Progress Report On COMESA Monetary Integration PDF

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CS/CCFMA/XX11/9
March, 2017
Original: ENGLISH
COMMON MARKET FOR EASTERN

AND SOUTHERN AFRICA
Symposium on Developments in COMESA Monetary Integration

Programme
29th March, 2017

Bujumbura, Burundi
PROGRESS, CHALLENGES AND A FIVE YEAR WORK PLAN FOR THE IMPLEMENTATION
OF THE COMESA MONETARY INTEGRATION PROGRAM
DISCUSSION PAPER
BY IBRAHIM ABDULLAHI ZEIDY
2017 (IZ/sss)
TABLE OF CONTENTS
ACRONYMS AND ABBREVIATIONS ........................................................................................... iv
LIST OF TABLES .......................................................................................................................... vii
LIST OF FIGURES ........................................................................................................................ vii
EXECUTIVE SUMMARY .............................................................................................................. viii
INTRODUCTION .............................................................................................................................1
CHAPTER 1 .....................................................................................................................................3
EXPERIENCE OF OTHER MONETARY UNIONS .........................................................................3
1.1 The European Monetary Union (EMU) ..................................................................................... 3

1.2 The West African Economic and Monetary Union (WAEMU) and Central African
Economic and Monetary Union (CEMAC)...................................................................................... 7
1.3 The West African Monetary Zone (WAMZ) .............................................................................. 7
1.4 Lessons for COMESA................................................................................................................... 8
CHAPTER 2 ................................................................................................................................... 10
ASSESSMENT TOWARDS MACROECONOMIC CONVERGENCE AND IMPLEMENTATION

OF COMESA MULTILATERAL MACROECONOMIC FRAMEWORK ....................................... 10
2.1 Progress on Achievements of Macroeconomic Convergence Criteria ......................... 10

2.1.1 Primary Criteria ......................................................................................................10
2.1.2 Secondary Criteria..................................................................................................14
2.2 The Assessment of Member Countries status of implementation of the COMESA
Multilateral Macroeconomic surveillance Framework (CMMSF) ........................................... 21
2.3 Challenges Faced in the implementation of the COMESA Macroeconomic
Convergence Criteria and COMESA Multilateral Fiscal surveillance Framework ............ 24
CHAPTER 3 ................................................................................................................................... 26
HARMONISATION OF MACROECONOMIC DATA .................................................................... 26
3.1 ........................................................................................................................................................... 26
Achievements in Macroeconomic Data Harmonisation........................................................... 26
3.2 Outstanding Issues in Harmonisation of Macroeconomic Data ..................................... 26
3.3 Recommendations for Short to Medium Term Actions to Improve Data Reported
for Convergence Monitoring ........................................................................................................... 27
ii
CHAPTER 4 ................................................................................................................................... 29
THE ASSESSMENT OF MEMBER COUNTRIES ACHIEVEMENT OF THE REQUIREMENTS

OF THE COMESA FINANCIAL SYSTEM DEVELOPMENT AND STABILITY PLAN (CFSDS)29
4.1 Challenges Faced by Member Countries in the implementation of the COMESA

Financial System Development and Stability Plan ................................................................... 33
CHAPTER 5 ................................................................................................................................... 35
DEVELOPMENTS IN TRADE INTEGRATION IN COMESA ....................................................... 35
CHAPTER 6 ................................................................................................................................... 37
SUMMARY OF LESSONS AND CHALLENGES FOR ACHIEVING COMESA MONETARY

UNION IN 2018 .............................................................................................................................. 37
CHAPTER 7 ................................................................................................................................... 38
CONCLUSION AND FIVE YEAR STRATEGIC PLAN (2017-2021) FOR COMESA

MONETARY INTEGRATION PROGRAMME............................................................................... 38
ANNEXES ...................................................................................................................................... 45
Annex 1: COMESA Macroeconomic Convergence Criteria .................................................... 45

Annex 2: Public Finance Management System .......................................................................... 46
Annex 3: Terms of reference for the Convergence Council ................................................... 47
Annex 4: COMESA: Regional Payment and Settlement System (REPSS) .......................... 48
Annex 5: Challenges in Microfinance Development ................................................................. 49
Annex 6: Challenges to the development of technology based financial services ......... 52
Annex 7: Recommendations on Regulatory and Supervisory Framework to Enhance
Financial Inclusion in the COMESA Region................................................................................ 53
Annex 8: Factors Affecting Capital Market Development in Africa ...................................... 54
REFERENCES .............................................................................................................................. 55
iii
ACRONYMS AND ABBREVIATIONS
ACP African, Caribbean and Pacific

AfDB Africa Development Bank
AML/CFT Anti-Money Laundering / Combating the Finance of Terrorism
ATI African Trade Insurance
BEPGS Broad Economic Policy Guidelines
BOP Balance of Payments
CABRI Collaborative Africa Budget Reform Initiative
CAF COMESA Adjustment Facility
CAMU Central Africa Monetary Union
CDD Customer Due Diligence
CEMAC Central African Economic and Monetary Union
CET Common External Tariff
CFSDS COMESA Financial System Development and Stability
CFTA Continental Free Trade Area
CGAP Consultative Group to Assist the Poor
CIF COMESA Infrastructure Fund
CMI COMESA Monetary Institute
CMMSF COMESA Multilateral Macroeconomic Surveillance Framework
CMR Customs Management Regulation
COMESA Common Market for Eastern and Southern Africa
COSWAP COMESA SWAP
CPI Consumer Price Index
CRB Credit Reference Bureau
CTN Common Tariff Nomenclature
CVTFS COMESA Virtual Trade Facilitation System
EAC East African Community
ECB European Central Bank
ECOFIN Economic and Financial Council
ECU European Currency Union
iv
EDP Excessive Deficit Procedure
EFSF European Financial Stability Facility
EMU European Monetary Union
ERM Exchange Rate Mechanism
ESM European Stability Mechanism
ESP Excessive Spillages
EU European Union
FDI Foreign Direct Investments
FRD Fiscal Risk Disclosure
FSAP Financial Sector Assessment Program
FSP Financial Service Provider
FTA Free Trade Area
GDDS General Data Dissemination Standards
GDP Gross Domestic Product
GFS Government Finance Statistics
GSMA Global System for Mobile Communication
HCPI Harmonised Consumer Price Index
IFMIS Integrated Financial Management Information System
IFRS International Financial Reporting Standards
IMF International Monetary Fund
KYC Know Your Customer
MFI Microfinance Institution
MIS Management Information System
MIX Microfinance Information Exchange
MMSF Multilateral Macroeconomic Surveillance Framework
MNOs Mobile Network Operators
MTBF Medium-Term Budget Framework
MTCCP Medium-Term Country Convergence Program
MTEF Medium-Term Expenditure Framework
MTFF Medium-Term Fiscal Framework
MTMEF Medium-Term Macroeconomic Framework
v
MTO Medium-Term Objective
NBFI Non-bank Financial Institution
NTBS Non-tariff barrier
ODA Official Development Assistance
OECD Organization for Economic Co-operation and Development
PAR Portfolio at Risk
PARMEC Programme d’ Appui
PEFA Public Expenditure and Financial Accountability
PFM Public Finance Management
PPP Public-Private Partnership
PTA Preferential Trade Area
REC Regional Economic Communities
REO Regional Economic Outlook
REPSS Regional Payment and Settlement System
RISM Regional Integration Support Mechanism
RTGS Real Time Gross Settlement
SACCO Savings and Credit Co-operative Organization
SADC Southern African Development Community
SGP Stability and Growth Pact
SNA System of National Accounts
SQA Standard and Quality Assurance
SSA Sub-Saharan Africa
TBT Technical Barriers to Trade
TFTA Tripartite Free Trade Area
UNDP United Nations Development Program
UNECA United Nations Economic Commission for Africa
WAEMU West Africa Economic and Monetary Union
WAMI West Africa Monetary Institute
WAMU West Africa Monetary Union
WAMZ West Africa Monetary Zone
vi
LIST OF TABLES
Table 1: European Monetary Union Timetable .................................................................................................................. 3
Table 2: Overall Fiscal Balance Excluding Grants (Percent of GDP) ................................................................ 11
Table 3: Consumer prices (Annual Average; Percent Change) ............................................................................ 12
Table 4: Reserves (Months of Imports of Goods and Services) ........................................................................... 13
Table 5: Real GDP Growth (Annual change; percent) ................................................................................................ 15
Table 6: Total Investment (Percent of GDP) .................................................................................................................... 16
Table 7: External Current Account Including Grants (Percent of GDP) ........................................................... 18
Table 8: Government Debt (Percent of GDP) .................................................................................................................. 19
Table 9: Total Revenue Excluding Grants (Percent of GDP) .................................................................................. 20
Table 10: Status of Implementation of CMMSF by Member Countries ............................................................. 22
Table 11: The status of implementation of the key elements of CFSDS .......................................................... 29
Table 12: Pillar I Macroeconomic Convergence, Statistical Harmonisation and Implementation of

COMESA Multilateral Macroeconomic Framework........................................................................................... 38
Table 13: Pillar II Implementation of COMESA Financial System Development and Stability Plan.. 42
LIST OF FIGURES
Figure 1: Overall Fiscal Balance excluding grants (percent of GDP) ................................................................ 11
Figure 2: Consumer Prices ....................................................................................................................................................... 12
Figure 3: Reserves (Months of Imports) ............................................................................................................................ 13
Figure 4: Real GDP Growth ....................................................................................................................................................... 16
Figure 5: Total Investment (Percent of GDP) .................................................................................................................. 17
Figure 6: External Current Account ..................................................................................................................................... 19
Figure 7: Government Debt ...................................................................................................................................................... 20
Figure 8: Total Government Revenue (Excluding Grants) ...................................................................................... 21
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EXECUTIVE SUMMARY
1. 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, cooperate in
monetary and financial matters and gradually establish convertibility of their currencies and
a payment union as a basis for the eventual establishment of a monetary union. This
mandate is further reinforced in Article 76-78 which respectively deal with the COMESA
Monetary and Fiscal Policy Harmonisation, the establishment of currency convertibility, and
the formation of an exchange rate union. The primary objective of this programme is to
create a common area of monetary and financial system stability which will facilitate
integration of financial markets in particular and economic integration in general. The
establishment of the COMESA Monetary Union was initially planned to be achieved in 2025.
This date was later changed to 2018 in order to precede the plan of the Association of
African Central Banks to establish the Africa Monetary Union in 2021.
2. The Monetary Cooperation programme considers fiscal and monetary discipline as the
overriding principle for achieving macroeconomic convergence by requiring member
countries to fulfil a set of 13 convergence criteria, categorized as either “primary Criteria” or
“secondary criteria” in three stages by 2018. In addition to convergence criteria the
programme also envisages development of Regional Payment and Settlement System for
cross-border transactions, statistical harmonisation and financial sector integration. In
addition, the COMESA Council of Ministers in 2011 adopted the COMESA Macroeconomic
Surveillance Framework. The objective of the Framework is to enhance fiscal convergence
which is the key for fulfilling all macroeconomic convergence criteria.
3. This paper is prepared based on the recommendation which was made by the 14th Meeting
of the Monetary and Exchange Rates Policies Sub-Committee which was held from 31 st
August to 1st September 2016 in Nairobi Kenya and approved by the Bureau of the
COMESA Committee of Governors of Central Banks. The Bureau requested CMI to
undertake a study on the evaluation of the progress that have been made so far, the lessons
learnt from the European Monetary Union and the challenges that have been encountered
in the implementation of the COMESA Monetary Cooperation Programme. The Sub-
Committee also recommended that the study should be reviewed by COMESA Committee
of Central Bank Governors in a symposium which should be organised by CMI on the side-
lines of the Monetary Cooperation Meetings which is scheduled to be held in Bujumbura,
Burundi.
4. The progress, and challenges for achieving the COMESA Monetary Cooperation
programme will be assessed by evaluating the implementation status of the following and
make recommendations for the way forward:
a) Convergence and harmonisation of macroeconomic policies and implementation of
COMESA Multilateral Macroeconomic Framework;
b) Implementation of the COMESA Financial System Development and Stability Plan;
c) Harmonisation of concepts, definitions of macroeconomic data; and
d) Developments in trade integration
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The main findings of the Study are as follows:
Lessons for COMESA Monetary Integration Agenda from the Experience of the European
Monetary Union
5. Experiences of existing and other prospective monetary unions suggest that the formation of
a sustainable monetary union can be long and complex, requiring adequate time for
preparation. It took the European Union over four decades to introduce the euro in 1999,
after encountering series of postponements and shifts in dates prior to the formation of the
EMU. The transition towards EMU was based on two principles: gradualism i.e. the
transition towards monetary union in Europe is seen as a gradual process, and convergence
criteria i.e. entry into the union is made conditional on satisfying specific convergence
criteria. The euro zone crisis has shown that monetary union was not an end in itself, and
that a sound and credible monetary union does not only imply monetary integration, but it
also require a combination of economic, financial, and fiscal integration with strong political
will.
6. Despite the complexity of forming monetary union as stated above, it is worthwhile to note
that, measures that are taken to enhance monetary integration such as macroeconomic
convergence and regional financial integration will serve a valuable role in the short and
medium term in complementing the other COMESA integration agenda through among
others the following channels:
a) Making the region zone of macroeconomic and financial stability
b) providing further powerful stimulus for domestic financial reforms;
c) increasing the scale of operation and competition in the financial system, thereby
increasing the system’s efficiency and productivity;
d) inducing foreign direct investment; and
e) enabling the national financial systems to grow into regional and ultimately global
players in the financial system
Assessment of member States’ Performance on the Convergence Scale and the

Implementation of the COMESA Multilateral Macroeconomic Surveillance Framework
7. The assessment of Member States’ performance on the convergence scale revealed that,
although member countries continued to record appreciable progress, the overall level of
convergence required for the establishment of a monetary union is still inadequate. In the
primary category, attainment of the fiscal deficit, inflation criteria, and external reserves in
months of imports remained the most challenging for member countries. Fiscal criterion was
missed by 14 out of 19 member countries in 2015. Inflation criterion was missed by 13
countries. Reserve requirement criterion was missed by 16 countries. Assessment on the
secondary criteria indicated that Member States’ performance was not satisfactory on
achieving stable exchange rates. Monetary policy stance varied depending on the individual
ix
circumstances in the member countries but generally remained focused on controlling
inflation. A number of member States responded to higher inflation and currency
depreciation by raising policy interest rates. Significant depreciation of currencies were
observed in a number of member countries, which was a continuation of a trend in 2014,
primarily owing to high public sector demand for foreign exchange to finance big public
investment projects, a strong dollar and high demand for foreign exchange from the local
corporate sector and other importing enterprises.
8. As per the requirements of the COMESA Multilateral Macroeconomic Surveillance

Framework, significant progress has been registered in fiscal transparency and
accountability. Most countries currently have Public Finance Management Act and Public
audit Act that guide the fiscal management to ensure transparency and accountability which
is in line with international best practices. There is also progress in, preparation of medium
term financial frameworks. Many countries have national fiscal rules. Those which do not
have written rules and laws rely on performance benchmarks agreed with IMF.
Improvements are visible in revenue administration, cash flow planning and procurement.
There are however, challenges among others in fiscal data quality and public finance
transparency of local governments, blurred line in some countries between general
government and the rest of the public sector and the accounting and reporting systems.
9. The following are the major challenges for the successful implementation of COMESA
Macroeconomic Convergence Criteria and Multilateral Macroeconomic Framework:
a) Some member countries are not fulfilling their obligation of reporting requisite
information requested by CMI.
b) Member states Development Plans do not reflect commitments related with
monetary integration and financial integration as per the requirement of COMESA
Treaty This can be mitigated by encouraging member countries to mainstream
COMESA integration agenda in their development plans.
c) Differences in concepts, methodology and statistical framework for compilation of
macroeconomic data among member countries. This can be mitigated by
encouraging member countries to adopt best international standards of compiling
macroeconomic data.
d) External and domestic shocks which complicate macroeconomic management in
member countries.
Assessment of Member Countries on Harmonisation of Statistics
10. On the harmonisation of statistics, most member States are making progress towards
implementing SNA 93. COMESA has operationalised a Consumer Price Index
harmonization Project (HCPI) with the support of African Development Bank. Furthermore,
member countries are quite advanced in the use of the Automated System for Customs
Data (ASYCUDA) and in the use of EUROTRACE for external trade statistics. The
compilation of monetary statistics in most member countries is in accordance with the IMF‘s
Monetary and Financial Statistics Manual. The periodicity and timeliness of the monetary
survey broadly follow the General Data Dissemination Standards (GDDS)
x
recommendations. The main areas where measurement problems still exist are with
inflation, the fiscal out turn and the determination of central bank financing of fiscal deficit, as
well as the derivation of reserves- months of import cover.
Assessment of Member Countries in the Implementation of the COMESA Financial

