The Country Session on Tanzania focused on the Tanzania National Development Vision and discussed emerging research issues. The presentations in this slideshare are from Christopher Adam, Pantaleo Kessy, Martina Kirchberger and Mujobo Moyo.
The East African Monetary Union: Progress and Challenges Towards a Common Currency
1. The East African Monetary Union: Progress and
Challenges
IGC Growth Week, 20 September 2011
Christopher Adam – Oxford and IGC
Pantaleo Kessy – Bank of Tanzania
Stephen A. O’Connell – Swarthmore and IGC
2. Outline
1. Context, background and initial conditions
2. Pre-conditions for effective monetary union
3. Transitional Arrangements
• Options
• Capital mobility and a grid system
• Design considerations
• Exit options
4. 1948 The new EAC
The EA High 2001
Commission Kenya
Kenya Tanzania
Tanganyika
Uganda
Uganda
2007
Burundi
Rwanda
1967
The EAC 2010
Kenya Common
Tanzania Market
Uganda Protocol
Targets
2012
1977 Monetary
The EAC Union
disbands
Kenyatta 2015
Nyerere
Political
Idi Amin
Federation
5. Milestones
• The Treaty for the establishment of the (new) EAC was signed on November 1999
and the EAC was formally launched in January 2001. The treat provides for the
following stages for economic and political cooperation:
• (1) East Africa Custom Union
• Established in 2005 focusing mainly on merchandise trade
• (2) EAC Common Market (free movement of factors of production - labour and capital)
• The Protocol on the Establishment of the EAC Common Market entered
into force on 1st July 2010
• (3) East Africa Monetary Union [EAMU]
• EAC member states are currently working towards an agreement on a
protocol for a monetary union by 2012
• (4) EAC Political Federation
• No time set yet – some indications of 2015
6. EAC Basic Indicators
Share of Head- Share of
Real GDP Exports of
Popula- EAC5 GDP count agricul- Trade Net ODA
per capita goods and
Country tion at official poverty ture in deficit (% of
($2005 services
(millions) exchange rate (at GDP (% GDP) imports)
PPP) (% GDP)
rates nat P-line (%)
Burundi 356 8.3 1.8 68.1 34.8 10.7 36.2 102.0
Kenya 1,428 39.8 39.7 46.6 22.6 25.2 13.1 15.4
Rwanda 1,032 10.0 7.1 56.9 34.2 11.7 17.5 61.0
Tanzania 1,237 43.7 29.7 35.7 28.8 23.2 11.9 37.2
Uganda 1,105 32.7 21.7 31.1 24.7 23.4 11.2 32.0
additional macro indicators
Present Gov’t CPI
Per-capita ER depr Reserves
value of Total debt deficit incl inflation
M2 growth rate, (months
Country external service grants rate
(% GDP) 2005-09 2005-10 of
debt (% XGS) 2007-09 2005-09
(%) (%) imports)
(% GNI) (% GDP) (%)
Burundi 36.7 13.4 13.3 7.2 -4.1 12.0 7.2 7.2
Kenya 42.7 19.4 5.0 4.0 -4.4 14.0 4.0 4.0
Rwanda 16.2 8.3 4.7 5.8 -1.3 10.6 5.8 5.8
Tanzania 28.8 13.5 3.5 5.3 -3.5 8.4 5.3 5.3
Uganda 20.6 8.2 2.0 6.4 -2.1 9.4 6.4 6.4
Source: World Bank, World Development Indicators. All except KEN are HIPC countries.
7. EAMU – anticipated benefits
• EAMU will replace the five individual country currencies with a common currency,
to be managed by an East African Central Bank (EACB).
• The proposed EAMU, may potentially offer economic benefits to the region:
– Elimination of intra-union exchange risk in trade and finance
– Larger and more competitive market => more attractive to domestic and foreign
investment
– (Enforced ) gains in coordinated economic management
– Potential political benefits e.g. increased collective political status in the international
arena
8. Feasibility and initial conditions I: intra-regional trade
• The five countries trade more with non-EAC countries, both on exports and import
side
• The gains in exchange rate certainty and in transaction cost reduction by having a
common currency are unlikely to be substantial at this stage.
