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ROADMAP FOR FINANCIAL AND MONETARY INTEGRATION IN COMESA

<p>COMESA has a programme of  financial and monetary integration which will culminate in Monetary Union. The  mandate to set up a Monetary Union in COMESA is derived from Article 4 (4) of  the COMESA Treaty signed in Kampala, Uganda on 5th November, 1993,  which states that the COMESA Member States shall &ldquo;in the field of monetary affairs and finance, co-operate in monetary  and financial matters and gradually establish convertibility of their  currencies and a payments union as a basis for the eventual establishment of a  monetary union&rdquo;. This mandate is further reinforced in Articles 76-78  which respectively deal with the COMESA Monetary and Fiscal Policy  Harmonization (MFHP), establishment of currency convertibility and formation of  an exchange rate union.  </p>
<p>The objective of COMESA Regional  Financial and Monetary Integration Programme is to enhance growth and reduce  poverty in the region. These are enhanced through the following different  channels:</p>
<ol>
<li>It provides a powerful stimulus for domestic financial  reforms;</li>
<li>Increases the scale of operations and competition,  reduces transaction costs and thereby increases productivity;</li>
<li>It increases access to financial services to all  sectors of the economy;</li>
<li>It induces foreign direct investment (FDI) inflows;</li>
<li>It enables the region&rsquo;s financial systems to grow into  regional and global players in the financial markets</li>
</ol>
<p>Based on the above mandate, the  COMESA Committee of Governors of Central Banks set up a COMESA Monetary  Institute, in order to undertake all activities related with making the region  zone of macroeconomic and financial stability and to ultimately achieve  monetary union.  The Institute became  operational in March 2011 in Nairobi, Kenya.</p>
<p>COMESA Regional Monetary and  Financial Integration roadmap has five stages. These are:</p>
<p><strong>Stage  I- Preparatory stage</strong>:  In this stage  countries need to fulfil certain preconditions relating to establishing  macroeconomic stability and bank soundness. In this stage, the main  responsibility falls on domestic policy makers to modernise domestic financial  systems. Substantial exchange of information and other forms of interaction  between the countries would be needed to make them aware of the reforms being  undertaken in partner countries.</p>
<p><strong>Stage  II- Harmonisation stage: </strong>At this stage, modernisation of the financial sector  in individual countries would be further extended by the introduction of and  compliance with various international standards and practices in the financial  sector to ensure regional harmonisation. Intra-regional exchange controls would  be abolished, and foreign investment flows would be liberalised. This would  also promote the effectiveness of the Free Trade Area and propel the private  financial sector to expand their activities cross-border.</p>
<p><strong>Stage  III- Cooperation Stage: </strong>At this stage countries would fully cooperate in  implementing agreed convergence criteria, to be monitored  and evaluated by a Convergence Council  comprising the Minister of Finance and Central Bank Governors.. Member  countries also need to complete the full harmonisation process relating to  regulatory, supervisory, and accounting procedures which began in stage two and  would cooperate in cross-border regulation and supervisory activities.  Arrangements would also be made to link domestic securities markets. Legal  systems would be reformed to enable cross-border enforceability of contracts.  Achievement of this stage will significantly contribute for realisation of the  planned COMESA Common Market in 2015.</p>
<p><strong>Stage  IV- Integration stage: </strong>At this stage, the focus will be at a regional level.  At this stage, there will be effective integration of various financial  institutions, and the exercise of regulatory and supervisory functions,  including single bank licensing, a single regulatory agency and increased  cross-border presence of financial institutions originating in member  countries. There will also be partial pooling of external reserves to meet  balance of payments difficulties of member countries, the establishment of  regional bond markets, and possibly a unified regional stock exchanges, increased  convertibility of member countries&rsquo; currencies and ultimately the creation of  the exchange rate union. Following the strengthening and linking of national  capital market, new regional financial products, such as regional bonds, would  also emerge to tap local savings.</p>
<p><strong>Stage  V- Unification/Monetary Stage:  T</strong>his  final stage would see the introduction of a common currency and a common  central bank on the financial side, and possibly the enhancement of the  implementation of economic community on the real side.</p>
<p>The stages from I-IV are planned  to be implemented by end 2017. The last stage will be implemented in the agreed  upon date of 2018 for achieving the COMESA Monetary Union.</p>
