COMESA Monetary Institute (CMI)
<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 “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”. 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’s financial systems to grow into regional and global players in the financial markets</li>
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<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’ 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’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>
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<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’ 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>
