Minister of Finance Address: International Forums & Hosting of G20 Summit

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Finance Standing Committee

28 August 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
29 August 2007
MINISTER OF FINANCE ADDRESS: INTERNATIONAL FORUMS & HOSTING OF G20 SUMMIT

Chairperson: Mr N Nene (ANC)

Documents handed out:

Presentation on International Engagements
Map of the African Galaxy

Audio recording of meeting

SUMMARY
The Minster of Finance addressed the Committee on relationships and implications of South Africa and certain international governing bodies, including the Southern African Development Community, the Customs Union, the International Monetary Fund, the World Bank and the African and European Unions. The most contentious issues raised by Members were around SADC and SACU and the question was raised whether overlapping did not create duplication of jobs. The Minister said that while there was an overlap with these institutions, the mandates of each one were different, which raised the need for them to function individually. The Minister agreed that SADC was an important institution, and that more time would need to be devoted to engaging in discussions about this country’s membership into SADC. It was noted that South Africa was reported as doing well in the African Development Bank because in the regional sector, it had the second largest shareholding of about 4%. In terms of the World Bank, questions were asked about institutions within countries and their borrowing ability from the World Bank.

MINUTES
Minister of Finance’s address on attendance at International forums and Hosting of the G20 Summit.
Hon Minister Trevor Manuel, Minister of Finance, addressed the Committee on the institutions that dealt with a number of issues on a geographical base. He noted that international engagement took place on three levels: Development in Africa – alleviating poverty, and promoting the developmental agenda and regional integration; Institutional Participation, by representing South Africa at finance, economic and development forums and supporting capacity building initiatives, and International Policy, developing and advocating the position of South Africa on international policy issues.

He noted in particular that the Southern African Customs Union (SACU) that had shown an increase largely due to South African imports since 1996. enabled South Africa to enter into transactions, not as a sovereign state but in respect of the region. The Southern African Development Community (SADC) in its early stages had looked at economic development but was now focusing on the SADC Trade Group, with the Customs Union 2010 being next in line. There was an overlap with SACU members also being members of SADC. The third institutions were the Pan African Institutions, which had seen a growth in the power and responsibility in the African Developmental Bank. Within the Pan African Institutions, there was a UN Economic Commission for Africa (ECA), which undertook critical research and gave support to regional institutions.

The Minster spoke about the African Developmental Bank (ADB) and the World Bank (WB). The key challenge for Africa was the development of infrastructure to increase intra-Africa trade, and to reduce revenue dependency from tariffs by developing the taxation system. He said that that there was an increasing role for South Africa in guiding a new ADB leadership and returns. At World Bank the reform issue was quite strong, as it had had a citizen of the United States as its president for the past 63 years. This bank’s role tends to be stronger in lower income countries, and it had a challenge in the middle income countries. The countries that were borrowing most extensively from the bank included China and India.

The International Monetary Fund (IMF) had been in the news lately due to the appointment of the managing director. However, it was also important to note that the IMF was facing some financial difficulties and a task team was formed that included The Governor of the South African Reserve Bank, Mr Tito Mboweni. The Crocket Report dealt with issues of revenue and the IMF going forward.

The Minister listed and described the G20 countries and indicated that it was this year chaired by South Africa, and in November South Africa would be hosting a conference. The Troika leadership consisted of South Africa, Australia and Brazil. The overall theme was partnership and sharing. Three main focus areas were Bretton Woods Reform, commodities and financial stability and fiscal elements of growth and development. It was an ideal opportunity to engage other African countries and to discuss effectiveness of aid and fiscal growth. International Policy issues would include strong focus on sustaining economic growth in sub-Saharan Africa, deepening regional economic integration, and doubling aid to Africa. Canada had apparently expressed a view that G20 should be expanded to include more countries.

Discussion
Mr S Asiya (ANC) asked about SADC, and the issue of debate around phasing in. He asked how the African Union (AU) were going to deal with the movement of people from country to country.

Mr Asiya believed poverty should be measured in both the African context as well as global context. He asked how long the measuring process would take, so that Members could calculate a midpoint. He said that while people sat in the boardroom and discussed how poverty was measured, people were suffering.

Mr D Gibson (DA) said that the President of France had made an interesting suggestion that the G8 should be called the G13. The newspaper reported that the Minister had declined to comment, and referred the media to the Presidency, who referred the media to the Department of Foreign Affairs, who could not be contacted for comment. He asked what progress was being made with the economic progress of the G8 and asked what the effect would be on South Africa’s neighboring countries.

Mr B Mnguni (ANC) said that on the issue of during a presentation on the investment protocol the Members were told that some countries in SADC had not yet signed the protocol. He asked whether these difficulties had been dealt with.

Mr Mnguni pointed out that in SADC some countries, such as Lesotho, earned 60% of their income from SACU. He sought further elaboration on this.