Exports to EAC as a ratio of total exports
35 Imports from EAC as a ratio of total imports
40
30
35
25
30
20 25
%
15 20
%
15
10
10
5
5
0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Tanzania Kenya Rwanda Tanzania Kenya Rwanda
Burundi Uganda Burundi Uganda
9. Feasibility and initial conditions II: external shocks
• The cost of loss of independent
monetary and exchange rate policy
depend, to a large extent, on the way
in which exogenous shocks affect the
member countries. Emerging
difference in production / trade
structures and in aid dependence
increase the likelihood of asymmetric
shocks
• Rapidly changing natural resource
dependence (esp if EAC included
South Sudan)
• Very different levels and trajectories
of reliance on aid
10. Feasibility and initial conditions III: mitigation
Labour mobility
• Despite EAC Common Market Protocol, the region does not yet have free
flow of labour
.
Capital mobility
• Significant differences on de facto measures. Uganda and Tanzania highly
open, Tanzania, Rwanda and Burundi
Compensatory fiscal structures
• Limited capacity at present…
12. Inflation convergence in the EAC
Home CPI relative to Kenyan CPI
600
% deviation over decade
0 200
-200 400
1980 1990 2000 2010
Year
dot: Burundi / diamond: Rwanda / square: Tanzania / +: Uganda
13. Exchange rate convergence in the EAC
Home currency per Kenya shilling
800 600
% deviation over decade
0 200 400
-200
1980 1990 2000 2010
Year
dot: Burundi / diamond: Rwanda / square: Tanzania / +: Uganda
15. Process and Models
• May 2010 Monetary Affairs Committee (MAC) of the EAC commissions a
study of transition to monetary union
• The big design issues:
– Post-union monetary framework (CBK and IMF)
– Exchange rate arrangements during the transition (BoT and IGC)
– Convergence criteria for transition and union (BoU and IMF)
• Not an OCA study (literature suggests not a natural OCA).
• Not much global experience to guide transition. A European Central Bank
study commissioned by the MAC in 2009 relies on Europe’s experience
(which spanned 30 years and is now under major stress)
16. Few global comparisons
• CFA zone, RMA continued colonial-era arrangements: no transition from
independent national currencies.
• Euro area the dominant model, but ...
– Advanced economies with high intra-regional trade
– Long history of exchange rate pegging
– Germany a very credible anchor
• Gulf Cooperation Council ‘close’ to union: oil economies already
successful with relatively hard US$ pegs
17. Initial conditions
• All countries moving towards the same fundamental exchange rate
policy – ‘managed float with no pre-determined path’ but at differential
speeds. [Figure 1]. Currently, Rwanda ‘crawl-like’ and Burundi
‘stabilized’.
• Forex market ‘broadly competitive’ in Kenya, Uganda and Tanzania.
• Central bank does not play decisive role in normal operations of market
(although could, if required or desired).
• Markets in transition in Rwanda and Burundi. Fewer private players =>
less competitive
• Central bank more decisive role b/c relative size of aid flows in forex
markets.
18. EAC Nominal Exchange Rate Indices against US$
All currencies indexed to 100 in December 2005
-25 -20 -15 -10 -5 0 5 10 15 20 25
Percent deviation from 2005m12
IMF Classification
IMF Classification
BUR: Stabilized / KEN: Floating / RWA: Crawl-like / TZA: Floating / Uganda: Floating
BUR: Stabilized / KEN: Floating / RWA: Crawl-like / TZA: Floating / Uganda: Floating
2005m7 2006m7 2007m7 2008m7 2009m7 2010m7
Burundi Kenya Rwanda
Tanzania Uganda
back
19. Issues at convergence
• The mechanics of establishing conversion rates
– A variety of empirical ‘equilibrium real exchange rate’ approaches,
none very satisfactory
– How far ahead should ‘final’ conversion rates be established? If the
conversion step is credible, market rates should converge.