System Development and Stability Plan
11. The financial system in most member countries had undergone significant reforms, with
progress recorded in the banking and insurance. The COMESA Financial System
Development and Stability Sub-Committee continued to provide the platform for the
enhancement of financial stability. Most member countries have benefitted from a Joint
IMF/World Bank FSAP and draw up well sequenced financial sector reform programmes to
modernise the financial infrastructure.
12. The following are some of the achievements and challenges:
a) To modernise payment systems many member countries have introduced RTGS

electronic payment system. The use of mobile banking is also developing very fast in
many countries.
b) COMESA has a Regional Payment and Settlement System which is fully operational.
c) COMESA member countries have also seen an increase in the number and
operations of microfinance institutions (MFIs). Banks have also started to focus more
on broadening access to retail banking through introduction of mobile banking
operations. Some banks for example, Equity Bank in Kenya have their business
model on low-end customers. Many banks are also broadening their branch network.
This trend can help to increase credit to the private sector in several countries in the
region.
d) There is high degree of compliance by many member countries to the Core
principles of Bank Supervision and Regulation that are applicable to them. Some are
in partial compliance to the principles.
e) Most countries are implementing Basel I, although there are challenges.
f) Quoting and trading in the COMESA national currencies by deposit money banks is
highly limited in most countries except to some extent in member countries which are
also members of EAC.
g) Regulatory framework for insurance and pension schemes are less developed in
most member countries of the COMESA region.
h) While most countries require the use of International Financial Reporting Standards
(IFRS) for financial sector enterprises, they are deficient in application, in part
because of lack of sufficiently trained personnel and the absence of enforcement
mechanism.
i) COMESA regional financial institutions such as PTA Bank, PTA Reinsurance
Company and African Trade Insurance Company are making great contributions in
enhancing the COMESA Regional Integration Agenda.
13. The following are achievements towards assuring financial stability in the region:
a) Most member Central Banks established the financial stability unit;

b) Many member Central Banks, publish financial stability reports
xi
c) Some countries established Credit Reference Bureaus.
d) Many member Central Banks provide data to CMI on Financial Soundness
Indicators.
e) Some countries are undertaking systemic risk assessment using bank stability index,
financial stress index, heat map and cobweb. Some also are undertaking micro and
macro stress testing.
14. CMI has provided and is providing capacity building trainings to member countries on the
following:
a) Preparation of forward looking financial stability reports;
b) Macro prudential analysis
c) Systemic risk assessment;
d) Modelling and forecasting volatility in financial markets within a multivariate
framework
e) Models used for rating downgrades and banking sector systemic risk,
15. CMI developed Guidelines to undertake the following:

a) Macroprudential Analysis;
b) Forward looking Financial Stability Reports.
c) CMI is developing a guideline for Systemic Risk assessment.
Assessment of Member Countries in Trade Integration
16. COMESA formed Free Trade area in October 2000 in which 16 member countries out of 19
are currently participating. COMESA also launched a Customs Union in 2009.
17. The top priority for implementation of Customs Union by member states is to finalise
domestication of the COMESA Common Tariff Nomenclature/Common External Tariff
(CTN/CET) to HS 2012 version and migrate to COMESA Customs regulations (CMRs.)
18. The following are the achievements in the implementation of the COMESA Trade integration
agenda
a) On Free Trade area, 16 out of nineteen countries are members of the COMESA FTA.
b) Intra-COMESA exports excluding informal trade increased from 3 billion USD in 2006
to 8.0 billion in 2015.
c) On Customs Management regulation (CMR), eighteen (18) Member States aligned
their customs laws on average by 98.33 % to the CMR. The performance was as
follows: Burundi (100%), Comoros (100%), Djibouti (91%), DR Congo (98%), Egypt
(99%), Eritrea (96%), Ethiopia (100%), Kenya (100%), Madagascar (98%), Malawi
(100%), Mauritius (95%), Rwanda (100%), Seychelles (100), Sudan (95%),
Swaziland (99), Uganda (100%), Zambia (100%) and Zimbabwe (99%). On the
whole all the 18 Member States have aligned their CMR to over 90% while 9 have
achieved 100%.
xii
d) On Common Tariff Nomenclature (CTN), eighteen (18) Member States aligned their
tariff nomenclature to the COMESA CTN at an average of 69%. This is an
improvement from 2015 when 11 Member States had aligned their nomenclature by
62%.
e) On the Common external Tariff (CET), eighteen (18) Member States aligned their
tariff to CET by an average of 34%.
f) There is a great effort to resolve Non-Tariff barriers through various avenues which
included bilateral meetings held in the margins of the Regional NTBs as well Trade
and Customs Meetings.
g) COMESA is implementing the Standards and Quality Assurance (SQA) and Sanitary
and Phyto-Sanitary (SPS) programmes. The specific objective of interventions of the
SPS programmes is to enhance the SPS capacity of the public and private sector of
member States, in order to gain and maintain regional and international market access
for food and agricultural products, whilst also simplifying SPS and other technical
measures in order to reduce trade transaction costs and increase intra-regional trade.
The objective of the SQA programme is to eliminate technical barriers to trade (TBTs)
among the Member States and other regional and international trading blocks, and to
promote quality standards infrastructure in the member States.
h) COMESA Secretariat is implementing programmes to improve the transport and

communications systems of the region as well as improve information available to
businessmen wishing to trade both within the region and beyond. They include
Harmonised Road Transit Charges; COMESA Carrier’s License; Harmonised Axle
Loading and Maximum Vehicle Dimensions; the Regional Customs Transit Guarantee
Scheme ,the Yellow Card; and the COMESA Virtual Trade Facilitation System
(CVTFS)
i) The member states of COMESA, the EAC and SADC agreed in October 2008 to
negotiate a Tripartite Free Trade Area (TFTA) in Kampala, Uganda. The Heads of
State and Government of the Common Market for Eastern and Southern Africa
(COMESA), East African Community (EAC) and Southern African Development
Community (SADC) met on 10 June, 2015 in Sharm El Sheikh, Egypt at the Third
Tripartite Summit to officially launch the COMESA-EAC-SADC Tripartite Free Trade
Area (TFTA). The Tripartite Summit had given Member/Partner States 12 months from
the launch of the TFTA in June 2015 to conclude outstanding negotiations issues on
rules of origin, trade remedies and tariff offers. However, due to a number of
challenges faced in the process, the deadline of June 2016 was not met, and the
commencement of Phase II negotiations – covering trade in services and other trade
related matters – has been delayed pending the conclusion of negotiations on Phase I
issues. The TFTA Agreement has been signed by 18 out of 26 member countries,
namely Angola, Burundi, Comoros, Democratic Republic of Congo (DRC), Djibouti,
Egypt, Kenya, Malawi, Namibia, Rwanda, Seychelles, Sudan, Tanzania, Uganda,
Swaziland, Zambia and Zimbabwe. The State of Libya signed the Agreement on 19
October 2016. The Agreement requires 14 ratifications to enter into force. So far, no
xiii
country has ratified it. The harmonization and coordinating of regional programmes in
the three RECs- COMESA, EAC and SADC - will play a pivotal role in not only
boosting intra-African trade but also in rationalizing use of resources and cooperation
among the RECs. The TFTA stands as part of a much more ambitious agenda to
establish a continental FTA (or CFTA) covering the whole of Africa.
Summary of Key Challenges for Achieving COMESA Monetary Union in 2018
19. From the review of the progress presented above, it can be observed that, Although
COMESA member countries continued to register some progress towards macroeconomic
stability, financial integration, harmonisation of macroeconomic data and trade integration
the following are summary of key challenges which need to be addressed in order to
enhance both monetary and real integration for the ultimate achievement of the COMESA
Monetary Union:
a) Achievement of the convergence criteria on a sustainable basis continued to pose a

serious challenge for most countries. The fiscal deficit and inflation criteria remained
the most challenging. Besides, most Member States did not factor the COMESA
criteria into their budget statements and economic policies.
b) Fiscal and monetary policy coordination- In some Member States, policy
coordination remained weak. Without effective policy coordination, financial
instability could ensue, leading to high interest rates, exchange rate pressures, and
rapid inflation. Furthermore, weak policy coordination could be challenging for fiscal
sustainability.
c) The COMESA Macroeconomic Multilateral Surveillance Framework is not yet fully
implemented.
d) The level of intra-COMESA trade remained low, partly on account of poor transport
network, unstable power and water supply, as well as the existence of some non-
tariff barriers.
e) Quoting and trading in the COMESA national currencies by deposit money banks
remained limited, partly due to the absence of stable exchange rates and the lack of
a mechanism for clearing and settling of accumulated long positions of banks.
f) Although the financial sector remained stable and sound in many member
countries, the financial markets are characterized by among others, low savings
rates, underdeveloped bond markets, limited investor base; lack of modernised
payment system in some countries; lack of cross-border supervision of financial
markets etc..
g) COMESA economies are prone to relatively large and asymmetric shocks, including
terms of trade and exchange rate shocks, with implications for the real economy.
The existence of asymmetric shock would pose a challenge for the effective
implementation of monetary policy in the zone.
h) Some countries were heavily dependent on unpredictable aid inflows to finance a
substantial portion of government expenditure. Reliance on such aid inflows for
budgetary support constrains the attainment of the fiscal deficit to GDP (excluding
grants) criterion on a sustainable basis.
xiv
i) In order to facilitate better assessment of the integration process and for purposes
of comparison of convergence indicators across member countries, reliable, timely
and harmonised statistical information is required. This can be mitigated by
macroeconomic data.
j) Lack of sufficiently trained man power to implement internationally accepted
standards.
k) Absence of strong political commitment and stakeholders’ buy in.
Conclusions and Recommendations for the Way Forward
20. Based on the assessments which are made in the preceding sections, the launch of the
monetary union by COMESA Member Countries by January 2018 is highly unlikely. The
study therefore, recommends the following:
a) The postponement of the launch date of the COMESA monetary union to 2030 four
years before the new date agreed by the Association of African Central Banks
(AACB) for the establishment of the African Monetary Union with a common Central
Bank in 2034.
b) The COMESA Committee of Governors of Central Banks to approve the proposed
five year work plan for enhancing monetary integration in COMESA that is contained
in tables 12 and 13 in chapter 7 of this study.
xv
INTRODUCTION
Evolution of COMESA Monetary Cooperation Programme

21. 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,
cooperate in monetary and financial matters and gradually establish convertibility of their
currencies and a payment union as a basis for the eventual establishment of a monetary
union. This mandate is further reinforced in Article 76-78 which respectively deal with the
COMESA Monetary and Fiscal Policy Harmonisation, the establishment of currency
convertibility, and the formation of an exchange rate union. The primary objective of this
programme is to create a common area of monetary and financial system stability which
will facilitate integration of financial markets in particular and economic integration in
general. The establishment of the COMESA Monetary Union was initially planned to be
achieved in 2025. This date was later changed to 2018 in order to precede the plan of
the Association of African Central Banks to establish the Africa Monetary Union in 2021.
countries to fulfil a set of 13 convergence criteria, categorized as either “primary Criteria”
or “secondary criteria” in three stages by 2018 (See annex No.1 for COMESA
Macroeconomic Convergence Criteria). However, among these criteria greater emphasis
is placed on fiscal convergence. Of the four primary criteria, three (including inflation)
relate to fiscal performance. Two of the nine secondary criteria also are fiscal criteria,
with the rest relating to financial sector and growth and investment. In addition to
convergence criteria the programme also envisages development of Regional Payment
and Settlement System for cross-border transactions, statistical harmonisation and
financial sector integration. In addition, the COMESA Council of Ministers in 2011
adopted the COMESA Macroeconomic Surveillance Framework. The objective of the
Framework is to enhance fiscal convergence which is key for fulfilling all macroeconomic
convergence criteria. The justification for enhancing fiscal convergence is that they to
ensure the viability and sustainability of a monetary integration which will culminate in
monetary union by ensuring that a member country does not out-pace other members in
terms of larger budget deficit and inflation rates, and thus protect member countries from
being exposed to contagion effects of macroeconomic instability in one or more member
countries.
23. This paper is prepared based on the recommendation which was made by the 14 th
Meeting of the Monetary and Exchange Rates Policies Sub-Committee which was held
from 31st August to 1st September 2016 in Nairobi Kenya and approved by the Bureau of
the COMESA Committee of Governors of Central Banks. The Bureau requested CMI to
undertake a study on the evaluation of the progress that have been made so far, the
lessons learnt from European Monetary Union and the challenges that have been
encountered, in the implementation of the COMESA Monetary Cooperation Programme.
The Sub-Committee also recommended that the study should be reviewed by COMESA
Committee of Central Bank Governors in a symposium which should be organised by
1|Page
CMI on the side-lines of the Monetary Cooperation Meetings which is scheduled to be
held in Bujumbura, Burundi.
24. The progress, and challenges for achieving the COMESA Monetary Cooperation
programme will be assessed by evaluating the implementation status of the following
and make recommendations for the way forward:
(i) Convergence and harmonisation of macroeconomic policies and implementation of
COMESA Multilateral Macroeconomic Framework;
(ii) Implementation of the COMESA Financial System Development and Stability Plan;
(iii) Harmonisation of concepts, definitions of macroeconomic data; and
(iv) Developments in trade integration
25. This report is structured as follows: Chapter 1 reviews experiences of other monetary
unions, Chapter 2 provides an assessment towards macroeconomic convergence and
implementation of COMESA Multilateral Macroeconomic Framework in the Member
States, Chapter 3 discusses issues on harmonisation of macroeconomic data, Chapter 4
provides an assessment of member countries achievement of the requirements of the
COMESA financial system development and stability plan(CFSDS), Chapter 5
articulates the progress made in trade integration in COMESA region, Chapter 6
presents the summary and key challenges for COMESA Monetary Integration
Programme and Chapter 7 provides the conclusion and Recommendations for the way
forward.
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CHAPTER 1
EXPERIENCE OF OTHER MONETARY UNIONS
1.1 The European Monetary Union (EMU)

26. The first step for the creation of European Monetary Union started in 1957 and was
culminated in the issuance of Euro notes and Coins in January 2002. The following are
the chronology of events that happened before the establishment of the European
Monetary Union:
(i) 1957
Everything began with the Treaty of Rome signed in 1957, which set the objective for
Europe of creating a "common market" to increase economic prosperity and contribute
towards "an ever closer union among the peoples of Europe". However, the Treaty did
not mention economic and monetary union and the single currency.
(ii) 1970
It is not until the Werner Report (end of 1970) that the European Community considered
a monetary union. The monetary turbulence of those days and the end of the Bretton
Woods agreements prevent the project from being carried out.
(iii) 1985
The European Community adopted the project of a single European market.
It soon becomes apparent that this will be supplemented by a single currency.
(iv) 1989
The Delors Report on Economic and Monetary Union proposed a three-stage plan
culminating in the creation of a single currency and a European Central Bank. The
Delors Report formed the blue print for the Maastricht Treaty and laid out a timetable
along three phases towards a credible EMU (see Table 1).
Table 1: European Monetary Union Timetable
Phase 1 Phase 2 Phase 3
Complete freedom for Establishment of European Irrevocable fixing of conversion
capital account transaction Monetary Institute rates
Increased cooperation Ban on granting central bank Introduction of Euro in 11 EU
between member States credit to the public member states
Free use of ECU Increased coordination of Foundation of the Euro System
monetary policy and transfer of responsibility for
the single monetary policy to the
ECB
Improvement of economic Strengthening of economic Entry into effect of the intra-EU
convergence convergence Exchange Rate
Mechanism(ERMII)
Start of preparatory work National Central Banks Entry into force of the Stability
for stage three become fully independent and Growth Pact.
with price stability as their
primary objective
Start of preparatory work for
stage three
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(v) 1992
The Maastricht Treaty transforms the European Community into a full Economic and
Monetary Union. The participants adopt a range of macroeconomic criteria (The
Mastriche Criteria) which must be respected in order to qualify for membership of the
Monetary Union.
(vi) 1995
The formal undertakings were given by the 15 Member States in favour of a single
currency. This was accompanied by a timetable that was adopted at the Madrid
European Summit on the basis of the Green Paper drawn up by the European
Commission on the practical arrangements for the transition.
(vii) 1997
The Stability and Growth Pact was adopted by all the member countries at
the Amsterdam European Council. For the countries joining the euro, it lays down
certain common constraints relating to public finance, mainly a 3% ceiling on the budget
deficit, and provides for financial sanctions. These constraints are necessary in an
asymmetrical system in which the countries of the euro area have a single monetary
policy while retaining their national fiscal policy.
(viii) 1999
Stage 3 of Economic and Monetary Union begins on 1 January 1999. The exchange
rates of the participating currencies were irrevocably fixed. The countries of the euro
area were required to implement a single monetary policy. The euro was introduced as
legal tender. Until 2001 the euro existed only in the form of cashless payments
(cheques, transfers, bank cards). Payments to tax and social security authorities can be
made in francs or in euros: there was no prohibition and no compulsion regarding the
use of the single currency.
(ix) 2002
On 1 January 2002 the euro notes and coins were introduced. In order to ensure
efficient implementation, an institutional framework with a comprehensive system of
coordination was developed. These include the Lisbon Treaty, the Stability and Growth
Pact, and the Economic and Financial (ECOFIN) Council’s Regulations
27. The EU Lisbon Treaty forms the primary regional law for enforcing multilateral fiscal
surveillance over the Euro Zone. It is based on six building blocks:
a) Excessive Deficit Procedure;