<p>The following are the  achievements of COMESA as related to Monetary and Financial Integration:</p>
<ol>
<li>There is progress towards macroeconomic stability. In  order to enhance greater macroeconomic convergence among member countries, COMESA  with the assistance of the African Development Bank designed the COMESA  Multilateral Fiscal Surveillance Framework (MFSF) which was endorsed by the  COMESA Summit in 2011. The  objective of MFSF is to ensure the viability and sustainability of the COMESA  Monetary Integration agenda which will culminate in a monetary union by  ensuring that a member country does not out-pace other members in terms of  larger budget deficits and inflation rates and protect member countries from  being exposed to contagion effects of macroeconomic instability in one or more  member countries. This also ensures that member countries maintain their  relative competitiveness which is crucial for their economic development. </li>
<li>There  is significant progress in modernizing national financial systems and to  complying with international standards of bank supervision and regulation,  although the degree of reform differs between countries. </li>
<li>There is significant progress in member countries  in  the liberalisation of the economies  and also in the introduction of indirect monetary policy instruments.</li>
<li>Taking advantage of the reform measures being  implemented at national levels, COMESA has also taken various steps to foster  monetary and financial integration among its member states. These include the  following:</li>
<li> COMESA has an  Action Plan for Harmonising Bank Supervision and Regulation, which is aimed at  complying by member countries with all Basel Core Principles as a minimum  standard. This will significantly contribute for COMESA&rsquo;s plan to create a  single financial service market in support of regional integration. Banks  authorised to operate in one member state will be able to export their services  to any other COMESA member state and will also have the right to establish  branches and subsidiaries. </li>
<li>COMESA has also established a detailed Action Plan for  Financial System Development and Stability. The ultimate objective of the COMESA Financial system  Development and Stability Plan is to achieve Regional Financial Integration  (RFI). RFI facilitates financing of larger real transaction activity among the  member countries of the region. RFI is thus a complementary process to trade  and services integration among member countries. It should be noted that trade  integration would be facilitated and accelerated if the financial sectors of  member countries are well developed and integrated. </li>
<li>In order to ensure financial stability in the region,  COMESA designed the Assessment Framework for Financial System Stability. This is  being implemented by member countries although the degree of implementation  differs between countries.</li>
<li>COMESA established the Regional Payment and Settlement  System. This is housed in the COMESA Clearing House in Harare, Zimbabwe.</li>
<li>COMESA has established various structures in support  of trade liberalisation, including a COMESA Fund, to channel development  funding from Aid for Trade, the EU, and other financial assistance. The Fund  has two windows: an Adjustment Facility and an Infrastructure Facility. The  adjustment Facility will provide donor (mainly EU) grant funds to member  countries to meet the costs of adjustment consequent upon the liberalisation of  trade. The infrastructure Fund will facilitate investment in the development of  trade related infrastructure projects in the COMESA region.</li>
<li>COMESA has also regional financial institutions,  namely, PTA Trade and Development   Bank,  PTA Reinsurance Company  (ZEP-RE), and  African Trade insurance  Agency (ATI)</li>
</ol>
<p>The major existing challenges to  regional monetary and financial integration in COMESA are the following:</p>
<ol>
<li>Wide divergence among COMESA member countries in terms  of sophistication of the financial systems and capacity in implementing the  internationally agreed regulatory and supervisory frameworks;</li>
<li>Divergence in capacity of member countries  for implementing  the agreed upon macroeconomic convergence  criteria;</li>
<li>Divergence in the compilation of macroeconomic data.</li>
<li>Absence of member countries&rsquo; own time bound action  plans , setting out precisely how they intend to conform to the COMESA Action  Plan; and</li>
<li>Absence of effective enforcement mechanisms.</li>
</ol>
<p>In conclusion, while progress has  been made in the implementation of the COMESA Monetary and Financial Integration  Programme, a lot of effort should be exerted by, COMESA, COMESA Monetary  Institute and member countries in order to ensure that the components of the  programme are implemented in a sustainable manner. There is particularly urgent  need of ensuring that member countries have their own time bound action plans  of how to conform to COMESA Action Plan.  Cooperating partners should also play crucial  role in building the capacity of member countries to implement the programmes.</p>

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