• Misalignment concerns
– Short-run macroeconomic tensions if wages and/or prices are sticky
and conversion rates imply different initial degrees of misalignment.
– Risk of competitive devaluations in conversion phase.
– Post-union shifts in equilibrium real exchange rates due to
differential resource endowments.
20. Exchange rate options for the transition phase
• A transitional arrangement needs to constitute a viable monetary policy
framework. Alternative arrangements differ in 2 main dimensions:
– How do they provide a nominal anchor? (Country by country, can
think of 3 leading anchors: a monetary aggregate, the exchange rate,
or an inflation forecast)
– Where do they vest policy sovereignty?
Monetary policy
Option Nominal anchor
sovereignty
1 – Float National money base and/or inflation targets National
2 – External grid National exchange rate pegs National but limited
Center: money base and/or inflation
3 – Delegated anchor Anchor country
Periphery: national exchange rate pegs
Collectively determined money base and/or
Collective with possible
4 – Collective anchor inflation targets coexisting with limited mutual
reserve pooling
exchange rate variability
Collectively determined money and/or inflation Weakly collective no
5 – Collective float
targets reserve pooling
21. Transitional Options
• Five options
– From ‘coordinated status quo to ‘full delegation’
• Float
• External Grid
• Delegated Anchor
• Collective Anchor
• Collective Float
22. Option I: A Float System
Design
• Countries maintain current (managed) floating regimes
• Adopt a common inflation target (with harmonized inflation measures)
• No explicit commitments on exchange rates
• Commitment to fiscal and macro convergence and increased information
sharing and coordination.
Conversion
• Once all countries are in agreed fiscal and macro ‘convergence zone’,
conversion date announced (ideally within 6 months) and conversion
rates between national currencies and EACU established.
23. Option II: External Grid
Design
• Each Partner state adopts a crawling (or fixed) band around a global
currency, most obviously the US dollar.
• Three choices Allows cross-
– Rate of crawl of central rate (c) rates between
any two Partner
– Initial width of band around central rate (b). states to move
– Rate at which band is narrowed +/- 2b%
Conversion
• As conversion approaches (subject again to meeting agreed fiscal and
macro convergence criteria) bands are progressively reduced, eventually
to zero on conversion.
• The EACU emerges as a hard peg to the US dollar
24. Option III: Delegated Anchor
Design
• Countries delegate one country (explicitly or implicitly) to maintain a
strong domestic anchor.
• Each other country commits to peg its own currency to that of the
delegated country’s currency.
• Commitments required for coordinated forex intervention to maintain all
currencies within their bands.
Conversion
• As conversion approaches (subject again to meeting agreed fiscal and
macro convergence criteria) bands around delegated currency are
progressively reduced, eventually to zero on conversion.
• Supranational EACB emerges to take over responsibility from delegated
country, with all monetary discretion removed from Partner State central
banks.
25. Option IV: Collective Anchor – the ECB proposal
Design
• Combines grid (plus band) system of delegated anchor (Option III) but with
collectively provided anchor.
• Authority delegated to supra-national body to design and run coordinated
union-wide monetary policy capable of anchoring union-wide inflation.
Conversion
• As conversion approaches (subject again to meeting agreed fiscal and
macro convergence criteria) bands are progressively reduced, eventually
to zero on conversion.
• The EACU emerges anchored by monetary policy run by supranational
EACB, with all monetary discretion removed from Partner State central
banks.
26. Option V: Collective Float
Design
• No explicit commitment to exchange rate arrangements during transition
(as Option I)
• Explicit, formalized, delegation to representative supranational monetary
authority (EAMI) of responsibility for designing and managing ‘shadow’
monetary regime for entire union..
Conversion
• Once all countries are in agreed fiscal and macro ‘convergence zone’,
conversion date announced (ideally within 6 months) and conversion
rates between national currencies and EACU established.