b) Protocol on the Excessive Deficit Procedure (EDP) with the reference value of 3% of
GDP for government deficit and 60% for gross debt;
c) The relevant provisions underpinning aggregated fiscal discipline;
d) Coordination of economic policies;
e) No monetary financing of government by ECB or national central banks;
f) No privileged access of government to financial institutions.
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28. The EU Stability and Growth Pact (SGP) was designed as a secondary law to
operationalize the primary regional law, According to the SGP, stability programmes
need to be submitted annually by Euro area member states, outlining macroeconomic
projections and fiscal policy plans for the next three years. The SGP also stipulates the
Medium Term Objective (MTO) for EU member countries which requires that member
countries achieve| close to balance or “surplus” in their respective budgets.
29. Article 99 of the Lisbon Treaty also stipulates the issuance of annual Broad Economic
Policy Guidelines (BEPGS) as the overarching policy framework for member countries.
The BEPGS are the heart of the coordination process of which SGP only one
component. The BEPGs are politically but not legally binding; no sanction mechanisms
are foreseen, compliance is voluntary and based on peer pressure. At the outset,
BEPGS were very general in scope, but recommendations became more concrete and
specific over time and country specific recommendations gradually gained in importance,
until broadly providing a mirror image of community-wide guidelines. BEPGs also set
parameters for fiscal policy and some member states have some internal rules as well.
In particular, the effectiveness of the BEPGS as a tool for multilateral surveillance was
improved in 2000, with the introduction of an annual implementation report that provides
ex post surveillance by assessing the extent to which Member States have followed the
recommendations set by the BEPGS.
30. Towards the end of 2011 euro found itself in a deep crisis. See in box No 1 the root
causes of euro’s problem and the series of measures which were undertaken to mitigate
the problems.
Box No.1: Euro Crisis
Towards the end of 2011 the European Currency union found itself in a deep crisis. The root
cause of the problems is that the zone covers a group of desperate economies and simply does
not meet the conditions of an Optimum Currency Area. The EU countries that initially formed or
later joined the European Union had to meet important convergence criteria with respect to
inflation, interest rates, budget deficits, national debt and exchange rates and were
subsequently subject to a uniform monetary policy under a regime of short term rate set by the
ECB and a single market determined exchange rate. However, Eurozone participation brought
together countries with substantial differences in competitiveness which did not converge. The
operational rules of the Eurozone provided for macroeconomic convergence but not for
economic convergence. The end result has been a divergence between member states with
stable and competitive economies experiencing current account surpluses and fiscal discipline,
exemplified by Germany, and economies that were not competitive, with large government and
current account deficits, exemplified by Greece. Deficits and the replacement of maturing bonds
have to be funded in the capital market by issuing euro-denominated government bonds. While
all euro states are subject to the same ECB rate, essentially short-term rate, interest rates in the
capital market are determined by market forces, which meant that the disparities between
member states came to be reflected in growing divergences in sovereign debt rates. The
interest rate that investors came to expect on the bonds of the weaker economies grew to levels
that far exceeded those on the bonds of the stronger economies. It was not unusual for the
spread between the rates of German and Greek bonds (the premium on Greek bonds) to
exceed more than 20 percentage points. Since new bond issues can only be placed in the
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capital market at current market rates, the high interest rates demanded of the weaker euro
economies result in an unsustainable fiscal liability. Interest on public debt must be paid from
tax revenue which means that high and increasing interest rates represent a severe fiscal strain
in economies that are expected to lower their fiscal deficits. Since the fiscal strain cannot be
absorbed, external assistance from various sources such as the International Monetary Fund
(IMF) and European stabilisation Fund is required to support the deficit economies. The euro’s
exposure to the views that exist and to positions taken in capital markets has also served to
illustrate the powerful force of danger of contagion. Since prices in the capital market are
determined by the forces of supply and demand, a weakening in demand can be driven by
market perceptions of the likelihood of future capital losses should interest rate increase. Market
fears are contagious and are reflected in lower prices paid for government bonds of countries
expected to face difficult times. In the euro zone, Ireland and Greece were given external bail-
out assistance but when Italy came into the firing line of negative expectations through
contagion a precarious situation developed. The rate on Italian debt at one stage increased to
above seven percent in capital markets, which is generally regarded as an unsustainable fiscal
burden. Compared to Ireland and Greece, Italy is a large European economy with financial
needs and stock of debt that cannot be accommodated through external assistance and
intervention. Furthermore, the size of the economy and its debt would leave European banks,
which hold government bonds as a large part of bank capital, with huge losses on their balance
sheets should there be a debt default or if banks are forced to accept so called “haircuts”
(cutting the value of bonds) on their bond holdings. The banking system in Europe and further
afield would be severely exposed to possible failure, which would create extreme strains in the
economies of Europe and in the wider world economy.
The only short-term solution to this problem of lack of confidence is for the ECB to intervene as
lender of last resort for European banks by accepting the lower quality bonds as collateral for
loans to the banks to provide liquidity in the banking system. This necessitated the introduction
of structural reforms that would build fiscal discipline into the system by adding elements of
fiscal union to the monetary union. This will impose fiscal discipline on Eurozone member states
with scrutiny over Eurozone national budgets and the provision of sanctions if countries do not
comply. EU members however, did not agree on full fiscal union. They however, agreed on
three elements for Eurozone management. The first is a “fiscal compact” providing for the
enforcement of the principle of balanced budgets and annual “structural” deficits of no more
than 0.5% of GDP and automatic fines for Eurozone countries that breach a three percent deficit
limit. The second is to enhance the scope of intervention (strengthening the so called fire wall
protecting the euro) to stabilise the euro through an enlarged European Financial Stability
Facility (EFSF) and the new European Stability Mechanism (ESM) that will be replacing the
EFSF in 2013, as well as an extra euro 200 billion to be lent by Euro zone and other EU states
to the IMF to increase the fund’s ability to assist euro countries in need of such support. Third,
the ESM will not require the involvement of private bond holders in any future rescue
operations.
Source: McCarthy Monetary Union: The Experience of the Euro and the Lessons to be learned
for the African (SADC) Monetary Union
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1.2 The West African Economic and Monetary Union (WAEMU) and Central African
Economic and Monetary Union (CEMAC)
31. The WAEMU and CEMAC share a similar history. Both the unions were established by
Treaties, and replaced the former monetary unions (WAMU and CAMU) in the aftermath
of the economic crisis (resulting in the devaluation of their currencies in early 1990s),
experienced by their predecessors with their respective common currency and common
central bank. Realising that the macroeconomic imbalances within the region that led to
the devaluation were caused mainly by the increasingly large fiscal imbalances and
public debt and accumulation of domestic and external arrears, the two arrangements
include as their central feature, the aim of achieving sustainable fiscal balance and
convergence among member countries through a mechanism of multilateral surveillance
based on quantitative performance criteria. In both the unions, convergence criteria
include various primary criteria and secondary criteria.
32. The WAEMU Treaty also requires harmonisation of budget legislation and procedures in
order to ensure their synchronisation with multilateral surveillance procedures.
Accordingly, a number of directives were issued which have the following three
objectives;
(i) Harmonise the rules for the entire budget process in all member countries;
(ii) Promote effective and transparent PFM in all member countries and
(iii) Enable comparability of public finance data of member countries for effective
multilateral surveillance and national budgetary process.
33. Both monetary unions have also set up a regional surveillance mechanism to monitor
and enforce progress towards satisfying the performance criteria. The WAEMU
Solidarity Pact requires member countries during the transition period from the dates of
entry into force of the Pact (2002) to prepare convergence programmes with annual
objectives of ensuring compliance with the convergence criteria. Semi-annual reports on
the implementation of policies are prepared and reviewed by the Council of Ministers,
which is charged with monitoring progress towards convergence. A member country not
satisfying one or more of the primary criteria is so notified by the Council of Ministers
and is required to prepare in cooperation with the WAEMU Commission a programme of
corrective measures. In 2004, CEMAC also adopted a regional surveillance framework,
which is conducted by the CEMAC Commission to prevent occurrences of fiscal deficits.
Despite the above mentioned fiscal convergence mechanism, both the unions are
finding it difficult to achieve fiscal stability. Many member countries did not also
transpose the directives into national laws, or if they did they did not implement them
fully.
1.3 The West African Monetary Zone (WAMZ)

34. Six member countries in West Africa namely, Gambia, Ghana, Guinea, Nigeria, Sierra
Leone and Liberia, formally agreed in December 2000, on the launching of the Zone with
the objective of establishing common central bank and introducing single currency. Like
COMESA and other RECS in Africa, the establishment of WAMZ was to be implemented
in stages, beginning with the harmonisation of macroeconomic policies through
compliance with certain convergence criteria, the operationalization of the exchange rate
mechanism, culminating in the introduction of o the single currency.
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35. The launch of the union, however, has been postponed several times. WAMI conducts
macroeconomic surveillance and prepare macroeconomic development and
convergence reports on each country, semi-annually and annually. These reports focus
on the macroeconomic policy thrust, overview of macroeconomic developments, and
status of convergence of each member state and policy recommendations in all sectors
of the economy.
36. The surveillance system in WAMZ is operated by the following organs:
(i) Convergence council, comprising the Ministers of Finance, Foreign Affairs, Trade/
Commerce, and Governors of central Banks
(ii) Committee of Governors of Central Banks
(iii) Technical Committee, comprising Directors of research of central banks and
representatives of the Ministry of finance that reviews reports and make proposals
for consideration of the Committee of Governors and the Convergence Council.
(iv) WAMI, which serves as secretariat to WAMZ organs.
37. In discharging its surveillance functions, the Convergence Council provides both peer
pressure (to correct the aberrations if persisting) and peer support by providing
assistance and sharing relevant experience and practices from within the Zone and
internationally. At the national levels, there are National and Zonal Committees to deal
with WAMZ programmes and obligations. These are the national Sensitisation
Committee, the national Payments System Development Committee, and the Zonal
Payment System Development Committee.
1.4 Lessons for COMESA
38. Experiences of existing monetary unions suggest that the formation of a sustainable
monetary union can be long and complex, requiring adequate time for preparation. It
took the European Union over four decades to introduce the euro in 1999, after
encountering series of postponements and shifts in dates prior to the formation of the
EMU. The transition towards EMU was based on two principles: gradualism i.e. the
transition towards monetary union in Europe is seen as a gradual process, and
convergence criteria i.e. entry into the union is made conditional on satisfying specific
convergence criteria. The euro zone crisis has shown that monetary union was not an
end in itself, and that a sound and credible monetary union does not only imply monetary
integration, but it also require a combination of economic, financial, and fiscal integration
with strong political will. (See box 2 below for lessons from the experience of European
economic Union).
Box No. 2: Lessons and Challenges from the European Economic and Monetary Union
(EMU)
The following lessons were drawn from the Euro Zone crises:
a) It is difficult to sustain a monetary union of member states without a fiscal union, which
would ensure proper coordination and harmonization of fiscal and monetary policies, and a
high degree of political integration.
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b) Where financial markets are integrated, even small economies can cause instability in the
monetary union.
c) A macroeconomic policy framework is essential to identify structural bottlenecks that
would lead to deviations from attaining macroeconomic convergence. The impact of
institutional environment (e.g. governance and business climate) is also important to
macroeconomic convergence.
d) There is need for a banking union, with common licensing, supervisory and regulatory
framework, across all member countries. Existing regulators will therefore have to
delegate some of their regulatory powers to a supra-national institution.
e) It is essential for member states to properly design Stability and Growth Pact by setting
rules which include:
(i) Introduction of limits for public debt in their constitutions

(ii) Designing economic measures for structural reforms to reduce excessive deficits and
domestic debt.
(iii) Strengthening the enforcement of sanctions including automatic application of the rule.
(iv) Strict conditionalities for access to any Financial Stability Facility and Stabilization
Mechanism.
f) Strict auditing of national economic statistics used to assess with compliance with
macroeconomic convergence, entry and membership criteria is necessary, in order to
prevent fraud and manipulation.
g) There is a need to have a crisis management mechanism and an exit strategy for members
who fail to adhere to the membership criteria, or who wish to leave the monetary union.
Source: AUC/UNECA, Joint AUC-AACB Strategy on the Establishment of the African Central
Bank” Paper presented to the Joint Annual Conference of the African Ministers of Finance,
Planning and economic Development” 31st March-2nd April 2016, Addis Ababa, Ethiopia. P.15
39. Despite the complexity of forming a monetary union as stated above, it is worthwhile to
note that measures taken to enhance monetary integration such as macroeconomic
convergence and regional financial integration will serve a valuable role in short and
medium term in complementing the other COMESA integration agenda through among
others the following channels:
(i) Making the region zone of macroeconomic and financial stability
(ii) providing further powerful stimulus for domestic financial reforms;
(iii) increasing the scale of operation and competition in the financial system, thereby
increasing the system’s efficiency and productivity;
(iv) inducing foreign direct investment; and
(v) enabling the national financial systems to grow into regional and ultimately global
players in the financial system
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CHAPTER 2
ASSESSMENT TOWARDS MACROECONOMIC CONVERGENCE AND IMPLEMENTATION

OF COMESA MULTILATERAL MACROECONOMIC FRAMEWORK
40. This chapter analyses COMESA member countries achievements as related to

macroeconomic convergence and the implementation of the COMESA Multilateral
Macroeconomic Framework. The chapter also discusses key challenges which hinder
implementation.
2.1 Progress on Achievements of Macroeconomic Convergence Criteria
countries to fulfil a set of 13 convergence criteria, categorized as either “primary Criteria”
or “secondary criteria” in three stages, the final stage is expected to be achieved in
2018. This chapter, review the progress made in achieving each criteria under both
categories.
2.1.1 Primary Criteria
Overall Fiscal Balance Excluding Grants
42. The convergence criteria for fiscal balance excluding grants to GDP ratio from 2011-
2015 is not to exceed 4%. The region’s average fiscal deficit excluding grants as a
percentage of GDP widened slightly from -5.1% in 2014 to -5.4% in 2015, against a back
drop of intense pressure to boost growth and reduce poverty by increasing infrastructure
investment and other pro-poor spending.
43. The performance of member states as regards to fiscal deficit excluding grants in 2015
was mixed. The convergence criteria dictate overall fiscal balance (excluding grants)
should not exceed 4%between 2011 up to 2015. As observed in table 2 below, this
criterion is far from being fulfilled by a vast majority of member countries. The average
annual deficit from 2012 to 2015 for COMESA as a whole was -4.9%. Only 5 countries,
namely, Egypt, Congo DR., Sudan, Seychelles and Zimbabwe, out of 19 met
convergence criteria in 2015.
44. This is despite the fact that, fiscal authorities in member countries took measures aimed
at improved fiscal balances including fiscal consolidation, innovative resource
mobilization and emergence of new sources of revenue, curbing corruption and
inefficiencies, the deterioration of fiscal deficits was driven mainly by infrastructure
investment, weak public spending controls and in some countries deteriorating relations
with foreign donors.
45. Given the uncertainty about future revenues including official development assistance
(ODA) flows, governments are taking measures to broaden the tax base and improve tax
administration. Broadening the tax base by reducing tax preferences and exemptions
and improving tax administration is generally preferable to increasing statutory tax rates.
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An effective tax administration requires a highly qualified and well equipped staff that
can work without political interference. The task of tax collectors is eased if the tax
burden is relatively low, if the number of taxes is relatively small and if taxation law is
clear, relatively simple and gives tax collectors minimal discretionary power to determine
tax liability. Reducing corruption and improving the quality of public spending, such that
people perceive taxes as essential for financing public goods and services also
facilitates tax collection (AfDB, OECD, UNDP, African Economic Outlook 2016).
Table 2: Overall Fiscal Balance Excluding Grants (Percent of GDP)
Country 2012 2013 2014 2015
Burundi -21.9 -19.4 -17.6 -19.6

Comoros -6.0 -9.7 -9.9 -10.2
Congo, Dem. Rep. -1.1 -0.6 -0.1 -0.6
Djibouti -2.7 -10.3 -16.8 -24.5
Egypt, Arab Rep. -10.5 -14.0 -16.7 12.5
Eritrea -16.5 -15.6 -14.8 -14.6
Ethiopia -2.9 -3.4 -3.7 -3.6
Kenya -5.5 -6.2 -8.0 -8.8
Libya 27.8 -4.0 -43.5 -
Madagascar -3.8 -5.3 -4.6 -3.8
Malawi -10.6 -13.1 -8.0 -9.8
Mauritius -2.5 -3.9 -3.3 -4.1
Rwanda -10.9 -11.2 -11.0 -11.4
Seychelles -1.9 -4.0 -0.5 1.2
Sudan -4.1 -1.9 -0.9 -1.2
Swaziland 3.3 0.3 -2.8 -6.8
Uganda -4.9 -5.1 -4.6 -8.0
Zambia -4.5 -7.7 -6.7 -8.3
Zimbabwe -0.5 -1.9 -1.5 -1.2
COMESA -4.2 -4.9 -5.1 -5.4
Source: IMF REO Sub Saharan Africa April 2016; IMF REO Middle East and Central Asia, April 2016.
Figure 1: Overall Fiscal Balance excluding grants (percent of GDP)
0
2012 2013 2014 2015
-1
-2
-3
-4
-4.2
-5
-4.9 -5.1
-6 -5.4
11 | P a g e
Inflation Rate
46. The convergence criteria are for annual average inflation not to exceed 3%. Region wide
average annual inflation rate increased marginally from 6.0% in 2014 to 6.8% in 2015.
The average for the period from 2012 to 2015 is 7.7%. Six countries out of 19 met the
convergence criteria in 2015. Lower global oil prices and the continuing fall in food prices
contributed for single digit inflation in most member countries. However, currency
depreciations in the wake of lower commodity prices increased the risk of imported
inflation. Some countries experienced increase in annual inflation rate due to exchange
rate depreciation in some cases disruptions in the supply chain. The inflation was at a
single digit level in most member countries, thanks to prudent monetary policies and
recent good harvest in a number of countries.
Table 3: Consumer prices (Annual Average; Percent Change)

