Is Southern Africa ready for regional monetary integration?

This paper examines whether Southern Africa is ready for regional monetary integration. It reviews the lessons from theory and experience, focusing on (i) the problem of spillover effects and the implications for policy coordination; (ii) the appropriate conditions for exchange-rate coordination, which is necessarily implied by monetary policy coordination; and (iii) issues surrounding convergence of per capita income and convergence of macroeconomic stability indicators. The paper considers macroeconomic policy and convergence in SADC. It provides summary information of the macroeconomic policies currently pumued in SADC, and highlights the areas of key policy weaknesses. The extent of convergence of per capita income in SADC is measured using the two most common methods. From this analysis there is no evidence of convergence in the SADC countries (if anything there is a slight divergence) but a pattern of convergence amongst the SACU countries is evident. The paper examines whether this result can be explained by divergence in policy variables. Using the Maastricht criteria variables (where data are available) as a starting point, the paper demonstrates that there is significant divergence of key policy and stability indicators among SADC as a whole, but there is a degree of convergence among a sub-sample consisting of the CMA countries, Botswana and Mauritius. The paper concludes that the lack of convergence of the economies over time and the significant divergence of policy and stability indicators suggests that Southern Africa is not yet ready for regional monetary integration.