• The EACU emerges anchored by monetary policy run by supranational
EACB, with all monetary discretion removed from Partner State central
banks.
27. Issues in Transition
• Properties of alternatives
– Degree of commitment to ER peg
• Can partner states trade-off domestic and external objectives in
transition?
– Delegation of authority versus policy coordination (e.g. reserve
pooling)
– Robustness to weak fiscal control
– Exit options and credibility
28. Key questions for next phase
• Should exchange rate commitments be part of the transition process?
• What is the appropriate role of the supranational authority, in the
transition and in planning for full union?
• How rapidly should Partner States seek to fully harmonize inter-bank
foreign exchange markets?
• What methods should be used to establish conversion rates, and how far
ahead should these be specified?
29. Introduction Data Findings Conclusion
Agricultural Productivity Growth in Tanzania
Martina Kirchberger
Department of Economics, University of Oxford
20 September 2011
IGC Growth Week
30. Introduction Data Findings Conclusion
Motivation
80% of Tanzania’s residents reside in rural areas and are highly
dependent on agriculture
Key to understand role of agriculture in economic growth in
Tanzania
Lack of evidence on trends in agricultural productivity
2 IGC commissioned studies on agricultural productivity
growth
"Poverty & Productivity: Small-Scale Farming in Tanzania
1991-2007" by Lokina, Nerman and Sandefur
"Agricultural Productivity Growth in Kagera between 1991 and
2004" by Kirchberger and Mishili
Present results from these two studies
31. Introduction Data Findings Conclusion
Main questions
What was the role of the agricultural sector in poverty
reduction and consumption growth?
Has the output of major crops increased in the last 20 years?
How much is due to increases in (i) productivity and (ii) land
area used?
Has the adoption of modern inputs increased?
32. Introduction Data Findings Conclusion
Outline
1 Data
2 Findings
33. Introduction Data Findings Conclusion
Data Sources
Household Budget Surveys, 1991/92, 2000, 2007
National Sample Census of Agriculture, 2002-2003
National Panel Survey, 2008-2009
Rainfall data 1991-2004; 2002-2008
Kagera Health and Development Survey, 1991 and 2004 rounds
34. Introduction Data Findings Conclusion
Structural Change, 1991-2007
35. Introduction Data Findings Conclusion
Table: Evolution of Labor and Land Use in Kagera, 1991-2004
1991-2004
Change in Total Labor -16.0%
Male (above 20yrs) 7.6%
Female (above 20yrs) -5.2%
Male (12-19yrs) -38.7%
Female (12-19yrs) -43.8%
Children (7-12yrs) -30.0%
Change in Land -23.9%
Change in Land/Labor -11.6%
36. Introduction Data Findings Conclusion
Consumption Growth
37. Introduction Data Findings Conclusion
Agricultural Production
Proportion of farmers growing a particular crop is simliar
National level
Yields for major crops contracted (except rice paddy)
output increases were mainly due to area expansion
Kagera
Value of output per worker or per acre contracted in most
communities
Some catch-up by pure farmers
38. Introduction Data Findings Conclusion
Agricultural Production
Table: Output and Yield Growth
Output Yield Planted crop in 2002/03
Maize 0.9% -1.3% 64.0%
Paddy 3.6% 6.9% 15.2%
Sorghum -0.1% -0.7% 11.9%
Beans -4.1% -8.1% 24.9%
39. Introduction Data Findings Conclusion
Terms of trade
Table: Consumer and Producer Prices
Variable Mean Median Sd
Laspeyre Consumer Price Deflator 4.01 4.12 0.55
Laspeyre Producer Price Deflator 3.42 3.27 1.16
Coffee 2.60 2.56 0.93
Maize 5.59 4.84 2.87
Beans 4.28 4.68 1.78
Cooking Bananas 5.02 4.33 3.03
Sweet Bananas 4.17 4.00 2.99
Other Bananas 4.25 3.77 2.84
Notes: Consumer and Producer price index and selected products for the 47
rural communities
40. Introduction Data Findings Conclusion
Adoption of ’modern inputs’
National level
Low levels of adoption of improved farming techniques
(improved seed, fertilizer, pesticides, irrigation of plots and
tractors)
No evidence for increases in productivity due to improved
farming techniques
Kagera
Increase in the proportion of households using manure and
hired labor
Reduction in the proportion of households using fertilizer or
pesticides
41. Introduction Data Findings Conclusion
Conclusion
Occupational shifts away from agriculture made the largest
contribution to consumption growth
Crop composition of farmers remained fairly stable
For maize and most other crops (except rice paddy) average
yields have declined between 2002/03 and 2008/09; where
output growth is present it is primarily attributable to area
expansion and not productivity growth
No evidence for increased adoption of improved farming
techniques
43. Attaining Middle
Income Status
Tanzania: Growth and Structural Transformation Required to
reach Middle Income Status by 2025.