Country 2012 2013 2014 2015
Burundi 18.2 7.9 4.4 5.6

Comoros 5.9 1.6 1.3 2.0
Congo, Dem. Rep. 2.1 0.8 1.0 1.0
Djibouti 3.6 2.4 2.9 2.7
Egypt, Arab Rep. 3.3 9.5 10.1 10.4
Eritrea 6.0 6.5 10.0 9.0
Ethiopia 24.1 8.1 7.4 10.1
Kenya 9.4 5.7 6.9 6.6
Libya - 2.6 2.8 8.0
Madagascar 5.7 5.8 6.1 7.4
Malawi 21.3 28.3 23.8 21.9
Mauritius 3.9 3.5 3.2 1.3
Rwanda 6.3 4.2 1.8 2.5
Seychelles 7.1 4.3 1.4 4.0
Sudan 11.8 36.5 36.9 16.9
Swaziland 8.9 5.6 5.7 5.0
Uganda 14.0 4.8 4.6 5.5
Zambia 6.6 7.0 7.8 10.1
Zimbabwe 3.7 1.6 -0.2 -2.4
COMESA 11.6 6.2 6.0 6.8
Source: IMF REO Sub Saharan Africa April 2016; IMF REO Update Middle East and Central Asia April 2016.
Figure 2: Consumer Prices
12.0
11.6
11.0
10.0
9.0
8.0
7.0 6.8
6.0 6.2 6.0
5.0
4.0
2012 2013 2014 2015
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Reserve Accumulation
47. The convergence Criteria is to achieve net external reserves position of equal to or more
than 5 months of imports of goods and services. In 2015, external reserves levels
continue to remain relatively low in most member countries at an average level of three
months of imports of goods and services. 3 member countries namely Comoros,
Mauritius, and Seychelles, out of 19 met the criteria in 2015. Adequate reserves help
countries better manage their economies and respond to external shocks. Member
countries whose exchange rates came under pressure responded by depleting their
usable international reserves in order to defend the exchange rate.
Table 4: Reserves (Months of Imports of Goods and Services)

Country 2012 2013 2014 2015
Burundi 3.5 3.5 3.9 2.1

Comoros 6.7 5.8 6.8 6.6
Congo, Dem. Rep. 1.6 1.4 1.3 1.0
Djibouti 2.6 4.8 4.3 2.9
Egypt, Arab Rep. 6.5 2.5 3.3 3.9
Eritrea 4.1 4.0 4.7 3.5
Ethiopia 2.0 1.8 1.5 1.9
Kenya 3.7 3.8 4.8 4.5
Libya − − − -
Madagascar 3.1 2.3 2.7 2.9
Malawi 1.1 2.0 3.0 2.4
Mauritius 5.0 5.3 6.3 7.7
Rwanda 5.6 5.1 4.3 3.6
Seychelles 2.8 3.6 4.3 5.1
Sudan - 1.9 1.7 1.2
Swaziland 3.3 3.9 3.7 3.7
Uganda 4.5 4.8 4.9 4.6
Zambia 3.3 3.1 4.2 4.5
Zimbabwe 0.6 0.5 0.5 0.5
COMESA 3.0 3.0 3.3 3.1
Figure 3: Reserves (Months of Imports)
3.4
3.3
3.3
3.2
3.1
3.1
3.0 3.0
3.0
2.9
2.8
2.7
2012 2013 2014 2015
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2.1.2 Secondary Criteria
Growth in Real GDP

48. The Convergence criteria are the achievement of sustainable real growth rate of real
GDP of not less than 7.0%. COMESA region’s average growth weakened slightly in
2015 to 6.0% (down from 6.5% in 2014). This is lower that the prescribed convergence
criteria of growth not less than 7.0%. The main reasons for the slowdown in growth in
2015 were weaker global demand and lower international commodity prices, which
adversely affected particularly the region’s resource rich countries. Despite its slowdown,
the region remained the fastest growing economy in the world. Several countries in
COMESA (Congo DR, Djibouti, Ethiopia, Kenya, Rwanda and Uganda) were among the
fastest growing countries in the world with growth between 5% and 10.0%.
49. China’s weaker growth and its transition from investment and exports of industrial goods,
towards consumption and services is an important factor in the recent drop in commodity
prices, which suggest that the “commodity super cycle” of the past decade has come to
an end. While lower commodity prices are providing significant headwinds to the region’s
commodity exporters, the rebalancing of China’s economy towards more consumption
may benefit the region’s economy in the coming years. The region is best placed to
export consumer goods to china, including agricultural products. This will benefit most
from China’s switch to more consumption based growth. China’s rising wages may also
erode its competitiveness in low-end manufactures and could further increase FDI
inflows to the region (AfDB, OECD,UNDP, UNECA, ACP and African Economic Outlook
2016).
50. In 2015, on the demand side, private consumption continued to support growth, helped
by lower oil and food prices and growing remittances. Construction investment, both
public and private also remained an important driver of growth. In contrast, exports
remained mostly sluggish and often declined due to weak global demand. Thus, the
region’s growth was again supported by domestic factors, which helped to cope with
headwinds from the global economy. Given the region’s vulnerability to external shocks,
promotion of regional trade and integration has assumed even greater importance
(AfDB, OECD, UNDP and African Economic Outlook 2016).
51. The recent commodity bust highlighted the vulnerability of economies that depend on a
few commodities with many governments in resource rich countries for example,
Zambia, now increasing their efforts to diversify. The low price levels for commodities
had adverse effects on investments and exploration, thus reducing growth potential in
resource rich countries.
52. On the supply side many countries in the region have further improved conditions for
doing business. Among the 51 African countries evaluated in the Doing Business (World
Bank Report), conditions for doing business improved in Kenya, Uganda, Rwanda,
Seychelles and Mauritius (AfDB, OECD, UNDP, African Economic Outlook 2016).
53. In 2015, agriculture supported growth in countries where weather conditions remained
favorable and investment had increased productivity. However, several countries
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experienced a headwind on growth (notably Ethiopia, Malawi, Zambia and Zimbabwe)
due to droughts.
54. Manufacturing activity improved in some countries (Kenya, Ethiopia Egypt, Mauritius and
Rwanda) but was often constrained by weak export demand and/or power shortages.
New investment is expected to boost manufacturing in the coming years in several
countries in the region. The construction sector continued to boost growth in many
countries, often driven by public infrastructure programmes and private investments
including housing. The services remained an important driver of growth in the region.
Both traditional services such as transport, trade, real estate, public and financial
services and new information and telecommunication technologies remain important
drivers for productivity and growth.
55. Tourism is also an important and growing service sector in the region. In several
countries (Ethiopia, Madagascar, Mauritius, Rwanda, Seychelles and Zimbabwe)
tourism boosted growth in 2015.
56. The region’s fastest growing countries achieved growth performance with quite different
sectoral patterns. It is worthwhile to note that productivity is not only raised by factor
reallocation between sectors, but also through modernization and reallocation within
sectors, as well as via better linkages between sectors. Particular, higher productivity in
agriculture can boost food processing and leather manufacturing to the benefit of both
sectors (McMillan and Harttgen, 2015)
Table 5: Real GDP Growth (Annual change; percent)

Country 2012 2013 2014 2015
Burundi 4.4 4.5 4.7 -4.1
Comoros 3.0 3.5 2.0 1.0
Congo, Dem. Rep. 7.1 8.5 9.2 7.7
Djibouti 3.7 5.0 6.0 6.5
Egypt, Arab Rep. 4.5 2.1 2.2 4.2
Eritrea 7.0 3.1 5.0 4.8
Ethiopia 8.7 9.9 10.3 10.2
Kenya 4.6 5.7 5.3 5.6
Libya 7.1 -13.6 -24.0 -6.4
Madagascar 3.0 2.3 3.3 3.1
Malawi 1.9 5.2 5.7 2.9
Mauritius 3.2 3.2 3.6 3.0
Rwanda 8.8 4.7 7.0 6.9
Seychelles 3.7 5.0 6.2 4.4
Sudan 5.9 3.9 3.3 4.9
Swaziland 3.0 2.9 2.5 1.7
Uganda 2.6 4.0 4.9 7.2
Zambia 7.6 5.1 5.0 3.6
Zimbabwe 10.6 4.5 3.8 1.5
COMESA 5.9 6.1 6.5 6.0
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Figure 4: Real GDP Growth
7
6.5
6
5.5
5
4.5
4
3.5
2012 2013 2014 2015
Overall Investment as a Percentage of GDP
57. The convergence criterion is achievement and maintenance of investment rate of at

least 20% of GDP. The average overall investment as a percent of GDP in COMESA
increased marginally from 24.6 percent in 2014 to 26.3 percent in 2015. However, a
number of COMESA countries recorded investment performance of less than 20% of
GDP which underscore the challenge facing policy makers in the region to implement a
set of policies that would move the economies into virtuous cycle of higher investment
and higher growth. The region needs high and inclusive growth to create enough jobs for
its increasing labour force. That requires adequate investment in both the private sector
and in infrastructure. But achieving a high growth path requires not only rising physical
capital and its efficient allocation but also adequate human capital, i.e. skilled people
who work with technologically advanced investment goods and entrepreneurs with
innovative skills and the ability to find new business opportunities. Maintenance of
infrastructure is also crucial for their effectiveness.
58. The region’s investment continues to be partly financed by foreign savings. This is
desirable for developing countries as long as it finances productive sector, as it enables
them to catch up faster. However, it is necessary to generate an adequate level of
domestic savings in order to ensure higher level of sustained investment.
Table 6: Total Investment (Percent of GDP)

Country 2012 2013 2014 2015
Burundi 14.3 14.9 15.5 10.6

Comoros 16.8 20.4 18.6 18.4
Congo, Dem. Rep. 12.7 15.3 15.7 15.6
Djibouti 26.4 29.6 - 30.1
Egypt, Arab Rep. 15.6 13.8 12.6 13.7
Eritrea 9.5 8.7 7.9 7.6
Ethiopia 37.1 34.1 34.5 39.8
Kenya 21.5 20.1 21.4 22.5
Libya 17.0 21.1 - -
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Madagascar 17.6 15.9 15.6 13.1
Malawi 12.1 12.7 12.0 12.0
Mauritius 24.8 25.2 23.0 17.5
Rwanda 25.9 26.5 26.1 25.7
Seychelles 38.1 38.5 37.7 31.8
Sudan 21.2 27.1 19.2 20.8
Swaziland 5.4 7.6 9.2 10.9
Uganda 29.5 27.8 26.4 27.5
Zambia 31.8 34.0 34.9 34.6
Zimbabwe 13.5 13.0 13.2 13.0
COMESA 25.0 24.3 24.6 26.3
Source: IMF REO Sub Saharan Africa April 2016; IMF REO Update Middle East and Central Asia May 2015.
Figure 5: Total Investment (Percent of GDP)
26.5
26.0
25.5
25.0
24.5
24.0
2012 2013 2014 2015
Monetary Policy and Exchange Rate developments

59. In 2015, most COMESA member countries were laboring to improve monetary policy
transmission mechanism so that monetary policy can better combat inflation and
stimulate their economies. Monetary policy stance varied depending on the individual
circumstances in the member countries but generally remain focused on controlling
inflation and the need to address risks posed by the global economic environment. A
number of member countries responded to higher inflation and currency depreciation by
raising policy interest rates.
60. Significant depreciation of currencies were seen in a number of member countries which
was a continuation of a trend in 2014, primarily owing to high public sector demand for
foreign exchange to finance big public investment projects, a strong dollar and high
demand for foreign exchange from the local corporate sector. In countries where
inflationary pressures have eased and exchange rates have remained relatively stable,
policy interest rates have been reduced to stimulate growth. Central banks in countries
where exchange rates came under pressure responded by tightening policies. But, risks
remain if exchange rate pressure continues and fiscal deficits remain high.
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External Current Account Including Grant
61. This has no quantitative ceiling. What is required is to achieve sustainable level of
current account position. External Current account including grants widened in the
COMESA region, averaging about -9.7% percent of GDP in 2015 as compared to -8.0%
in 2014.
62. The lack of significant improvement in the current account deficit in Member States can
be attributed to persistent trade imbalances due to a combination of declining export
demand and relatively inelastic import bills for fuel and food products, and in some cases
late disbursement of external aid flows faced by most countries in the COMESA region.
63. It is worthwhile to note that sustainable current account deficit to GDP ratio is desirable,
if it is the result of national investment growth rather than savings decrease, especially
when the national savings are low.
Table 7: External Current Account Including Grants (Percent of GDP)
Country 2012 2013 2014 2015
Burundi -18.6 -19.5 -18.8 -15.4

Congo, Dem. Rep. -4.6 -10.6 -9.6 -12.2
Comoros -17.6 -15.9 -10.7 -10.2
Djibouti -7.9 -23.3 -25.6 -31.0
Egypt, Arab Rep.* 0.2 -2.2 -4.9 -4.5
Eritrea -2.3 -0.1 0.6 -2.2
Ethiopia -6.9 -5.9 -7.9 -12.8
Kenya -8.4 -8.9 -10.4 -8.2
Madagascar -6.9 -5.9 -0.3 -3.4
Libya 9.1 6.6 6.0 -12.6
Malawi -9.3 -8.7 -8.2 -8.9
Mauritius -7.3 -6.3 -5.6 4.8
Rwanda -11.4 -7.4 -11.5 -18.1
Seychelles -21.3 -12.3 -22.2 -14.2
Sudan -5.3 -8.5 -6.7 -7.7
Swaziland 3.1 5.1 3.3 5.1
Uganda -6.8 -7.0 -9.5 -9.5
Zambia 5.4 -0.6 2.1 -3.5
Zimbabwe -24.5 -23.9 -18.6 -17.3
COMESA (SSA -6.6 -7.7 -8.0 -9.7
Member Countries)
*Excluding grants
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Figure 6: External Current Account
0
-1 2012 2013 2014 2015
-2
-3
-4
-5
-6
-7 -6.6
-8
-7.7 -8
-9
-10
-9.7
Debt to GDP Ratio

64. Debt to GDP has no quantitative ceiling and is assigned the secondary criteria status.
Most COMESA member countries have benefitted from international efforts to
restructure and forgive debts of developing countries under the aegis of the IMF and the
World Bank. The average debt to GDP ratio for the COMESA region from 2012 to 2015
was 41.2.
Table 8: Government Debt (Percent of GDP)
Country 2012 2013 2014 2015

Burundi 39.9 36.6 33.9 42.4
Comoros 42.6 18.1 22.6 25.4
Congo, Dem. Rep 23.2 19.1 16.8 18.9
Djibouti 57.4 42.4 43.2 39.5
Egypt, Arap Rep - 84.8 86.3 89.0
Eritrea 127.6 128.4 126.5 127.1
Ethiopia 36.9 42.4 46.3 56.1
Kenya 41.7 41.5 46.7 51.3
Libya 15.2 3.7 36.4 73.8
Madagascar 33.0 33.9 34.7 35.5
Malawi 89.5 100.3 94.6 82.0
Mauritius 51.5 53.9 56.2 58.6
Rwanda 21.5 28.7 31.1 37.3
Seychelles 82.5 68.8 68.6 69.0
Sudan 102.5 89.9 77.3 72.9
Swaziland 14.4 14.5 13.4 17.0
Uganda 24.2 27.7 31.2 34.4
Zambia 24.9 25.9 33.6 56.3
Zimbabwe 56.7 54.6 55.3 58.9
COMESA (SSA Member 37.1 38.2 41.4 47.9
Countries)
Source: IMF REO Sub-Saharan Africa, October 2016; IMF REO Middle East and Central Asia, October 2016.
19 | P a g e
Figure 7: Government Debt
55
49.5
50 47.9
45
41.4
40 38.2
37.1
35
30
25
2012 2013 2014 2015 2016
Government Revenue to GDP ratio

65. As secondary criteria, this convergence requirement stipulates that government revenue
should be at least 20% of GDP. The need for this criteria arises from the fact that this
ratio for COMESA countries is generally well below the average for developing
countries, and that social and investment needs in the public sector demand that this
ratio be raised significantly This ratio was below 20% for 12 member countries in 2015.
This underscores the need to pursue these criteria more proactively through review of
the taxation system to increase its elasticity.
Table 9: Total Revenue Excluding Grants (Percent of GDP)
Country 2012 2013 2014 2015

Burundi 15.6 14.0 14.4 12.9
Comoros 19.3 15.5 14.5 16.5
Congo, Dem. Rep. 14.4 12.9 13.3 11.2
Djibouti 28.0 27.4 26.3 30.9
Ethiopia 13.8 14.3 13.8 15.1
Egypt, Arab Rep 24.3 21.6 20.2 20.9
Eritrea 14.2 14.1 14.1 13.9
Kenya 18.7 19.2 19.3 19.1
Libya 55.1 65.2 37.9 21.5
Madagascar 9.6 9.6 10.2 10.4
Malawi 18.3 21.6 21.8 21.0
Mauritius 20.8 21.0 20.5 22.0
Rwanda 15.0 16.5 16.7 18.6
Seychelles 36.7 34.2 34.1 33.9
Sudan 17.2 10.4 11.4 10.7
Swaziland 29.4 28.2 28.5 27.0
Uganda 11.6 11.7 12.5 13.9
Zambia 17.0 16.2 18.1 18.0
Zimbabwe 28.0 27.7 26.6 27.5
COMESA(SSA Member) 16.6 16.6 16.7 16.8
Source: IMF REO Sub-Saharan Africa, October 2016; IMF REO Middle East and Central Asia, October 2016
20 | P a g e
Figure 8: Total Government Revenue (Excluding Grants)
20
19
18 16.8 17
16.6 16.6 16.7
17
16
15
14
13
12
11
10
2012 2013 2014 2015 2016
2.2 The Assessment of Member Countries status of implementation of the COMESA

