Trade and Industry

Friday, 15 June 2001

Prospects for Financial Sector Reform in the Context of Regional Integration in SADC

  • Year: 2001
  • Organisation: TIPS
  • Author(s): Rosalind Mowatt
  • Countries and Regions: Southern African Development Community (SADC)

The reform of the financial sector has been an important component of the structural adjustment programmes pursued by developing countries, whereby reform entails reducing government involvement, freeing up financial markets, and strengthening
financial institutions. In Southern Africa, however, the financial systems of most countries remain relatively underdeveloped, in spite of these reforms. The Southern African Development Community (SADC) is currently in the process of drafting a protocol on finance and investment, which should address the issue of financial sector development. The questions that arise from this are, firstly, what kind of role can SADC play in promoting financial sector development, and secondly, what are the possibilities for financial integration within SADC?

One of the stated aims of SADC is monetary integration; however, no timetable for monetary integration has been drawn up, nor has there been any in-depth discussion of the issue at SADC level. It seems that, while monetary integration may be a long-term goal of the organisation, it is not considered achievable at present. To complement monetary integration, the establishment of a wider internal market for financial services would be required, as well as the convergence of a number of financial variables. Financial integration encompasses all of these goals, including a common currency. Some SADC leaders have spoken of the need for financial integration within the region, but the use of the term has not been clearly defined. Indeed, Linah Mohohlo, the governor of the Bank of Botswana, recently said that, “financial integration should not require any surrender of sovereignty” (Business Week, 18/9/2000), which raises the question of what exactly is meant by the term “financial integration.” The question of whether SADC should aim to follow an EU-style approach to financial integration, or whether it should continue with its current ad hoc approach, has therefore not been addressed.

A related issue is the questionable political will with regard to economic integration, as demonstrated by SADC’s leaders. The 14 countries of SADC are at differing levels of economic development, with South Africa accounting for about 78% of the region’s total GDP. Some countries, such as Angola, the DRC, and (increasingly) Zimbabwe, are facing economic crises, due to internal instability. Other countries, like Botswana and Mauritius, are stable and have reasonable growth rates, but face the problem of diversifying their economies. The countries of the Common Monetary Area1 are still heavily dependent on South Africa. Others, such as Tanzania, Mozambique and Zambia, are dealing with the transition from a heavily state-dominated economy to one that relies on market forces. Each nation has its own development strategy that has been tailored to the specific needs of their own economy. However, economic integration by its very nature requires some sacrifice of national sovereignty, in order to reap the benefits of a single market. While the rationale for economic integration in Southern Africa is wellunderstood, there appears to be an unwillingness on the part of member states (perhaps understandably) to substitute regional priorities for national ones, making the decisionmaking process slow and difficult. The result is that little progress has been made towards economic integration thus far.

Given this rather discouraging background, this paper looks at the role that SADC can realistically play in developing the financial systems of the countries of Southern Africa. Section I reviews some of the literature and theory around financial sector reform, particularly in the context of Southern Africa. Section II offers an overview of the financial systems of the various SADC countries. Section III considers regional integration, looking at SADC as an organisation, as well as highlighting some of the possible barriers to integration. Section IV explores the issue of SADC’s role in financial sector reform, and makes some suggestions that could perhaps be considered in the drafting of the Finance and Investment Protocol. Finally, Section V contains some concluding comments as well as suggestions for further research.