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FINANCIAL SECTOR PREPARES FOR REGIONAL INTEGRATION, HARMONISES
POLICIES
by Munetsi Madakufamba
| As southern Africa moves closer and closer to a common market, the question of
institutional reform is expanding from the usual issues concerning tariff reduction to
include the need to harmonise payment systems. The Southern African Development Community (SADC) Trade Protocol, which seeks to establish a single market in the 14-member bloc, is expected to come into force as early as January 2000. If this happens, intra-regional trade is expected to increase sharply from the current level of 22 percent. In the build up to the common market, debate has centred on the sticky issues of tariff reduction and the need to set up relevant institutions to cope with the intricacies of cross-border trade. Since the trade protocol was signed in 1996, member countries have been engaged in protracted negotiations on which commodities to remove/reduce tariffs, by how much and over what period. Very little has been said about other equally important, requisite institutional reforms, mechanisms and legal frameworks, such as those in the financial sector, which need to be put in place if the sector is to cope with increased market activity. Intra-regional trade in SADC was a mere 12 percent a couple of years back. Now it is 22 percent and, according to SADC Deputy Executive Secretary, Prega Ramsamy, it may go up to 35 percent by 2005. With the coming into force of the trade protocol, therefore, the volume of trade is expected to multiply and with it, the volume and value of transactions that the financial sector will have to deal with. Cognisant of the impending surge in inter-bank transactions, and the increasing will toward regional integration in SADC, central banks in southern Africa are quietly designing a model for financial cooperation. Under the auspices of the SADC Finance and Investment Sector, coordinated by South Africa, the SADC Committee of Central Bank Governors was formed with a mandate to spearhead the harmonisation of financial sector policies. The broad strategy of the committee, according to a recent report, is based on the premise that a "sound financial basis must first be laid within each of the participating countries before it can be extended to the region as a whole." One of the key objectives of the committee is to ensure greater financial cooperation by helping member countries define their payment system strategies. This is regarded as the main contribution the central banks should make to the expansion of trade and investment in the region. How payment systems in different countries work is a fairly intricate subject to many including those who work in the financial sector. Generally defined as a system that facilitates the process of making payments, consisting of instruments, banking procedures and inter-bank transfer systems that enable the circulation of money, payment systems affect all players in any economy one way or the other. The efficiency of a payment system has a bearing on the image of business. For instance, the faster a Zambian company can receive payment for its cross-border activities in Mozambique, the faster it will be able to meet its obligations at home. Similarly, the more individuals and companies engage in cross-border activities, the more complicated the payment, clearing and settlement systems become. "A well functioning payments system will facilitate the effective execution of monetary policy, bank supervision and the notes and coin issuance and distribution functions (of the central bank)," says Leonard Tsumba, Governor of the Reserve Bank of Zimbabwe. Thus the more countries open up to cross-border trade, the more they need to harmonise their payments systems in order to ensure that customers receive their payments on time and at reasonable prices. A recent book, Payment Systems in the Southern African Development Community, is an attempt by the committee of central bank governors to increase the understanding of the way payment systems work in 12 of the 14 SADC countries. Not included in the book, prepared by the SADC Payment System Project Team, are the Democratic Republic of Congo and Seychelles, which joined SADC in 1997 after the project had started. Recognising the need for an efficient and secure financial infrastructure, the SADC countries have set themselves the ambitious task of modernising their existing payment and settlement systems. To speed the process, says the book, they have chosen to adopt a cooperative, regional approach. "The main objective is . to learn from each other and to help each other to create appropriate structures for the central bank, the private banking sector and the financial markets in each of the members of SADC. "The domestic financial sector reforms introduced in each country must, however, even at this early stage, take cognisance of the development needs of the region and the longer term objective of a more coordinated and regional financial sector," recommends the book. The publication is seen as a joint effort, involving all SADC central banks, to lay the foundation for the development of a compatible and inter-linkable national payment, clearing and settlement system for financial transactions. Having successfully completed the first stage of the project - analysing the state of domestic payment systems - the publishers hope to do a second edition that will look more closely at cross-border settlements. Regular updates of the payment systems in SADC will also appear in future editions of this series dubbed the "Green Book", according to the publishers. The reason for developing coordinated payment systems goes beyond building capacity that can cope with increased market activity. Of equal concern to central banks is their ability to guard against systemic risk - the risk arising from failure by one participant such as a bank to settle its financial obligations leading to other participants failing to meet their own commitments. Central banks have an overall responsibility to ensure stability in the financial sector, and therefore should ensure that payment, clearing and settlement systems function smoothly. The Asian crisis of 1997 provided a classic lesson. What started as mere currency collapse in Indonesia, South Korea and Thailand spread like flu to all parts of Asia, and later, to other parts the world. The Asian flu showed that financial stability is as critical at the regional level, as it is at the national level. The central banks of southern Africa have a lot to learn from the Asian turmoil, not just to avoid a similar crisis in SADC, but also to establish a solid financial sector that will enable the process of regional integration to run smoothly. (SARDC). |
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