Multilateral Macroeconomic surveillance Framework (CMMSF)
66. The key elements of the Framework are the following:
(i) To ensure national ownership of the monetary integration programme each member
state table before their parliament/National assembly of agreed regional
convergence criteria and the government’s commitment that those criteria , among
others will guide the country’s convergence programme;
(ii) Strengthening and harmonising the national public finance management (PFM)
system at the country level;
(iii) Trade integration, its formulation and implementation , be embedded as a parallel, if
not an integral part , of macroeconomic surveillance framework;
(iv) The establishment of the Convergence Council comprising Ministers of Finance,
Central Bank Governors, Ministers of trade and Ministers of Industry. ( The terms of
Reference of the Convergence Council is attached)
(v) Preparation by member countries a Medium Term Fiscal Convergence Programme
indicating the time path and policy framework the country proposes to follow to fulfil
the agreed regional convergence criteria. This Framework will be supported by the
underlying Medium Term Macro-economic Framework and Medium Term Fiscal
Framework;
(vi) Establishment of a system of fiscal rules by member countries that will guide the
implementation of the Convergence Programme and seek legislative approval for
those rules;
(vii) Ministries of Finance of member countries to establish a strong Surveillance Unit that
will provide periodic reports on the implementation of the Convergence Programme
(viii) Provision by member countries to COMESA Monetary Institute with relevant
statistical and other relevant information in the format to be determined by CMI to
enable CMI to prepare and assess macroeconomic developments in member
countries,
(ix) Member countries submit annual reports to CMI, in a format to be prescribed by CMI
on the progress the country is making in the implementation of the Convergence
Programme.
21 | P a g e
(x) Member country should submit itself to the “slippage” procedure, should the
Convergence Council so make the decision regarding the implementation of the
convergence programme, and implement to the best of its ability, the
recommendations that may be made by the Convergence Council to bring the
programme on track and facilitate its implementation.
(xi) Adopt the trade surveillance framework and assess member countries performance
through the Framework.
(xii) The creation of the COMESA Monetary Institute to undertake comprehensive
assessment of the progress of the convergence criteria
(xiii) Creation of COMESA Swap Facility to provide for bilateral currency Swaps should a
fellow member country run into financial crisis.
67. The status of implementation of the above mentioned key elements of Multilateral
Macroeconomic Surveillance Framework in COMESA member countries are presented
in table 10 below.
Table 10: Status of Implementation of CMMSF by Member Countries
Elements of CMMSF Status of implementation by member countries

To ensure national ownership of the monetary Not yet implemented
integration programme each member state
table before their parliament/National assembly
of agreed regional convergence criteria and the
government’s commitment that those criteria
among others will guide the country’s
convergence programme
Strengthening and harmonising the national (i) Most countries currently have Public Finance
public finance management (PFM) system at management Act, the Public Procurement Act
the country level (See annex no. 2 for minimum and Public Audit Act that guide the fiscal
desirable characteristics for PFM) management to ensure transparency and
accountability which is in line with the
international best practice.
(ii) A majority of countries follow some form of
top down approach.
(iii) There are clearly defined law and practice.
However, there is blurred line in some
countries between general government and
the rest of the public sector, which makes it
difficult to accurately establish the full extent
of extra-budgetary spending or to clearly
define general government.
(iv) By current international practices, the
robustness of a countries PFM system is
assessed on the basis of scoring on 31
individual fiscal performance indicators
developed by PEFA. On the basis of PEFA
assessment reports for COMESA member
countries, the overall score is graded as B on
a 7 scale ranging from a low of D to a high of
A, with fairly wide divergence in scores
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between countries and in case of each
country as between the 31 indicators.
(v) Most countries have made efforts to improve
transparency
(vi) Improvements are visible in revenue
administration, cash flow planning and
procurement. However, the accounting and
reporting system is still evolving and data
sharing and coordination is lacking, and the
internal audit function is not very strong.
(vii) Fiscal information on central government is
fairly comprehensive and readily available to
the public. Fiscal transparency of local
governments remains weak.
(viii) Critical weaknesses in fiscal data quality in a
number of countries;
(ix) The timeliness in the submission of audit
reports has improved in many countries but
backlogs pertaining to local government exist.
(x) Reconciliation of government bank accounts
reveals discrepancies between the monetary
accounts and fiscal accounts;
(xi) Quarterly, semi-annual and annual reports on
the outturns of the central government are
available in websites of some member
countries.
The establishment of the Convergence Council Convergence Council was established and its
comprising Ministers of Finance, Central Bank Terms of Reference which is contained in Annex
Governors, Ministers of trade and Ministers of No.3 were endorsed by the Inaugural Meeting of
Industry. the Convergence which was held on 21st
November 2015 in Lusaka, Zambia.
Preparation by member countries, a Medium There is progress in many countries in developing
Term Fiscal Convergence Programme Medium Term Financial frameworks. The Medium
indicating the time path and policy framework Term fiscal objectives are clearly stated in budget
the country proposes to follow to fulfil the documents. The objective of adopting medium
agreed regional convergence criteria. This term financial frameworks was to introduce better
Framework will be supported by the underlying alignment between policies, planning and
Medium Term Macro-economic Framework and resources.
Medium Term Fiscal Framework.
Establishment of a system of fiscal rules by The assessment made by CABRI revealed that
member countries that will guide the most member countries have national fiscal rules.
implementation of the Convergence Some countries, however, do not have written laws
Programme and seek legislative approval for or rules but rely on performance benchmarks
those rules; agreed with IMF.
According to CMMSF, Fiscal Responsibility Law
should fulfil the following:
(i) underpin the implementation of PFM;
(ii) Promote fiscal stability; and achieve
COMESA’s regional macroeconomic
convergence criteria;
(iii) Enhance transparency, accountability
and ensure enforceability.
(iv)
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Ministries of Finance of member countries to Not yet implemented
establish a strong Surveillance Unit that will
provide periodic reports on the implementation
of the Convergence Programme to CMI
Provision by member countries to COMESA CMI prepared reporting templates which will be
Monetary Institute with relevant statistical and implemented after endorsement by the
other relevant information in the format to be Convergence Council.
determined by CMI to enable CMI to prepare
and assess macroeconomic developments in
member countries.
Member countries Submit annual reports to Member countries are expected to submit reports
CMI, in a format to be prescribed by CMI on the after the endorsement of the reporting templates
progress the country is making in the by the Convergence Council
implementation of the Convergence
Programme.
Member country should submit itself to the Implementation Guideline for Excessive Slippage
“slippage” procedure should the Convergence Procedure was endorsed by the Inaugural Meeting
Council make the decision regarding the of the Convergence Council which was held on
implementation of the convergence programme 21st November 2015 in Lusaka, Zambia. It will be
and implement to the best of its ability the implemented after the macroeconomic surveillance
recommendations that may be made by the process becomes fully operational.
Convergence Council to bring the programme
on track and facilitate its implementation.
Implement trade surveillance framework and Indicators developed by COMESA under RISM to
assess member countries performance assess trade performance.
through the Framework.
Creation of the COMESA Monetary Institute to COMESA Monetary Institute became operational
undertake comprehensive assessment of the since March 2011.
progress of the convergence criteria
Creation of COMESA Swap Facility to provide A study is being undertaken to address the
for bilateral currency Swaps should a fellow concerns raised by the Convergence Council
member country run into financial crisis.
2.3 Challenges Faced in the implementation of the COMESA Macroeconomic

Convergence Criteria and COMESA Multilateral Fiscal surveillance Framework
68. The following are the major challenges for the successful implementation of COMESA
Macroeconomic Convergence Criteria and COMESA Multilateral Macroeconomic
Framework:
(i) Some member countries are not fulfilling their obligation of reporting requisite
information requested by CMI.
(ii) Member states Development Plans do not reflect commitments related with
monetary integration and financial integration as per the requirement of COMESA
Treaty. This can be mitigated by encouraging member countries to mainstream
COMESA integration agenda in their development plans.
(iii) Differences in concepts, methodology and statistical framework for compilation of
macroeconomic data among member countries. This can be mitigated by
macroeconomic data.
(iv) External and domestic shocks which complicate macroeconomic management in
member countries.
24 | P a g e
69. In order to mitigate the above challenges CMI in collaboration with COMESA Secretariat
will work with Member States to strengthen capacity to:
(i) Integrate decisions of the authority and Council into national development plans;
(ii) Monitor and report progress on the implementation of the programmes;
(iii) Increase the two-way flow of information between the member states and CMI; and
(iv) CMI need to hold research and capacity building activities to ensure improved
macroeconomic management and to enhance financial system development and
stability.
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CHAPTER 3
HARMONISATION OF MACROECONOMIC DATA
3.1 Achievements in Macroeconomic Data Harmonisation
70. The following are achievements in macroeconomic data harmonisation
(i) COMESA has initiated a Consumer Price Index harmonization Project (HCPI) with
the support of African Development Bank. Furthermore, member countries are quite
advanced in the use of the Customs Declaration Information System software and in
the use of EUROTRACE for external trade statistics.
(ii) The compilation of monetary statistics in most member countries is in accordance
with the IMF‘s Monetary and Financial Statistics Manual. The periodicity and
timeliness of the monetary survey broadly follow the General Data Dissemination
Standards (GDDS) recommendations.
3.2 Outstanding Issues in Harmonisation of Macroeconomic Data
71. There are concerns on the quality of data and also on the measurement of core
convergence criteria. The main areas where there are measurement problems are with
inflation, the fiscal out turn and the determination of central bank financing of fiscal
deficit, as well as the derivation of reserves- months of import cover. The following are
some of the outstanding issues which need to be addressed:
National accounts
(i) The inconsistency in some countries of national accounts with other macroeconomic
accounts;
(ii) Long lag in producing National Accounts Data
(iii) National accounts do not include informal sector
(iv) Autonomously managed government institutions are not covered in some countries
(v) The base year used for calculation of National accounts are outdated in some
countries
(vi) Quarterly national accounts are not available in most member countries.
Inflation
(i) The consumer price index, which is the main measure for inflation in member
countries, covers mostly urban areas, usually in capital and some big cities.
(ii) The household consumption surveys on which the CPI basket is based are deemed
to be out dated in some countries.
(iii) Different base years are in use in different member countries.
(iv) COMESA Harmonised Consumer Price Index is used by COMESA to compare
inflation at a regional level.
26 | P a g e
External Sector Data
(i) Most Central Banks are not yet very familiar with methodology used in surveys.
(ii) The level of reserve import cover is assessed based on current level of imports of
goods and service and not based on projected imports. It is more appropriate to
compute import cover of reserves based on projected imports. This convention
hinges on the fact that reserves provide insurance against unexpected shocks to
foreign exchange position of a country and as such a measure of expected payments
should be considered the appropriate reference base.
(iii) Current account statistics are characterized by large volume of activities in the
informal sector but are not recorded.
(iv) Data on private capital flows are scanty in many countries.
(v) Data on official grants, loan disbursements and repayments are relatively available
and reliable.
Government Finance Operations

Most member countries have current information on central government revenue and
expenditure. The following are some of the issues that need to be addressed:
(i) Discrepancies between net credit data as recorded in in the central bank
monetary accounts and government accounts (central treasury);
(ii) Data on outstanding domestic government arrears are scanty. It may therefore
be difficult to determine the level of domestic indebtedness and proposing
remedial measures;
(iii) Some countries present data for the central government only, others report for all
the public sector, including state and local governments. Where the financial
flows between the different tiers of government are significant, the reliability of
assessing the overall fiscal outcome may be compromised
(iv) Many countries have not started compilation of GFS according to the new GFS
Manual of the Fund.
3.3 Recommendations for Short to Medium Term Actions to Improve Data Reported
for Convergence Monitoring
72. Indeed, member countries are currently making efforts to address the above mentioned
outstanding issues in data compilation with the assistance of cooperating partners,
particularly IMF. The pace of these efforts needs to be accelerated to support the
COMESA monetary integration process. The following are some of the
recommendations for short to medium term actions to improve data reported for
convergence monitoring:
(i) Undertake household expenditure surveys in member countries where the

existing one is outdated, to provide a basis for construction of an up-to-date and
nationwide CPI.
(ii) All member countries adopt SNA 1993 as a minimum requirement and also
reduce the long lag in producing national accounts.
27 | P a g e
(iii) Sustain the ongoing regular reconciliation between the Central Bank and Ministry
of Finance Data;
(iv) Expand monetary survey to include non-bank financial institutions
(v) Improve recording of capital and financial transaction through regular surveys to
capture information on foreign direct investment.
(vi) Reduce the lag in the BOP accounts to at most six months.
(vii) Adopt the latest IMF Balance of Payment Manual for compilation of BOP
Statistics.
(viii) Adopt the latest Manual for compilation of GFS.
(ix) Harmonise fiscal data from various sources, namely central bank, the Central
Bureau of Statistics, Ministry of Finance, Revenue Authority.
(x) Introduce an integrated information technology to harmonise data from various
sources.
(xi) Introduce Integrated Financial Management Information System (IFMIS) to link
all fiscal data generation departments.
(xii) When reporting, it is necessary to include notes on the compilation methodology.
(xiii) Member countries need to show commitment to improving capacity in the
production and dissemination of statistics. This would require conscious efforts at
providing resources such as financial allocations for statistical capacity building
and pursue technical assistance from International donors such as IMF.
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CHAPTER 4
THE ASSESSMENT OF MEMBER COUNTRIES ACHIEVEMENT OF THE REQUIREMENTS

OF THE COMESA FINANCIAL SYSTEM DEVELOPMENT AND STABILITY PLAN (CFSDS)
73. The COMESA Financial System Development and Stability Sub-Committee provide the
platform for the implementation of CFSDSP. The key elements of the Plan are the
following:
(i) Achieving macroeconomic stability;
(ii) Convertibility of national currencies;
(iii) Strengthening financial system architecture;
(iv) Promote financial system stability;
(v) Compliance to the 29 Core Principles of Bank Supervision and Regulation;
(vi) Compliance with Basel 1
(vii) Establishment of a road map to implement Basel II and III.
(viii) Developing a harmonised Consolidated Supervision Framework
74. The table below summarises the status of implementation of the key elements of the
Plan.
Table 11: The status of implementation of the key elements of CFSDS
Elements of COMESA Financial System Status of implementation by member

Development and Stability Plan countries
Achieving Macroeconomic Stability The status is discussed in Chapter 2 of this
report.
Quoting and trading in the COMESA national

Convertibility of national currencies currencies by deposit money banks and forex
bureaus are highly limited in most countries
except to some extent in member countries which
are also members of East Africa Community
(EAC).
Strengthening financial system architecture. a) Most member countries have benefitted from
This includes: a Joint IMF/World Bank FSAP and draw up
(i) Modernising the National payment well sequenced financial sector reform
system. programmes to modernise the financial
(ii) Using Regional Payment and Settlement infrastructure. These include among others:
System to promote intra-regional trade.
(iii) Development of Microfinance (i) Modernising national payments
institutions. system. Many member countries have
(iv) Development of insurance and pension introduced RTGS electronic payment
schemes. system. The use of mobile banking is
(v) Development of securities market. also developing very fast in many
(vi) Adoption of International Accounting countries.
and Auditing standards.
(vii) Diversifying the Financial System. (ii) COMESA has a Regional Payment
(viii) Introduction of region wide capital and Settlement System which is fully
market products such as a regional operational (See Annex 4 for key
bond issuance. features of the system)
(ix) Adoption of International Accounting
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Standards and ensuring their alignment (iii) COMESA member countries have
with prudential requirements also seen an increase in the number
(x) Strengthening Regional Financial and operations of microfinance
infrastructure namely PTA Bank (PTA); institutions (MFIs). Banks have also
COMESA Infrastructure Fund (CIF); started to focus more on broadening
African Trade Insurance Agency, PTA access to retail banking through
Reinsurance company and expanding introduction of mobile banking
the source of funding COMESA operations. Some banks for example
Adjustment Facility Equity Bank in Kenya have their
business model on low-end
customers. Many banks are also
broadening their branch network. This
trend can help to increase private
credit in several countries in the
region. See Annex 5 for the
challenges in microfinance
development in the COMESA region,
Annex 6 for challenges facing the
development of technology based
financial services and Annex 7 for
recommendations on Policy and
Regulatory Framework for Inclusive
Finance which is the outcome of the
COMESA financial inclusion workshop
(iv) Regulatory framework for insurance

and pension schemes are less
developed in most member countries
of the COMESA region.
(v) Nine of 19 member countries of

COMESA have organised stock
Exchanges with two exceptions
(Egypt and Kenya) the rest are
generally characterised by a relatively
small number of listed companies, few
market participants, low capitalisation
and low trading volumes (See Annex
8 on factors affecting capital market
development in African countries)
(vi) While most countries require the use

of International Financial reporting
Standards (IFRS) for financial sector
enterprises, they are deficient in
application in part because of lack of
sufficiently trained Personnel and the
absence of enforcement mechanism.
(vii) PTA Bank provides its assistance to

member countries of the region, in a
variety of ways including loans, lines
of credit and guarantees, its lending
30 | P a g e
products include letter of credit, pre-
shipment and post-shipment loans,
syndicated lending, finance for capital
equipment and bills discounting. Most
countries in the region have benefited
from PTA Bank lending.
(viii) COMESA Reinsurance Firm (ZEP-

RE) was set up in 1992 to retain
insurance business within the region.
It markets its products both within and
outside COMESA region. The
company was successful in writing
significant volume of business both
from COMESA region and outside the
region. As part of its regional
integration programmes ZEP-RE
maintains close partnerships with
other COMESA institutions including
the COMESA Secretariat, PTA Bank
and the African Trade Insurance
Agency (ATI).
(ix) African Trade Insurance Agency (ATI)

was established in 2001. ATI is the
continent’s first multilateral export
credit insurance agency which
provides political and commercial risk
cover to the satisfaction of overseas
sellers and their financiers. ATI has
contributed significantly to productive
sector in the region by providing
support for insurance, coinsurance,
reinsurance, guarantees and other
financial instruments and services for
the purpose of promoting trade and
investment in Africa.
(x) COMESA Infrastructure Fund (CIF)

was launched in 2010 by COMESA to
invest in infrastructure projects in
member states. The CIF set out to
attract investments from COMESA
sovereigns and institutions as well as
other non-COMESA investors being
sovereign, multilateral, private and
public enterprises among others. The
Fund’s target is to raise USD$1 billion
in tranches. It is managed by PTA
Bank.
(xi) The COMESA adjustment facility

