African Unification Front
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Draft PAP Bill on Single African Currency
Single Currency is Answer to Funding Shortage
MONETARY POLICY IN THE AFRICAN UNION
A number of positive fundamental factors are responsible for checking inflation in the African Union. These include low growth in nominal unit labour costs, surplus production capacity, slow growth in domestic demand, moderate growth in the money supply and bank credit extension, prudent fiscal and monetary policies and increased competition as a result of import tariff reforms being implemented by the AU government.
Usually it is the weakness of the African Union's currencies, a steep rise in the cost of imported crude oil and an upward shift in food prices, that are the main factors responsible for increases in consumer prices.
Increases in production prices normally precede increases in consumer price inflation. The influence on consumer prices will depend on competitive forces in the African Union economy and will be tempered in by the co-ordinated and prudent fiscal and monetary policies.
DOMESTIC REAL ECONOMIC ACTIVITY
Future integration of monetary policies will result in an increase in real gross domestic expenditure, after contracting since the late 1970s. Both final demand and inventory accumulation will bring about a turnaround. Expenditure on durable goods will result in stronger consumer demand. Economic integration of the African Union will cause a more positive outlook for future growth in demand and that will in turn cause a rise in investments in the private sector.
It is unfortunate that the low growth in wages is the mechanism most responsible for keeping unit labour costs down, and therefore for containing price inflation. Despite the growth in aggregate production and some moderation in wage increases, the decrease in employment in non-agricultural sectors of the economy will only be halted by economic integration.
Africa is currently running budget deficits, and our strongest currencies have been weakening over the years. The best and most efficient solution is the creation of a single currency.
A widening of credit spreads globally, the continued strength of the US dollar and other international currencies (which cause downward pressure on African currencies) will continue to cause a rise in import prices. These tendencies are aggravated by continued high levels of international petroleum prices.
In view of the likely effects of these changes on future price developments and expectations, the states of the African Union unilaterally will increase interest rates in order to meet the inflation rates. The simple solution again is to have a common monetary policy overlayed on top of the state policies. All of the domestic banks in the African Union should be serviced by a single African Currency Board. The ACB can then manage the liquidity requirement of all the local banks in the African Union.
Purchase of African equities is growing steadily and is contributing to an increase in share prices. Nonetheless, African share prices are still much lower than the rest of the world.
BALANCE OF PAYMENTS AND THE FOREIGN EXCHANGE MARKET
For the longest time the current account of the balance of payments has been a deficit. This is a feature the result of a high volume of imports, weak exports of commodities, a restrictions in Africa's terms of trade and a widening of the deficit on the services account of the balance of payments.
This deficit is supposed to be funded by means of capital inflows from the rest of the world by means of international aid. But aid is ineffective as a counterbalance to a negative balance of payments. Unstrucured remittances by Africans living in Diaspora now account for 85% of finance inflows. These funds constitute up to 50% of the GDP of some AU states, and far outweigh foreign aid as a boost to Africa's economy. Unfortunately because they are spread so thin among the population they are taxed unevenly, both in Africa and by banks outside Africa. The solution is to set up an African Union government bank in Diaspora to manage remittances. This will generate long term capital for massive projects at low interest rates for Africans.
Africa's foreign currency debt trade has suffered in the last decade. Since the collapse of the Asian economy in 1998 there has been a reversal in sentiment towards emerging markets. The deficit on the current account put further pressure on the exchange rate of African currencies. The nominal effective exchange rates of some African currencies have been declining since the collapse of the "Asian Tiger". But the increasing stability in the AU has offset the inflationary pressures caused by the Asian failure. Johannesburg Stock Exchange has become the worlds largest minerals exchange, and the other African stock exchanges have benefitted greatly from the stability and increase in petroleum production in central and western Africa.