Mujobu Moyo (IGC), Rebecca Simson (IGC),
Arun Jacob (POPC) and Francois-Xavier de Mevius (POPC)
44. Outline:
1. Aim of the document
2. Methodology
3. Changes required
i. Sectoral shares and implied growth
ii. Employment and urban population
iii. Macroeconomic Indicators
4. Conclusions
5. Further issues
45. 1. Aim
To analyse the growth path and structural change
required if Tanzania is to become a lower middle income
country by 2025.
To outline the challenges and trade-offs that Tanzania is
likely to face in the next 15 years.
Used as a necessary tool to review the Tanzania
Development Vision (TDV) 2025 and develop a Five
Year Development Plan.
46. 2. Methodology
Sample: Countries that reached lower middle income
country (LMIC) status between 1960 and 2009
Analyze the structure of their economies in the year that
they reached LMIC status.
We derive economic parameters for a model middle
income country using the average values from our
sample of countries.
For Tanzania to become a LMIC it will have to grow at a
rate of 5% per capita or 8% overall assuming a 3%
population growth
47. (i). Sectoral shares and implied growth
Change
Tanzania
MMIC 2025 Required
2009
(total)
Industry (% of GDP) 24 30.7 27.92%
Manufacture (% of GDP) 9.4 17.8 89.36%
Service (% of GDP) 47.6 48.6 2.10%
Agriculture (% of GDP) 28.4 20.7 -27.11%
Sources: WDI database, ES 2009, own computation
48. (iii). Employment and Population
Tanzania MMIC Req. Ann.
2009 2025 Change
Employ. in agric (% of total) 74.6 41.2 -3.64%
Employ. in indust. (% of total) 5 20.5 9.22%
Rural pop (% of total) 74 62.3 -1.07%
Rur: Number of people (Millions) 30.12 37.64 1.40%
Urb: Number of people (Millions) 10.58 22.78 4.91%
Source: WDI (2010), ES (2009), ILFS (2006), own computation.
49. (ii). Macroeconomic Indicators
Tanzania 2009 MMIC
Exports (% of GDP) 13.20 30.50
Imports (% of GDP) 29.00 37.40
Trade Deficit (% of GDP) 15.80 6.90
GFKF (% of GDP) 25.00 26.60
FDI (% of GDP) 3.90 4.50
G Dom S (% of GDP) 17.90 21.60
Net ODA (% of GNI) 12.90 4.50
Rev (% of GDP) 16.20 20.70
M2 (% of GDP) 27.50 51.50
Sources: WDI database, ES 2009, own computation
50. 4. Conclusions
A fall in the share of agriculture and a rise
in the share of manufacturing in GDP
Movement of labour from agriculture to
manufacturing
Large productivity gains in agriculture
Rapid growth in exports, FDI, domestic
savings, government revenue
51. 5. Further Issues
The transition is already underway
Growth driven by the service, construction
and mining sectors
Growth in the manufacturing sector is still
slow
Natural resources potential
Growth paths and their implications