(CAF) has continued to operate with
31 | P a g e
funding from the EDF since 2007
financed by EU. Many member
countries have benefitted from the
funding to address adjustment
challenges which resulted from
implementing COMESA integration
programmes
.
Strengthening legal, regulatory and (i)
Most COMESA member countries
supervisory framework have adequate legal supervisory
framework for banks but certain
aspects need strengthening
particularly in respect to the
effectiveness of implementation. In
general Central banks and banking
laws are in place.
(ii) Regulatory and supervisory
framework for non-banks such as
insurance and pensions are not well
developed in most countries;
(iii) Many countries have developed
supervisory and regulatory framework
for MFIs.
(iv) Many countries have adopted a
modernised legal and regulatory
framework for national payment
system.
(v) Many countries have introduced risk
management and corporate
governance practices
(vi) Most countries control money
laundering activities
(vii) A number of countries have deposit
insurance schemes
Compliance to the 29 Core Principles of Bank There is high degree of compliance by many
Supervision and Regulation member countries to the Core principles that are
applicable to them. Some are in partial
compliance to the principles.
Compliance with Basel 1 Most countries are implementing Basel 1,

although there are challenges.
Establishment of a road map to implement Most countries are preparing to implement Basel
Basel II and III. II despite among others the following challenges:
(i) Absence of trained man power;
(ii) Submission of incomplete data by
banks;
Developing a harmonised Consolidated A harmonised consolidated supervisory and

Supervision Framework regulatory framework for COMESA is not yet
developed. Consolidated supervision requires
amendment of national laws to provide for
consolidated supervision
32 | P a g e
Promote financial system stability. The (i) Most member Central Banks
activities under this include: established the Financial stability unit;
(i) Establishment of financial (ii) Many member Central Banks, publish
stability unit in member central Financial stability reports
banks (iii) Some countries established Credit
(ii) Preparation of forward looking reference Bureaus.
financial stability reports; (iv) Many member Central Banks provide
(iii) Member countries providing data data on Financial Soundness
on financial soundness Indicators to CMI.
indicators to CMI (v) Some countries are undertaking
(iv) Development of capacity to systemic risk assessment using bank
undertake macro-prudential stability index, financial stress index,
analysis, micro and macro stress heat map and cobweb. Some also are
testing and assessment of undertaking micro and macro stress
financial system stability testing.
(vi) CMI is providing capacity building
trainings to member countries on the
following:
a) Preparation of forward looking
financial stability reports;
b) Macro prudential analysis
c) Systemic risk assessment;
d) Modelling and forecasting volatility
in financial markets within a
multivariate framework
e) Models used for rating
downgrades and banking sector
systemic risk,
(vii) CMI developed Guidelines to
undertake the following:
a) Macroprudential Analysis;
b) Forward looking Financial Stability
Reports.
(v) CMI is developing a guideline for
Systemic Risk assessment.
4.1 Challenges Faced by Member Countries in the implementation of the

COMESA Financial System Development and Stability Plan
75. As indicated in the above table there is significant progress in the implementation of the
COMESA Financial System Development and Stability Plan. The following are the few
challenges which need to be addressed:
(i) Absence of adherence to the COMESA Macroeconomic Convergence Criteria which
is a prerequisite for higher degree of Financial Integration.
(ii) Wide divergence in the sophistication of financial system among COMESA member
States;
33 | P a g e
(iii) Limited supervision capacity and independence in some countries. This has meant
that they have sometimes lacked the means to take prompt corrective action when
required. As a result weak banks remain in the system for a longer time.
(iv) Financial regulations are only as effective as a larger body of laws and regulations
supporting commercial transaction. It is generally agreed that weak property rights
and poor enforceability of contracts which is prevalent in most COMESA member
countries constrain financial market activity
(v) Legal framework for non-banking financial sector in most countries are weak
(vi) Cross-border payments are mostly conducted by member countries via bank’s
correspondent accounts with partner banks abroad or via bank’s with cross-border
subsidiaries instead of using the COMESA Regional Payment and Settlement
System (REPSS). REPSS was created to enhance the effectiveness of the
COMESA FTA and Customs Union, by reducing cost of cross-border financial
transaction.
(vii) Lack of sufficiently trained man power to implement International Financial Standards
(IFRS)
(viii) Most Stock Exchanges in COMESA region except in Egypt and Kenya are too small
individually to ensure efficiency and liquidity and thus the need for the integration of
the Exchanges, although this might prove to be a difficult task. Meanwhile, efforts
should be directed at eliminating barriers to intraregional investment and facilitating
cross listing. EAC member countries, most of which are also COMESA members,
are fairly advanced in coordination of securities marker regulation and in setting up a
joint stock exchange. An effective linkage of national stock exchanges implies intra-
regional liberalisation of exchange controls, since the latter are impediment to capital
market integration.
(ix) Low access of financial services to large majority of the population in many
countries, although banks have started focusing more on broadening access to retail
banking to low end customers through innovative means such as mobile banking
operations.
(x) Commonly identified barriers to micro finance in most member countries are high
operating costs, poor market response, coordination among stakeholders, the
absence of reliable financial data on access and usage; greater consumer
understanding, trust and protection. While technology emerges as a viable route to
financial inclusion in Africa it is impeded by stringent regulations, limited
interoperability, scarcity of qualified agents and low level of financial literacy and
income.
34 | P a g e
CHAPTER 5
DEVELOPMENTS IN TRADE INTEGRATION IN COMESA
76. COMESA formed Free Trade Area (FTA) in October 2000 in which 17 member countries
out of 19 are currently participating. COMESA also launched a customs union in 2009.
Article 45 of the COMESA Treaty provides for the progressive formation of a Customs
Union among the Member States with the principles of customs duties and other
charges of equivalent effect imposed on imports removed; as well as the removal of non-
tariff barriers including quantitative, prohibitive and administrative obstacles to trade
among the Member States. It further provides for the establishment and maintenance of
a common external tariff in respect of all goods imported into the Member States from
third countries.
77. The top priority for implementation of customs union by member states is to finalise
domestication of the COMESA Common Tariff Nomenclature/Common External Tariff
(CTN/CET) HS 2012 version and migrate to COMESA Customs regulations (CMRs.)
78. The following are the achievements in the implementation of the COMESA Trade
integration agenda
(i) On Free Trade area 16 out of nineteen countries are members of the COMESA FTA.
(ii) Intra-COMESA exports excluding informal trade increased from 3 billion USD in 2006
to 8.0 billion in 2015.
(iii) On Customs Management regulation (CMR), eighteen (18) Member States aligned
their customs laws in average 98.33 % to the CMR. The performance was as
follows: Burundi (100%), Comoros (100%), Djibouti (91%), DR Congo (98%), Egypt
(99%), Eritrea (96%), Ethiopia (100%), Kenya (100%), Madagascar (98%), Malawi
(100%), Mauritius (95%), Rwanda (100%), Seychelles (100), Sudan (95%),
Swaziland (99), Uganda (100%), Zambia (100%) and Zimbabwe (99%). On the
whole all the 18 MS have aligned their CMR to over 90% while 9 have achieved
100%.
(iv) On Common Tariff Nomenclature (CTN), eighteen (18) Member States aligned their
tariff nomenclature to the COMESA CTN at an average of 69%. This is an
improvement from 2015 when 11 MS had aligned their nomenclature by 62%.
(v) On the Common external Tariff (CET), eighteen (18) Member States aligned their
tariff to CET by an average of 34%.
(vi) There is a great effort to resolve Non-Tariff barriers through various avenues which
included bilateral meetings held in the margins of the Regional NTBs as well Trade
and Customs Meetings.
(vii) COMESA is implementing the Standards and Quality Assurance (SQA) and Sanitary
and Phyto-Sanitary (SPS) programmes in line with the mandates of the Council of
Ministers. The specific objective of interventions of the SPS programmes is to
enhance the SPS capacity of the public and private sector of MS in order to gain and
maintain regional and international market access for food and agricultural products,
whilst also simplifying SPS and other technical measures in order to reduce trade
transaction costs and increase intra-regional trade. The objective of the SQA
programme is to eliminate technical barriers to trade (TBTs) among the Member
States and other regional and international trading blocks, and to promote quality
standards infrastructure in the MS.
35 | P a g e
(viii) COMESA Secretariat is implementing programmes to improve the transport and
communications systems of the region as well as improve information available to
businessmen wishing to trade both within the region and beyond. They include
Harmonised Road Transit Charges; COMESA Carrier’s License; Harmonised Axle
Loading and Maximum Vehicle Dimensions; the Regional Customs Transit
Guarantee Scheme ,the Yellow Card and the COMESA Virtual Trade Facilitation
System (CVTFS)
(ix) The member states of COMESA, the EAC and SADC agreed in October 2008 to
negotiate a Tripartite Free Trade Area (TFTA) in Kampala, Uganda. On 12 June,
2011, the Heads of State and Government of the three regional economic
communities (RECs) met in Johannesburg, South Africa again and signed a
declaration launching negotiations for the establishment of the COMESA-EAC-SADC
Free Trade Area (FTA). The Heads of State and Government again met on 10 June,
2015 in Sharm El Sheikh, Egypt at the Third Tripartite Summit to officially launch the
COMESA-EAC-SADC Tripartite Free Trade Area (TFTA).
The Tripartite Summit had given Member/Partner States 12 months from the launch
of the TFTA in June 2015 to conclude outstanding negotiations issues on rules of
origin, trade remedies and tariff offers. However, due to a number of challenges
faced in the process, the deadline of June 2016 was not met and the
commencement of Phase II negotiations – covering trade in services and other trade
related matters – has been delayed pending the conclusion of negotiations on Phase
I issues.
The TFTA Agreement has been signed by 18 out of 26 member countries, namely
Angola, Burundi, Comoros, Democratic Republic of Congo (DRC), Djibouti, Egypt,
Kenya, Malawi, Namibia, Rwanda, Seychelles, Sudan, Tanzania, Uganda,
Swaziland, Zambia and Zimbabwe. The State of Libya signed the Agreement on 19
October 2016. The Agreement requires 14 ratifications to enter into force. So far, no
country has ratified it.
While the scope of the TFTA economy is large, significant structural and policy
bottlenecks still remain to be overcome: poor infrastructure, high transaction costs
and low levels of industrialisation. The launch of the TFTA augurs well for expanding
investment in infrastructure, connectivity and production linkages in regional value
chains as a platform for economies and improving backward integration into global
value chains.
(x) The harmonization and coordinating of regional programmes in the three RECs-
COMESA, EAC and SADC - will play a pivotal role in not only boosting intra-African
trade but also in rationalizing use of resources and cooperation among the RECs.
The TFTA stands as part of a much more ambitious agenda to establish a
continental FTA (or CFTA) covering the whole of Africa by 2017, and ultimately, a
continental customs union by 2019.
36 | P a g e
CHAPTER 6
SUMMARY OF LESSONS AND CHALLENGES FOR ACHIEVING COMESA MONETARY
UNION IN 2018
79. From the review of the progress presented above, it can be observed that, although
COMESA member countries continued to register some progress towards
macroeconomic stability, financial integration, harmonisation of macroeconomic data
and trade integration, the following are summary of key challenges which need to be
addressed in order to enhance both monetary and real integration for the ultimate
achievement of the COMESA Monetary Union:
(i) Achievement of the convergence criteria on a sustainable basis continued to pose a

serious challenge for most countries. The fiscal deficit and inflation criteria remained
the most challenging. Besides, most Member States did not factor the COMESA
criteria into their budget statements and economic policies.
(ii) Fiscal and monetary policy coordination - In some Member States, policy
coordination remained weak. Without effective policy coordination, financial instability
could ensue leading to: high interest rates, exchange rate pressures and rapid
inflation. Furthermore, weak policy coordination could be challenging for fiscal
sustainability.
(iii) The COMESA Macroeconomic Multilateral Surveillance Framework is not yet
implemented.
(iv) The level of intra-COMESA trade remained low, partly on account of poor transport
network, unstable power and water supply, as well as the existence of non-tariff
barriers
(v) Quoting and trading in the COMESA national currencies by deposit money banks
and forex bureaus remained limited, partly due to the absence of stable exchange
rates and the lack of a mechanism for clearing and settling of accumulated long
positions of banks.
(vi) Although the financial sector remained stable and sound in some countries, the
financial markets are characterized by among others, low savings rates,
underdeveloped bond markets, limited investor base, lack of modernised payment
system in some countries, lack of cross-border supervision of financial markets etc.
(vii) COMESA economies are prone to relatively large and asymmetric shocks, including
terms of trade and exchange rate shocks, with implications for the real economy. The
existence of asymmetric shock would pose a challenge for the effective
implementation of monetary policy in the zone.
(viii) Some countries were heavily dependent on unpredictable aid inflows to finance a
substantial portion of government expenditure. Reliance on such aid inflows for
budgetary support constrains the attainment of the fiscal deficit to GDP (excluding
grants) criterion on a sustainable basis.
(ix) In order to facilitate better assessment of the integration process and for purposes of
comparison of convergence indicators across member countries, reliable, timely and
harmonised statistical information is required. This can be mitigated by encouraging
member countries to adopt best international standards of compiling macroeconomic
data.
(x) Lack of sufficiently trained man power to implement internationally accepted
standards which are related with monetary integration.
(xi) Absence of strong political commitment and stakeholders’ buy in
37 | P a g e
CHAPTER 7
CONCLUSION AND FIVE YEAR STRATEGIC PLAN (2017-2021) FOR COMESA

MONETARY INTEGRATION PROGRAMME
80. Experiences of existing and other prospective monetary unions suggest that the
establishment of a sustainable monetary union requires sufficient degree of
macroeconomic convergence, financial and trade integration, as well as legal and
institutional preparedness with strong political commitment. It took the European Union
over four decades to introduce the euro in 1999 following series of postponements. The
transition towards EMU was based on two principles: gradualism (the transmission
towards monetary union in Europe was a gradual process) and convergence criteria
(entry into the union was made conditional on satisfying specific convergence criteria at
a particular point in time).
81. Based on the assessments which are made in the preceding Chapters, the launch of the
monetary union by COMESA Member Countries by January 2018 is highly unlikely. The
study, therefore, recommends the following:
(i) The postponement of the launch date of the COMESA monetary union to 2030 four
years before the new date agreed by the Association of African Central Banks (AACB)
for the establishment of the African Monetary Union with a common Central Bank in
2034.
(ii) Approval by the COMESA Committee of Governors of Central Banks the work plan to
enhance COMESA Monetary Integration agenda for the coming five years which is
contained in tables 12 and 13.of this study. The work plan focuses on the following two
pillars:
a) Macroeconomic Convergence, Statistical harmonisation and implementation of

the COMESA Multilateral Macroeconomic Framework; and
b) Implementations of the COMESA Financial System Development and Stability

Plan.
Table 12: Pillar I Macroeconomic Convergence, Statistical Harmonisation and

Implementation of COMESA Multilateral Macroeconomic Framework
Objective Strategies Measures Time Indicators Responsibi

Frame lity
Empirical Conduct Empirical Use econometric 2017 2021 Publication of CMI
Research Research on techniques to research work
COMESA Economies investigate the
impact of
Organize seminar government policies
presentation on key
macroeconomic
variables on
COMESA
38 | P a g e
economies.
Capacity Conduct training to 1. Organise 2017 2021 Manuals for: CMI

building on COMESA member trainings (i) Implementing
Macroeconomic countries on issues 2. Prepare the knowledge
Management related with Manuals based obtained
Macroeconomic on training through the
Management in materials training, and to
collaboration with be used for
Bank of England, IMF training of more
Afritac East and staff by central
South, Central Bank of banks at
Egypt and with other national level.
Centers of Excellence
Monetary Policy Design a monetary Review experience 2018 2019 Monetary Policy CMI and
Strategy Policy framework for of monetary Policy Framework for Expert
COMESA Strategy of other COMESA Group from
regional member
organisations countries.
Framework for (i) Enable member (i) Undertake status 2018 2020 Harmonised CMI,
the countries adopt assessment National accounts COMESA
harmonization of SNA 1993 as a using the Statistics
National minimum Statistical Unit, IMF
Accounts requirement and Assessment Afritac
also reduce the Questionnaires South and
long lag in national to be developed East.
accounts. by COMESA Harmonized CPI
(ii) Update the base Statistics Unit and GDP
year used for and CMI
calculation of (ii) Transformation
National accounts to SNA 93
for those (iii) Construction of
countries where quarterly
the base year is national
out dated accounts
(iii) Construction of
Quarterly national
accounts
Framework for The framework for Production of 2017 2021 Use of harmonized COMESA
Harmonisation COMESA Harmonised harmonized consumer price Statistics
of Price Consumer Price consumer price index by all Unit and
Statistics Statistics is already index by member member countries CMI
designed and countries to analyse price
operational developments
Framework for (i) Adopt the latest (i) Undertake status 2018 2020 Harmonized COMESA
the Manual for assessment Government Statistics
harmonization of compilation of using the Statistics Unit, CMI
Government GFS. Statistical and IMF
Finance (ii) Harmonise fiscal Assessment Afritac
Statistics data from various Questionnaires South and
sources, namely; to be developed East
39 | P a g e
Central Bank, the by COMESA
Central Bureau of Statistics Unit
Statistics, Ministry and CMI
of Finance, (ii) Adoption by
Revenue member
Authority countries the
latest IMF
manual for
compilation of
Government
finance statistics
(iii) Member
countries
harmonise fiscal
data from
various sources,
namely; Central
Bank, statistics
office, revenue
authority
CMI Statistical Preparation of (i) Undertake an 2018 2018 Accurate and CMI and
Database statistical data base exercise to have updated data base COMESA
from country Reports high frequency Statistics
macroeconomic unit
data for
COMESA
member
countries from
2000 -2016.
(ii) Continue to
pursue
collaboration
with COMESA
Statistics Unit,
AfDB / World
Bank on
Statistical
Harmonization
and Database
Development
Alignment of Align COMESA Submit the aligned 2017 2017 Aligned CMI
COMESA Macroeconomic framework for macroeconomic
Macroeconomic Convergence approval to the convergence
Convergence frameworks to the COMESA framework
Framework to African Monetary Committee of
the African Cooperation Governors of
Monetary Programme proposed Central Banks.
Cooperation by AACB
Programme
Implementation (i) Start (i) The following 2017 2021 (i) MS ensure CMI,
of the COMESA implementation of capacity building national COMESA
Multilateral CMMSF by trainings will be ownership of Secretariat,
Macroeconomic designing a undertaken: MMSF Ministries of
40 | P a g e
Surveillance protocol of a) Strengthening (ii) Capacity Finance and
Framework(CM surveillance and and building Central
MSF) enforcement of harmonising trainings Banks of
convergence the national undertaken; Member
(ii) Ratification of the public finance (iii) Ministries of Countries,
protocol management finance and IMF Afritac
(iii) To ensure national (PFM) system. Central Banks East and
ownership of the b) A guide for of MS establish South.
monetary preparations of macroeconomic
integration Medium Term surveillance
programme each Financial units
member state table Frameworks. (iv) CMI start
before their (ii) Ministries of preparing
parliament or Finance of Macroeconomic
National assembly member Surveillance
of agreed regional countries to Reports.
convergence establish a (v) Effective FTA,
criteria and the strong including
government’s Surveillance Unit Tripartite FTA,
commitment to that will provide customs Union
these criteria periodic reports and Common
(iv) Undertake capacity on the Market
building trainings implementation
on key elements of of the
the Framework Convergence
(v) Undertake study Programme
on the (iii) Endorsement by
operationalization the
of the COMESA Convergence
Swap Facility Council the of
(vi) Implement trade reporting
surveillance templates
framework and prepared by CMI
assess member (iv) Provision by
countries member
performance countries to
through the COMESA
Framework. Monetary
Institute with
relevant
statistical and
other relevant
information in
the format to be
determined by
CMI to enable
CMI to prepare
and assess
macroeconomic
developments in
member
countries.
(v) Undertaking a
41 | P a g e
study for
operationalizing
of COSWAP
Facility.
(vi) Undertake
surveillance of
the
implementation
of trade
integration
issues.
Table 13: Pillar II Implementation of COMESA Financial System Development and

