IMF, Policymakers, and Academics, Debate the Future of Monetary Integration in Sub-Saharan Africa

By International Monetary Fund (IMF)

The Africa Training Institute (ATI), the IMF, and the Banque de France jointly organized a high-level seminar at the ATI in Mauritius on March 7—8, 2016. Over 30 high-level policymakers from across sub-Saharan Africa and academics from Africa, America, and Europe gathered to discuss the future of currency areas, with a focus on conditions under which they remain an appropriate mechanism for improving welfare in their member countries.

In their opening remarks, IMF Deputy Managing Director Carla Grasso and Institute for Capacity Development Director Sharmini Coorey underlined the timeliness of this seminar. Monetary integration is arguably one of the most pressing macroeconomic policy questions of our times, with urgent questions regarding governance and design of the Euro area on the one hand, and enthusiasm for further monetary integration in Africa on the other.

Participants' views converged on the prerequisites for monetary integration such as more trade and economic integration. The exposure of potential monetary union members to large asymmetric shocks and the risks associated with large current account imbalances were recognized as sources of concern. Some participants noted that while monetary unions–such as the CFA zone–have contributed to price stability, there are more gains to be achieved on growth and economic development from trade integration, than perhaps from monetary integration. They discussed whether Africa should focus more on those integration objectives.

A panel that focused on the need to develop capacity before starting regional integration agreed on the need for better infrastructure development in all sectors–both physical and IT–as well as for strengthened human resources as prerequisites for reaping the benefits of any form of regional integration.

In the second ATI Presidential Lecture, Dr. Carlos Lopes, Executive Secretary, UN Economic Commission for Africa, made a strong appeal to African leaders to deliver on their agreed upon strategy of industrialization in Africa as a prerequisite for a successful regional integration. He noted the priorities of investing in infrastructure and the development of both human resources and institutions. He argued that, while Africa is late in the industrialization race, some factors play in its favor going forward. These include the continent's large internal market, the declining cost of fossil fuel energy and large potential for renewable energy, low labor costs, and the large gains in employment that could be realized from even a modest increase in the value chain produced within Africa given the low current level.

Several participants were skeptical about the gains from fiscal unions at this stage, as a complement to monetary unions, given that many countries do not feel ready to give up political sovereignty, which comes with the implementation of a fiscal union. However, with a single monetary policy, fiscal rules are necessary to avoid the free rider problem even in the absence of a deficit monetization risk.

Asymmetric shocks in a monetary union can be significant given the economic structure of many African countries as commodity exporters. Here, several speakers emphasized that the rich literature on optimum currency areas can be a valuable reference, as it discusses mitigating factors such as factor mobility, diversification, financial integration, and fiscal mechanisms in the face of such asymmetric shocks. However, making such mitigating factors require structural reform.

The seminar concluded that monetary integration should not be pursued too fast and that priority should be given to implementing a comprehensive structural reform agenda as it emerged from the discussion.