2.75 percent on industrial property. - Namibia: Minimum: 0 percent, for value under 100,000 Maximum: 11,000, plus 8 percent for values exceeding 400,000 - South Africa: Property tax rate differs with local governments. For individual nationals: Minimum 5 percent Maximum: 8 percent For legal entities: 10 percent - Swaziland: Minimum: 2 percent Maximum: 6 percent Mineral rights tax: various rates - Value-added tax / sales tax / excise - Lesotho: 14 percent. - Namibia: 15 percent. - South Africa: 14 percent. - Swaziland: General sales tax: 14 – 25 percent - Excise tax: Specific or ad valorem rates or both (Lesotho, Namibia, South Africa); Mostly specific rates (Swaziland). - Taxes on international trade and transactions - Lesotho: Specific or ad valorem duties or both charged on FOB value of goods at varying rates. - Namibia: Tariff schedule based on the Harmonized System 2002 nomenclature with general, most favored nation, and preferential duty rates. - South Africa: Specific or ad valorem duties Tariff rates generally fall within eight levels ranging from 0 to 30 percent with a few exceptions. - Swaziland: 45 ad valorem rates, ranging from 0 to over 70 percent. - Incentives and export support (selected) - Lesotho: Skills training grant; Refinance arrangement granted by the Central Bank of Lesotho to commercial banks to provide exporters with concessionary export finance; Counter-guarantee arrangement: Central Bank assumes 95 percent of the risk associated with guarantees issued by the LNDC; financial backing from the Central Export Development Fund organized on a revolving basis; fund is managed by the Central Bank of Lesotho. - Namibia: Guarantees (on loans granted by banks). LNDC equity participation. 80 percent exemption from taxation on profits accruing to exports of manufactured goods (except fish and meat products). - South Africa: Full rebate on imported intermediate materials or components for use in export processing; Provision of serviced industrial plots, customized factories, commercial and residential properties for lease; Export processing and special incentive zones; More than 50 general and sector-specific incentives covering taxes, duties, and financing. - Swaziland: Exemption from withholding tax on dividends for ten years for qualifying investments; Duty-free importation of capital goods, new machinery, and equipment for use in manufacturing enterprises. - Investment guarantees and international agreements - Lesotho: Signatory to the International Centre for Settlement of Investment Disputes (ICSID) and a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA). - Namibia: Signatory to the MIGA, U.S. Overseas Private Investment Corporation (OPIC), and similar accords. - South Africa: Comprehensive double taxation agreements with numerous countries worldwide. Signatory to international investment protection agreements including the MIGA. - Swaziland: Member of MIGA. ### Appendix IV — The Southern African Customs Union (SACU): revenue distribution and the 2002 Agreement - Brief history and key facts - Three agreements crucial to SACU: the 1910 Customs Union Arrangement, the 1969 agreement, and the 2002 agreement (signed on October 21 after eight years of negotiation). - Current members: Botswana, Lesotho, Namibia, and Swaziland (the BLNS countries) and South Africa. - Under the 1910 arrangement, revenue shares were fixed and gave South Africa 98.7 percent of the revenue. - The 1969 agreement distributed revenue using a formula that allocated shares to each BLNS country with South Africa’s share as a residual; the formula enhanced each BLNS country’s receipts by 42 percent. Revenues are distributed with a lag of two years. - In 1977 a “stabilized revenue rate” guaranteed minimum receipts equal to 17 percent of the total value of SACU imports and excisable value to the BLNS countries as a group. - Objectives of the 2002 agreement (Article 2) include (listed verbatim) - (i) to facilitate the cross-border movement of goods between the territories of the member states; - (ii) to create effective, transparent, and democratic institutions that will ensure equitable benefits to member states; - (iii) to promote conditions of fair competition in the common customs area; - (iv) to substantially increase investment opportunities in the common customs area; - (v) to enhance the economic development, diversification, industrialization, and competitiveness of member states; - (vi) to promote the integration of member states into the global economy through enhanced trade and investment; - (vii) to facilitate the equitable sharing of revenue arising from customs and excise duties levied by member states; and - (viii) to facilitate the development of common policies and strategies. - Institutional and policy changes under the 2002 agreement - Introduces a new institutional structure, a new system of managing and sharing the common revenue pool, and a dispute settlement mechanism. - Notes the need for common policies for industrial development, agriculture, competition policy, and unfair practice. - Decisions of all SACU institutions except the Tribunal are to be made by consensus; all member countries now take part in managing the customs union and have a voice in new customs tariffs. - Revenue-sharing formula and components (as presented) - The revenue-sharing formula for a given financial year is described; symbols and definitions provided: - Ri = revenue share of SACU country i (i = Botswana, Lesotho, Namibia, South Africa, or Swaziland) - C = all customs duties actually collected on goods imported into SACU, less the cost of financing the Secretariat, the Tariff Board, and the Tribunal, less customs duties rebated or refunded - Ai = c.i.f. value (at the border) of imports of SACU country i from all other SACU members, less re-exports - A = total c.i.f. value (at the border) of intra-SACU imports, less re-exports - E = all excise duties actually collected on goods produced in the SACU area, less the cost of financing the Secretariat, the Tariff Board, and the Tribunal, less excise duties rebated or refunded - GDPi = gross domestic product of SACU country i - GDP = total gross domestic product of SACU members - Yi = gross domestic product per capita of SACU country i - Y = average gross domestic product per capita of all SACU members - The new formula has three parts: - The customs component: C*(Ai/A). Total customs duties collected are distributed to each country in proportion to its share of intra-SACU imports. On the basis of 1998/99 trade, South Africa would have contributed about 80 percent to the customs component and its share of the customs pool would have been 20 percent. - The excise component: E*(GDPi/GDP). The size of this component has been set initially at 85 percent of total excise duties collected and distributed in proportion to share of SACU GDP. In 1998, South African GDP represented about 93 percent of SACU total GDP, and its share of this component would have been about 79 percent. - The development component: 20*(0.15)*E*(1-((Yi/Y)-1)/10). The size of this component has been set initially at 15 percent of total excise duties collected and will be distributed inversely to GDP per capita: The smaller a country’s GDP per capita, the greater its share of the development pool. - Implications noted: - The BLNS countries would largely derive their total SACU revenues from the customs component. - South Africa would get most of its SACU revenue from the excise component. - The development component is more important the less developed the member is (WTO, 2003). *Source: IMF and national authorities.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07158.pdf_