Stability Plan
Time
Objective Strategies Measures Indicators Responsibility
Frame
Capital Market Develop a (i) Undertake a 2018 2019 Strategy CMI
Development and strategy for the study developed
Integration development and (ii) Organize
promotion of workshop for
Regional Stock validation of the
Exchanges strategy
Bonds market Develop a (i) Undertake a 2019 2020 Strategy CMI
Development regional strategy study developed
for Bond Market (ii) Organize
development workshop for
validation of the
strategy
Strengthening non- Develop regional (i) Undertake a 2019 2020 Non-bank CMI
bank financial strategy study financial
institutions such (ii) Organize Institutions
as pension and workshop for Strengthened.
insurance validation of the
strategy
Development of Policy and Regulators of 2017 2021 (i) Creating an Member

policy and Regulatory Microfinance enabling countries
regulatory framework for institutions and other environment
framework for inclusive growth financial service for the
inclusive finance already providers implement development
developed the of MFIs and
recommendations other
financial
service
providers
(ii) Creation of
well-
equipped
regulators
and market
practitioners.
42 | P a g e
Modernize Member countries (i) Adoption of 2017 2021 (i) Existence of Member
financial develop properly electronic efficient countries
infrastructure sequenced plans payment system payment
to modernize such as RTGS and
financial by all member settlement
infrastructure, countries; system
particularly the (ii) Full utilization of (ii) Existence of
payment/clearing Regional modern
system, Payment and accounting
accounting and Settlement and auditing
auditing system, System by standards
credit system and member (iii) Full
regulatory countries utilization of
framework (iii) Adoption of Regional
modern Payment
accounting and and
auditing Settlement
standards by System.
member
countries.
(iv) Improve the
Interbank and
Deepen the
Money Market
Promote financial (i) Adopt (i) Member 2017 2021 (i) The CMI and
System soundness international countries existence of Member
best practices undertake self- efficient Countries
in bank evaluation of regulatory
supervision compliance to and
and regulation Basel Core supervisory
(ii) Encourage Principles of framework
strategic Bank in member
alliance in the Supervision and countries;
banking Regulation and (ii) Existence of
sector report to CMI Sound
(iii) Enhance (ii) Organize corporate
credit culture capacity building governance
in the region. trainings on and risk
(iv) Enable Basel II and III. managemen
member (iii) Establishment of t system;
countries to credit Reference (iii) Existence of
be fully Bureaus in safe and
compliant to member secure
the 29 Core countries financial
Principles of (iv) Enhancement of system;
Bank risk (iv) Existence of
Supervision management efficient
and and corporate deposit
Regulation. governance protection
practices in system;
member (v) Member
countries countries
(v) Enacting have a road
43 | P a g e
legislation by map for full
member implementat
countries that ion of Basel
offer consumer II and III.
protection; (vi) Existence of
(vi) Member credit
countries have reference
anti-money Bureaus
laundering
policies
(vii) Member
countries
establish stand-
alone deposit
insurance
schemes
Consolidated Strengthen cross (i) Conduct 2018 2019 The existence CMI and
supervision border workshops to put of clear road Member
supervision in place properly map for the countries
sequenced implementation
action plan for of consolidated
the supervisory
implementation framework
of consolidated
supervision.
Ensure Financial Capacity building (i) Member 2017 2021 (i) Publication CMI and
Stability countries of Financial Member
prepare forward Stability Countries
looking financial reports
stability reports; (ii) Publication
(ii) Member of Manuals
countries by CMI for
provide data to assessing
CMI on financial financial
soundness system
indicators stability
(iii) CMI organize
capacity building
trainings
annually on
macro-prudential
analysis, micro
and macro
stress testing,
and assessment
of systemic risk
and financial
system stability
44 | P a g e
ANNEXES
Annex 1: COMESA Macroeconomic Convergence Criteria
Stage 1 (Year 2005-2010)

Primary Criteria
(i) Overall budget deficit/GDP ratio (excluding grants) of not more than 5%;
(ii) Annual average inflation rate not exceeding 5%;
(iii) Minimize the central bank financing of the budget towards 0% target; and
(iv) External reserves of equal to or more than 4 months of imports
of goods and non-factor services.
Secondary Criteria
(i) Achievement and maintenance of stable real exchange rates;
(ii) Achievement and maintenance of market based positive real interest rates;
(iii) Achievement of sustainable real growth rate of real GDP of not less than 7.0%;
(iv) Sustained pursuit of debt reduction initiative on domestic and foreign debt. i.e. reduction
of total debt as a ratio of GDP to a sustainable level;
(v) Total domestic revenue to GDP ratio of not less than 20%;
(vi) Reduction of current account deficit (excluding grants) as a % of GDP to sustainable
level;
(vii) Achievement and maintenance of domestic investment rate of at least 20%;
(viii) Implementation of the 25 Core Principles of Bank Supervision and Regulation based on
agreed Action Plan for Harmonization of Bank Supervision for the COMESA region; and
(ix) Adherence to the Core Principles for Systematically Important Payments Systems by
modernizing the payment and settlements system.
Stage 2 (2011-2015)
Primary Criteria
(i) Overall budget deficit/GDP ratio (excluding grants) not exceeding 4%;
(ii) Annual average inflation rate of not more than 3%;
(iii) Elimination of the central bank financing of the budget deficit; and
(iv) External reserves of equal to or more than 5 months of imports of goods and services.
Secondary Criteria
Same as in Stage I
Stage 3 (2016-2018)
Primary Criteria
(i) Overall budget deficit/GDP ratio (excluding grants) not exceeding 3%
(ii) Annual average inflation rate not exceeding 3%;
(iii) Elimination of central bank financing of the budget deficit; and
(iv) External reserves of equal to or more than 6 months of imports goods and services.
Secondary Criteria
Same as in Stage I
45 | P a g e
Annex 2: Public Finance Management System
Public Finance Management System

(Minimum Desirable Characteristics)
Budget Formulation and Planning
(i) "Top-down" budgeting and strong centralized agency (usually the ministry of finance)
responsible for preparing the budget proposals;
(ii) Comprehensiveness of the budget (current and capital budget, contingent liabilities,
aid and debt receipts and expenditures);
(iii) Budget classification system consistent with international standards
(iv) Fiscal rules limiting discretionary authority of the budget agency;
(v) Medium-term macroeconomic and fiscal context to guide annual budgeting exercise
(Medium-Term Macroeconomic Framework (MTMEF) and Medium-Term Fiscal
Framework (MTFF), plus sectoral Medium-Term Expenditure Framework (MTEF);
(vi) Consistency between debt management policies and other macroeconomic policies;
Inclusion of cyclical and 'risk' factors.
Budget approval:
(i) Clear timeline for the submission and approval of annual budget proposals;
(ii) Submission by the Government a comprehensive set of documents supplementing the
budget proposals to enable legislature to scrutinize budget proposals;
(iii) Limited powers of legislature to amend the overall revenue or expenditure ceilings
proposed by the Government;
Budget execution and post audit:

(i) Budget monitoring based on management information systems;
(ii) Internal controls on spending;
(iii) System of internal audit in individual ministries;
(iv) Independent external audit;
(v) Reconciliation of fiscal and banking records.
Transparency:
(i) Medium-term budget frameworks (MTBF);
(ii) Fiscal risk disclosures (FRD);
(iii) Minimal and transparent off-budget items;
(iv) Inclusion of contingent liabilities (public guarantees, PPP obligations, etc.);
(v) Effective accounting standards;
(vi) Regular in-year fiscal reporting;
(vii) Issuance of consolidated financial statements on timely basis;
(viii) Publication of report on the reconciliation of budgeted and outturn expenditures;
(ix) Appropriate corrective actions on the findings of budget and audit reports
Source: COMESA, AfDB group” Facilitating Multilateral Fiscal Surveillance in Monetary Union
Context, with Focus on COMESA Region” February, 2011
46 | P a g e
Annex 3: Terms of reference for the Convergence Council
The Convergence Council shall:
(i) Be responsible for the development of COMESA regional programs and action plans in
the implementation of Multilateral Macroeconomic Surveillance framework;
(ii) Monitor and keep under constant review, and ensure the proper implementation of
macroeconomic convergence programme pursuant to the provisions of the Treaty
establishing COMESA;
(iii) Focus surveillance also on aspects of regional trade integration and industrialization
policies, in order to ensure sustainability of macroeconomic stability and
competitiveness of intra-regional trade in member states;
(iv) Ensure the existence of appropriate structures and procedures for Member States to
report to the COMESA Secretariat of macroeconomic developments in their countries,
and other information the Convergence Council may consider necessary for the
discharge of its surveillance functions
(v) Assess Member State’s performance against the targets and policies inscribed in the
Medium-term Country Convergence Program (MTCCP);
(vi) Require the COMESA Secretariat to submit annual reports, or in year reports if
necessary , assessing macroeconomic performance of each member state and
assessing whether the performance is satisfactory as compared to the targets and
policies in the MTCCP or whether it has recorded “Excessive Slippages”;
(vii) Perform ‘preventive’, ‘promotional’ and ‘corrective’ functions as will be provided in the
“Guidelines of Excessive Slippages Procedure” (ESP). The Excessive Slippages
Procedure Implementation Guidelines will form an integral part of the terms of Reference
of the Convergence Council;
(viii) Take decision ‘concluding’ its assessment of the Member State’s progress in
implementing its convergence program;
(ix) Report through Council of Ministers to the Authority of the Heads of States and
Governments concerning the implementation of the Multilateral Macroeconomic
Surveillance Framework and communicate any decisions taken under the ESP.
Source: Report of the Inaugural Meeting of the Convergence Council, November 2015, Lusaka,
Zambia
47 | P a g e
Annex 4: COMESA: Regional Payment and Settlement System (REPSS)
The Regional Payment and Settlement System (REPSS) is at an advanced stage of

completion. Software and hardware have been acquired with EU financing, the system is being
tested and training is being provided. It is not yet clear how many COMESA members will
participate from the outset. COMESA follows a variable speed approach, which allows those
members who are willing and able to join immediately, whereas others may join when ready. It
is also not clear whether, once a country decides to join REPSS, individual banks will participate
or not. Zambia intends to make bank participation compulsory.
REPSS is a multilateral netting system with end-of-day settlement in a single currency

(Euro or US Dollars). Under REPSS, the exporter’s currency will be quoted on letters of credit;
transactions will be settled at spot T+0, with value T+2, at the agreed spot exchange rate; a
single currency will be used for net settlement; as single nostro correspondent will be used for
the net settlement currency; the COMESA Clearing House will act as the agent of the central
banks; and bilateral limits will be set by each central bank at the Clearing House. Agreement
has been reached that the Central Bank of Mauritius will act as the settlement central bank, and
it has accordingly set up the settlement accounts in Euro and US Dollars.
REPSS should lead to a reduction in transactional and operational costs. REPSS will bring
about a reduction in:
(i) Settlement transactions;
(ii) Liquidity requirements to secure payments;
(iii) Exposure to foreign counter-parties; and
(iv) Foreign correspondent banking charges for covering confirmation/drawing of LCs by
correspondents.
REPSS will also bring about a switching of relationships for trade transactions from commercial
banks/foreign correspondent to commercial bank/central banks for intra COMESA trade.
REPSS links central banks’ RTGS systems via an interface with the COMESA Clearing
House. As noted above, not all countries have yet introduced an RTGS system. It is also
feasible to develop a separate interface for those countries that have an electronic retail
payment system, but this work is not yet completed.
Sources: COMESA Clearing House
48 | P a g e
Annex 5: Challenges in Microfinance Development
While many developing countries are showing high commitment to including the whole
spectrum of their populations in the formal financial system, they have come up against
barriers that make it difficult to tackle financial exclusion to the degree to which they would
aspire. Commonly identified barriers include high operating costs; poor market response; the
need for greater stakeholder coordination; lack of reliable data as well as national identity
documents and systems; and the need for greater consumer understanding, trust and
protection, amongst others.
1. High operating costs

Investment in Africa's microfinance sector is on the rise but lower than average financial
performance still plagues many of the small MFIs. High costs are the main factor inhibiting
performance. The average operating costs for MFIs in Africa in 2010 equaled approximately
32.6% of their entire loan portfolios. Many MFIs also struggle with inadequate human capital at
all organisational levels due to the limited numbers of skilled senior managers, especially in the
areas of finance, internal audit and law. As a result of limited financial and human capital
resources, many MFIs employ inadequate management information systems (MIS) that are
ineffective with regards to risk mitigation and cost control. This is partly due to the wide range of
MFIs and the types of services they offer for a wide array of contexts, making it hard for
affordable systems to encompass the wide spectrum of features and functionality that an
individual MFI may desire. In some cases, however, some MFIs are just not willing to pay the
costs of a good MIS. Not surprisingly, inadequate management tools have been directly
correlated with higher portfolio at risk (PAR) figures.
2. Poor market response

For financial inclusion to be expanded through enabling regulation, market uptake is critical, and
surveys indicated that this has been a challenge in some places. Passing regulation to improve
access to and use of financial services does not guarantee increased access. Regulators may
face challenges in predicting or understanding market uptake because of a lack of clarity
surrounding business models and the resulting incentive structures needed to motivate financial
service providers to pursue harder to reach markets. Thus, financial institutions often do not
have the right motivation, or business case, to abandon their "comfort zone" and explore new
areas of activity.
Policymakers in Indonesia highlighted the role of pragmatic discussion with 'banks to overcome
this challenge, which involves the setting of realistic financial inclusion targets. In Brazil there
was a financial inclusion breakthrough point in the model for banking correspondents when
transactions became profitable because of a policy decision to channel social payments through
accounts accessible through agents. Furthermore, new players, such as MNOs, are entering
financial markets to become suppliers of financial services.
3. Coordination amongst stakeholders

Financial inclusion policymaking involves multiple stakeholders from different public institutions.
For example, in Sierra Leone institutional responsibility for financial inclusion lies with the Bank
of Sierra Leone, the Ministry of Finance, the Ministry of Trade and Industry, as well as the
Ministry of Agriculture. The absence of platforms to bring relevant agents together may hamper
the correct design and implementation of financial inclusion reforms and policies. Lack of
coordination also increases the risk of bad timing and sequencing of regulatory changes.
49 | P a g e
Countries such as Yemen are aspiring to improving coordination efforts and others are already
embarking on such efforts with the leadership of the central bank. Though coordination is a
challenge, it does not appear to be a deal breaker. The Philippines has made strides in financial
inclusion in the absence of "one" national policy on financial inclusion, but with key parts of the
approach framed through the National Strategy on Microfinance and with various government
initiatives undertaking financial inclusion initiatives related to their legal mandate and within their
areas of jurisdiction.
4. The absence of reliable financial data on access and usage

The absence of reliable data (even for baseline issues such as "how many people have no
access to or make little use of financial services" or "who they are and where they live") is still a
reality in many developing countries. This poses a major obstacle to policymakers' ability to
make well informed decisions, as well as to monitor the progress of financial inclusion initiatives.
Without data, financial inclusion enters a vicious cycle. No data means it is difficult to have a
complete picture of the situation in the country, which in turn results in the lack of political
awareness and few subsequent actions being taken. Regulators indicated that policymakers
addressing financial inclusion are often unable to collect data and therefore develop informed
policy because they lack the budget or mandate for these activities as this policy area lacks a
clearly assigned overseeing authority.
5. The absence of national identity documents

