Saturday, December 3, 2022

Botswana’s readiness for CMA enlargement examined

A Senior Research Fellow at the Halle Institute for Economic Research in Germany, Dr Tobias Knedlik, has come out boldly to assert that Botswana stands to benefit by joining the proposed Common Monetary Area (CMA) enlargement.
“In summary, Botswana is ready for CMA enlargement,” he concludes in his research paper published in the journal of the Botswana Economics Association.

Knedlik is well published on issues relating to the contribution of the Southern African Development Community (SADC) Central Banks to regional integration. On the country’s readiness for CMA, Knedlik argues that it is stable economic conditions and strong regional trade linkages that constitute important positive arguments for such an enlargement. The high dependence of Botswana on intra-regional trade, he says, strongly supports the integration of the country into a regional monetary policy framework, while the instability of the Rand against major trading partner’s currencies speaks against Botswana’s membership in the CMA.

The issue of Botswana becoming a member of SADC single currency unit has been a hot potato in the past, with arguments biased against such an initiative. A lot of commentators have argued that the country stands to lose a lot, particularly price advantage. On the costÔÇôbenefit analysis, Knedlik is of the view that there is no need to jump the gun.

“Whether or not the integration of Botswana will benefit the country, depends largely on the future exchange rate policy of the potentially enlarged CMA,” he notes.

He adds that price convergence with regard to nominal interest rates and inflation “is fulfilled in the case of Botswana”. He is equally optimistic about convergence of real interest rates, saying the real rates system is expected to become more stable due to changes in policy since 2005.

Government, through the Bank of Botswana, enacted a number of far reaching adjustments to the exchange rate regime, including devaluations which culminated in the introduction of crawling peg system.

He, however shares the same sentiments with other critics of CMA by acknowledging that the status quo of South Africa exchange rate policy stands to undermine the optimality of common monetary policy for the country. Knedlik argues that for Botswana and other potential members to enjoy optimality of CMA enlargement, it should be aimed to increase factor mobility. Particular attention should be given to mobility of labour with the focal point being devising a common policy position.

Factor mobility is central to the country’s decision making of whether to become CMA member or not. This is because the country is vulnerable to asymmetric shocks, which can be counteracted by factor mobility.

Knedlik was motivated to investigate the country’s readiness, together with Mozambique to CMA enlargement and drafted the paper at the 11th annual conference of African Econometrics Society that was held in Dakar, Ghana last July. SADC intends to implement a monetary union by 2016 while the African Union aims to implement it by 2028. To some degree, a common CMA is already in place within the region. South Africa, Namibia, Lesotho and Swaziland use the same currency unit. These countries, together, with Botswana, constitute the Southern African Customs Union (SACU).


Read this week's paper