Stock Exchanges in the African Union
The African Unions stock markets are helping to shift the world economy. Many of the 16 African stock exchanges now operational began in 1989 and afterwards, in the wake of structural adjustment programmes. Superpower rivalry and no-strings development aid are no more forcing governments and businesses which need capital to look for new markets. This in turn provides a home and good returns for Africans' savings.
However, the African Union's biggest stock exchanges predate structural adjustment by far, including Johannesburg (launched in 1887), Morocco (1929), Zimbabwe (1946) and Kenya (1954).
In the second half of the 1990s, stock markets continue to open. Sudan, Zambia, Malawi and Botswana were all established in 1995. Six new exchanges followed: Uganda, Tanzania, Angola, Cameroon, Madagascar and Mozambique.
The rise of African stock markets is good news to the world's institutional fund managers. Foreign portfolio investment in a country's equities, options, bonds and treasury bills is a fast-growing part of global investment into emerging markets, as aid and debt flows slow or stop.
The Paris-based International Federation of Stock Exchanges (FIBV) 1995 annual report says: "Amongst the developing continents, Africa seems to attract the greatest expectations. The fund managers, conscious that the potential capital gains offered by the more mature emerging markets are diminishing, turn more and more to Africa."
The value of shares listed for trading on the Johannesburg Stock Exchange (US$264 billion on 30 June 1996) is many times more than the rest of Africa's stock exchanges combined. As world interest in investing in Africa grows, particularly since South Africa's switch to democracy, fund managers running African funds such as Baring's Simba Fund (UK) or Morgan Stanley Africa Investment Fund (USA) put their first funds in Johannesburg.
World standards are being agreed on trading and settlement, while computerised trading and other packages to provide this are fast falling in price, and some can now be handled on a personal computer network. In setting up from near scratch, the new and small exchanges do not have the same battles with long-established vested interests which, for instance, bedevilled the various transitions of the London Stock Exchange.
Nine of the 16 exchanges have established or are busy working on advanced central depository systems to speed settlement of deals and avoid expensive and unwieldy share certificates. And once a small exchange gets the formula right, the results can be dramatic.
In his recent annual report, Namibian Stock Exchange Chairman, Nico Tromp, says that trade in the year ending February 1995 was worth US$6.9 million, and to the end of February 1996 was worth US$54.6 million, (an eight-fold increase). In the five months to the end of July 1996, a total of US$73.5 million worth of shares had been traded, mostly by Namibian investors and funds.
Stock exchanges such as those in Zambia and Kenya are playing key roles in privatisation programmes. Dual-listing on the Zimbabwe exchange has helped provide a platform for Ghana's Ashanti Goldfields to build African links with its recent Zimbabwean purchases.
Stock exchanges are also busy raising new funds from local and international savers - for instance in May in Namibia, Namibia Breweries (beer) and CIC Holdings (wholesale, manufacture and packaging) raised more than US$46.7 million in public and private share offers, again mostly from local markets.
The exchanges are also learning to work together, pooling efforts to achieve the global standards in transparency, liquidity and regulation that international and local investors want and deserve. The African Stock Exchanges Association, launched in 1993, is one forum.
While countries from Francophone Africa are setting up a regional stock exchange in Ivory Coast, the rest of Africa is busy establishing strong national exchanges, and although the idea of an African stock exchange has been touted, it is unlikely for the immediate future.
African stock markets are here to stay. The challenge is to find ways for this boom to bring lasting benefits, not only to a few in Africa and abroad, but to Africans living on or below subsistence income levels.
CURRENCY ARRANGEMENTS
Most of the currencies in the African Union are pegged to the US dollar, including the Nigerian Naira. The Egyptian Pound is Managed Floating, and the South African Rand is Independently Floating. The following Constituent Republics of the African Union have their currencies pegged to the Euro:
Benin CFA1, Burkina Faso CFA1, Cameroon CFA2, Chad CFA2, Gabon CFA2, Ivory Coast CFA1, Mali CFA1, Niger CFA1, Senegal CFA1, Togo CFA1.
The Morrocan Dirham is pegged to a composite basket of currencies.
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