Many countries lack national identity documents and systems required for financial service
providers to perform know your customer (KYC) procedures and open accounts, and in those
countries that do, low income clients often still do not possess such documents. The extent of
the challenge of AML/CFT standards have posed to countries has varied. For some countries,
only the banking sector is subject to these rules; but in others, such as the Philippines, MNOs
and other nonbank entities licensed as "electronic money issuers" must abide by these
standards and this requirement, therefore, can hinder the expansion of financial services
through nonbank entity channels as well.
6. Greater consumer understanding, trust, and protection

Many policymakers expressed consumer protection as a central pillar of their overall financial
inclusion strategy. Some countries like Peru cite demand side barriers, putting emphasis on
policies that are critical to empowering people so that they are aware of financial services and
make good use of them. Other countries cite consumer protection challenges related to the
supply of financial services such as over indebtedness. In Mexico and Thailand, the importance
of consumer protection (and financial education) as an inextricable part of financial inclusion is
highlighted by the prominent place in their definitions and demand side surveys that measure
financial inclusion.
Though originating in developed countries, the recent financial crisis has put the spotlight on
consumer protection and the fact that unfettered access to financial services is not politically
palatable. Past financial crises may have long lasting effects. One of them is the erosion of trust
in the financial system, reducing people's willingness to use it. This problem is seen in regions
like Latin America, heavily affected by the hyperinflation that occurred during the 80s or the
"corralitos" more recently. Lack of trust is reflected in the low levels of use of financial products,
mainly savings accounts; the predominant use of hard currencies in daily transactions; or, for
those who can afford it, the abundance of offshore bank accounts in countries considered to be
"safe".
50 | P a g e
7. Challenges of the political process
Despite impressive progress in recent years, the level of political awareness regarding financial
inclusion is still very poor. In some cases it is still being perceived by policymakers as a non-
urgent issue thereby relegating financial inclusion to a lower priority level in the political agenda.
In Namibia, one of the most important tasks for financial authorities was to convince
policymakers of the importance of financial inclusion.
The situation is compounded by the low levels of politicians' understanding of financial sector
issues. This is a problem for regulators, who often see their technical proposals changed and
transformed beyond recognition as the proposals are subject to the political process in
Parliaments. The changes introduced by politicians in the successive drafts of the bill regulating
microfinance activity in Guatemala emptied the proposal from regulators, making it effectively
useless.
Financial inclusion also requires a dynamic and flexible approach to regulation that more often
than not is missing. Constant innovation and changes in the sector requires regulators to
respond with dynamism to new challenges and opportunities in the market. When this does not
happen, regulatory frameworks quickly become obsolete and unable to satisfy the needs of both
customers and financial Institutions.
8. Market level barriers

While there is great variance across the continent, the lack of market infrastructure and market
information stands out as significant barriers in most countries. For example, while 26 countries
in SA have public credit registries, only six of these cover microfinance (MIX and CGAP, 2010).
Also, local stock markets are weak or non-existent, which limits equity investors' exit options.
Progress has been made on the regulatory side. Most countries in SSA have no restrictions on
foreign investments in the banking sector. Seventeen countries have adopted national
microfinance strategies and 27 have adopted microfinance legislation to date. Between 2007
and 2009 alone, 14 countries drafted, adopted, or revised microfinance laws/regulations,
including a new law for decentralized financial systems for the West African Economic and
Monetary Union (WAEMU region), which replaced the Programme d'Appui (PARMEC) law.
Twenty nine countries have specialised microfinance laws, and in 15 others, microfinance is
regulated under banking or NBFI laws. Despite this progress, some regulations are inadequate,
and implementation, including licensing, remains challenging, especially in West Africa.
Additional approval requirements create long delays, branch licensing is cumbersome and there
can be frequent and confusing changes in capital and other regulatory requirements.
Supervisory capacity is often a challenge and weakly regulated institutions threaten the
development of a sound market for investment. The next regulatory push on the continent will
need to bolster existing policies, ensure compliance and account for recent innovations and
trends in the field, such as mobile banking services and increased consumer protection.
Finally, macroeconomic instability, as well as political instability and interference, help to explain
the low level of investment in several countries. While regional conflicts have diminished and
investments are growing in stabilising post conflict countries, such as the DRC, there is still
unease about investing in other post conflict countries, such as Sudan. The overall business
environment remains unfavourable in countries such as Chad, Niger, Burundi and the Central
African Republic, while issues with corruption, oil subsidies and instability hamper investments
in Nigeria.
Source: COMESA, Alliance Forum Foundation, AfDB Group” Proceedings of Microfinance

Training on “Initiatives for Regulation and Supervision for Financial Inclusion” 2-9 December
2014, Lusaka, Zambia.
51 | P a g e
Annex 6: Challenges to the development of technology based financial services
While technology emerges as a viable route to financial inclusion in Africa, various obstacles
have been preventing the development of technology based financial services on a larger scale.
These include the following:
1. Stringent regulation
Several African countries are still missing regulatory frameworks that govern the activities of
technology based financial services, including mobile financial services. For instance, m-
payments require the accepted use of electronic signatures, such as a personal identification
number (PIN) to authorise transactions. If the e-signature is not legally valid, the transaction
could be challenged. There is, therefore, a need to provide status to electronic transactions
equivalent to that achieved by physical signatures. Moreover, international AML/CFT standards
require that adequate customer due diligence (CDD) be undertaken on all new accounts and on
single payment cash operations to identify suspicious transactions. National laws and
regulations in Africa typically require verification of: (1) client identity using an official document
and (2) the client's physical address. This constrains the outreach of technology based solutions
as only 22% of African households receive mail at home and a large share of them do not have
identity documents. This calls for clear regulatory frameworks for technology based solutions
and flexibility in the application of CDD requirements.
2. Limited interoperability
Reaching an optimal scale for a provider of technology based financial services requires
interoperability at many levels. The ideal situation is to have widespread access to a point of
sale (POS) to allow customers to perform a large spectrum of operations. According to the
outcomes of the Global Payment Systems Survey conducted in 2010 by the World Bank, less
than 20% of products were reported to be fully and partially interoperable. This limits the
attractiveness of technology based solutions to customers and leads to a low level of usage.
3. Scarcity of qualified agents
The ability of agents to drive transaction volumes, educate customers on how the service works
and deliver error free transactions have a major bearing on the success of a technology based
financial solution. The 2011 Global System for Mobile Communication (GSMA) Global Mobile
Money Adoption Survey shows that agents of the eight fastest growing mobile financial services
deployments had significantly more activity (up to 64.8 transactions per active agent outlet per
day) relative to agents of other services (an average of 3.8 transactions per active agent outlet
per day). Well qualified agents are not always easy to find in Africa. It is only through well
trained agents that success of technology based solutions can be ensured.
4. Low levels of financial literacy and income
Africa holds one of the lowest literacy rates in the world. In this context, the population's ability
to understand technology based financial services is not optimal. Hence, financial literacy
programs are needed to inform customers and show them how these services work and the
risks involved. In addition, adoption of smartphone tailored solutions will eventually become
widespread in Africa; but so far smartphones are unaffordable to a large share of the population.
Source: COMESA, Alliance Forum Foundation, AfDB Group” Proceedings of Microfinance
Training on “Initiatives for Regulation and Supervision for Financial Inclusion” 2-9 December
2014, Lusaka, Zambia
52 | P a g e
Annex 7: Recommendations on Regulatory and Supervisory Framework to Enhance
Financial Inclusion in the COMESA Region
1. Recommendations related with Policy and Regulatory Framework

(i) Categorization of financial service providers and clearly indicating the types of
regulation that is applicable to them. For example, prudential or non-prudential
(ii) Framework to provide for collaboration among different regulators (Bank regulators,
Telecom Regulators and Sacco regulators.
(iii) Where non-financial institution provide e-money as one of the primary activities, the
framework should require these to be registered or licensed by the banking regulator
(iv) Risk based regulation should be applied to FSPs that can cause material risks on the
financial system;
(v) Deposit taking Microfinance Institutions and SACCOS that are likely to cause systemic
risk may be prudently regulated.
(vi) Those MFI institutions which are less likely to cause material risk on the financial system
should be non-prudentially regulated.
(vii) Different regulatory bodies should coordinate where it is appropriate (to oversee the
sector wide activities)
(viii) Ensure transparency to protect customers from unfair or hidden costs in interest rates,
charges or fees. These include among others:
(ix) The law to provide for disclosure of the effective interest rate (including charges and
fees) and prescribe the form, content, method of calculation and disclosure.
(x) Contracts should be in a clear and simple format and language
2. Recommendations Related with Consumer Protection
(i) The Framework should capture all the key principles that govern the consumer
protection. These are:
a) Appropriate product design and deliver;
b) prevention of over indebtedness;
c) Transparency;
d) Responsible pricing;
e) Fair and respectful treatment of clients;
f) Privacy of client data;
g) Mechanism for complaint resolution.
(ii) Establish Credit Reference Bureaus. It should be mandatory for all FSPs to submit
information to Credit Reference Bureaus (CRB) and penalty should be applied in case of
non-compliance
(iii) FSP shall be obliged to consult the CRB before granting any loan.
(iv) Where there are no CRBs there is need to:
a) Encourage information sharing through MOUs;
b) Encourage private sector to invest in CRBs;
c) Central banks to consider establishing a national credit agency;
(v) Interest rates should be market determined
(vi) FSPs may be guided in their lending rates by reference rates set by the Central Banks.
Interest rate caps though not promoted can be set at a level that ensures MFIs
sustainability.
(vii) Collateral not to be mandatory
Source: COMESA, Alliance Forum foundation, AfDB Group” Recommendations on Policy and
regulatory Framework for Inclusive Finance “ PP 46-65, Nairobi, Kenya, 2016
53 | P a g e
Annex 8: Factors Affecting Capital Market Development in Africa
Honohan and Beck attribute the following reasons for low level of capital market development in
Africa: low level of economic activity, which makes it difficult to reach a critical mass; the state of
company accounts and their low reliability and some exchanges were established primarily by
external influences (in part political) rather than by the perceived demand in the market. A
related factor is the relatively low demand from institutional investors, as private pension funds
and insurance companies have not yet built up significant capital stock, and there are certain
statutory limits on the composition of their portfolios that restrict investment in equity capital.
Most observers agree that African stock exchanges in general are too small individually to
ensure efficiency and liquidity, consequently, they argue in favour of an integration of
exchanges. Indeed, given the small number of listed stocks and the fixed costs involved in
setting up and running the exchanges, listing costs are relatively high in Africa. This has been
cited as a contributing factor to the low number of listings. It should therefore be a goal to
ultimately unify COMESA exchanges, although this may prove a difficult task. Meanwhile, efforts
should be directed at eliminating barriers to intraregional investment and at facilitating cross
listing. EAC members, most of which are also COMESA members, are fairly advanced on
coordinating securities market regulation and in setting up a joint stock exchange. They have
created an East African Member States Securities Regulatory authority to serve as a
coordinating body for capital market cooperation and integration. Partial capital account
liberalisation has been implemented and cross listing has been encouraged
An effective linkage of national stock exchanges implies intra-regional liberalisation of exchange

controls since the later are an impediment to capital market integration. Exchange controls need
to be eliminated, at least on intra-COMESA flows to permit COMESA wide market. This is rightly
recognised in the COMESA Financial System Development and Stability Plan and an earlier
lifting of these controls particularly on intra COMESA trade is desirable.
Honohan and Beck (2007) pose the question whether International (IOSCO) standards for
capital market regulations are too “heavy” and costly for African stock exchanges. They suggest
perhaps lighter touch regulations might be better suited to African conditions. Some countries
consider setting up second board along the lines of some existing in advanced economies. The
second board would have less onerous requirements in terms of company governance and
information requirements for new listings as well as listing fees. The Nairobi Stock Exchange
has already established such a second board.
When considering possible linkages of national stock exchanges, it is also necessary to explore
the introduction of region wide capital market products, such as a regional bond issuance. A
case in point could be the finance to be raised by the COMESA Infrastructure Fund. It could
issue infrastructure development bonds to be subscribed by residents across the COMESA
region.
Source: African Development Bank Group “Financial sector Integration in Three Regions of
Africa” 2010
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REFERENCES
African Development Bank Group”Financial sector Integration in Three Regions of Africa” 2010
AUC/UNECA, Joint AUC-AACB Strategy on the Establishment of the African Central Bank”
Paper presented to the Joint Annual Conference of the African Ministers of Finance, Planning
and economic Development” 31st March-2nd April 2016, Addis Ababa, Ethiopia. P.15
COMESA, AfDB group” Facilitating Multilateral Fiscal Surveillance in Monetary Union Context,
with Focus on COMESA Region” February, 2011
COMESA, Alliance Forum Foundation, AfDB Group” Proceedings of Microfinance Training on

“Initiatives for Regulation and Supervision for Financial Inclusion” 2-9 December 2014, Lusaka,
Zambia
COMESA, Alliance Forum foundation, AfDB Group” Recommendations on Policy and regulatory
Framework for Inclusive Finance “ PP 46-65, Nairobi, Kenya, 2016
IMF: Regional Economic Outlook, Sub Sahara Africa Region and Middle East and Central Asia
Region, April 2016.
IMF: Regional Economic Outlook, Sub Sahara Africa Region and Middle East and Central Asia
Region, October 2016.
McCarthy Monetary Union: The Experience of the Euro and the Lessons to be learned for the
African (SADC) Monetary Union
Report of the Inaugural Meeting of the Convergence Council, November 2015, Lusaka, Zambia
55 | P a g e

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COMMON MARKET FOR EASTERN

Symposium on Developments in COMESA Monetary Integration

29th March, 2017

BY IBRAHIM ABDULLAHI ZEIDY

ACRONYMS AND ABBREVIATIONS ........................................................................................... iv

LIST OF TABLES .......................................................................................................................... vii

LIST OF FIGURES ........................................................................................................................ vii

EXECUTIVE SUMMARY .............................................................................................................. viii

EXPERIENCE OF OTHER MONETARY UNIONS .........................................................................3

1.1 The European Monetary Union (EMU) ..................................................................................... 3

ASSESSMENT TOWARDS MACROECONOMIC CONVERGENCE AND IMPLEMENTATION

2.1 Progress on Achievements of Macroeconomic Convergence Criteria ......................... 10

HARMONISATION OF MACROECONOMIC DATA .................................................................... 26

THE ASSESSMENT OF MEMBER COUNTRIES ACHIEVEMENT OF THE REQUIREMENTS

4.1 Challenges Faced by Member Countries in the implementation of the COMESA

DEVELOPMENTS IN TRADE INTEGRATION IN COMESA ....................................................... 35

SUMMARY OF LESSONS AND CHALLENGES FOR ACHIEVING COMESA MONETARY

CONCLUSION AND FIVE YEAR STRATEGIC PLAN (2017-2021) FOR COMESA

Annex 1: COMESA Macroeconomic Convergence Criteria .................................................... 45

ACP African, Caribbean and Pacific

Table 1: European Monetary Union Timetable .................................................................................................................. 3

Table 2: Overall Fiscal Balance Excluding Grants (Percent of GDP) ................................................................ 11

Table 3: Consumer prices (Annual Average; Percent Change) ............................................................................ 12

Table 4: Reserves (Months of Imports of Goods and Services) ........................................................................... 13

Table 5: Real GDP Growth (Annual change; percent) ................................................................................................ 15

Table 6: Total Investment (Percent of GDP) .................................................................................................................... 16

Table 7: External Current Account Including Grants (Percent of GDP) ........................................................... 18

Table 8: Government Debt (Percent of GDP) .................................................................................................................. 19

Table 9: Total Revenue Excluding Grants (Percent of GDP) .................................................................................. 20

Table 10: Status of Implementation of CMMSF by Member Countries ............................................................. 22

Table 12: Pillar I Macroeconomic Convergence, Statistical Harmonisation and Implementation of

Figure 1: Overall Fiscal Balance excluding grants (percent of GDP) ................................................................ 11

Figure 2: Consumer Prices ....................................................................................................................................................... 12

Figure 3: Reserves (Months of Imports) ............................................................................................................................ 13

Figure 4: Real GDP Growth ....................................................................................................................................................... 16

Figure 5: Total Investment (Percent of GDP) .................................................................................................................. 17

Figure 6: External Current Account ..................................................................................................................................... 19

Figure 7: Government Debt ...................................................................................................................................................... 20

Figure 8: Total Government Revenue (Excluding Grants) ...................................................................................... 21

Assessment of member States’ Performance on the Convergence Scale and the

8. As per the requirements of the COMESA Multilateral Macroeconomic Surveillance

Assessment of Member Countries on Harmonisation of Statistics

Assessment of Member Countries in the Implementation of the COMESA Financial

12. The following are some of the achievements and challenges:

a) To modernise payment systems many member countries have introduced RTGS

a) Most member Central Banks established the financial stability unit;

15. CMI developed Guidelines to undertake the following:

Assessment of Member Countries in Trade Integration

h) COMESA Secretariat is implementing programmes to improve the transport and

Summary of Key Challenges for Achieving COMESA Monetary Union in 2018

a) Achievement of the convergence criteria on a sustainable basis continued to pose a

Conclusions and Recommendations for the Way Forward

Evolution of COMESA Monetary Cooperation Programme

EXPERIENCE OF OTHER MONETARY UNIONS

1.1 The European Monetary Union (EMU)

a) Excessive Deficit Procedure;

Box No.1: Euro Crisis

1.3 The West African Monetary Zone (WAMZ)

1.4 Lessons for COMESA

(i) Introduction of limits for public debt in their constitutions

ASSESSMENT TOWARDS MACROECONOMIC CONVERGENCE AND IMPLEMENTATION

40. This chapter analyses COMESA member countries achievements as related to