Mr Mnguni said that there was a view that China was trying to form another market similar to the London Stock Exchange. He asked what the South African economic position on that issue was.

Mr Mnguni asked if it was practical or possible to develop free trade by 2008 and a Customs Union by 2010.

Mr M Mbili (ANC) asked what the mechanism of transformation was for the World Bank. He asked if the Minister of Finance himself intended to run for office as President of the Bank.

Mr Mbili referred to the issue of overlapping membership. He asked what the significance was of keeping SACU and SADEC as individual bodies and if this did not result in duplication of work.

Mr K Moloto (ANC) asked about the integration of African countries, saying that for example companies in Botswana or Mozambique wanted to invest in the stock exchange with a view to raising capital. He asked whether the matter of macroeconomic convergence had been taken into consideration.

Mr Moloto asked how in the private sector matters such as the audit of financial statements were going to be regulated.

Minister Manuel responded to the questions in broad categories.

On the issue of the Customs Union, he said that the formula included a developmental component. Narrowly defined it would include the customs pool, where whatever was collected in customs duties were shared in a ratio. There was also the excise pool, where all of the “sin taxes” were added. The developmental component should exist or be based on a calculation, which was inversely proportional to per capita Gross Domestic Product (GDP). In SACU, the country with the highest per capita GDP was Botswana, and the lowest was Lesotho. In fact Treasury’s submission was that the direct relationship between capital and GDP was not correct, and if not amended then there was no development matter in the pool.

On the general issues of SADC, Minister Manuel said that there was a variety of thought around regional economic integration. The key issue would be the speed with which South Africa could travel. SADC, in the strategic development plan, set out a number of criteria around inflation rates, ratio budget deficit and GDP and nominal value of guaranteed debt. South Africa had no problem in meeting the criteria. South Africa, Lesotho, Namibia, and Swaziland had a common monetary area and this was the first level of integration. The second level was the customs Level. In those countries, the macro-economic convergence levels were quite high. Botswana, relative to the other four, had high interest rates and because of that, there was a high level of convergence. Variable geometry could be used to measure the level of convergence. One of the issues to be considered was that the customs pool was not a gift from South Africa; it was based on revenue collected. This relationship with other countries required careful management.

In relation to the investment protocol, Minister Manuel said that the countries that had not signed were Malawi, Zambia, Angola, and Namibia, and the reasons for non signature included complexities with changes in government.

On the issues around economic partnerships, Minister Manuel said that Mr Gibson was correct in stressing that
Economic partnership with European Union – The Minister said that Mr Gibson was correct in saying that South Africa is a separate entity. The key issue was that it would be preferable if the European Union (EU) negotiated with SADC. EU had carved out East Africa and left the remainder. The argument was that this region was the essence of the AU, that the division did not help, and that therefore Brussels should be asked to negotiate with the EU to strengthen the entity. The division into east and west hindered cross border flows.

In relation to the questions around borrowing and capital markets, Minister Manuel said that interestingly there was the same platform as London between the Johannesburg Stock Exchange (JSE) and the Namibian Stock Exchange so that Namibian company shares could be traded on the JSE. The World Bank and the IMF had raised capital in our market so that the exchange integration was between that country and South Africa. This supported larger and more efficient markets. One of the converse trends was that the Development Bank of South Africa had been able to lend in both Zambian and Malawian currencies, taking out the exchange risk for currencies there. The process was working.

In relation to the World Bank, the Minister responded that his Bank did advance policy debates. The WB Development Reports should be studied by the Committee. The World Bank did not define poverty. National Treasury and Stats SA were conducting studies on this measurement because it had to be one unique to South Africa. In addition, there was a fear that some of these measures might be used for industrial relations. These statistics should be available in the next couple of weeks.

A member of the Committee said that the Minster should encourage other Ministers in the Legotlas to follow in his footsteps by giving such superb comments. He asked what was meant by middle class countries and the challenges that these middle class countries were posing.

A member asked if there were strategies to overcome the challenges with SACU and whether these challenges would deteriorate into problems.

Mr S Marais (DA) referred to the AU and the African galaxy, and asked the Minister for his view on the possibility of rationalisation of trade in Southern Africa. He then went to ask if South Africa could play a developmental role in addressing challenges in the AU.

Ms J Fubbs (ANC) asked a question relating to leadership and chairing of G20.

Ms Fubbs asked what were some of the challenges in terms of governance issues and democratisation of IMF, which also had a bearing on access to funds.

Ms Fubbs asked what purpose the quota system was serving if it was providing some sort of glass ceiling for some emerging economies. She was concerned that the quota system was a negative influence in terms of access to funds, and asked if the Minister shared the same views.

Mr N Singh (IFP) asked for the Minister’s view on how the formula for SACU should be restructured, and who was responsible for the distribution of resources within SACU.

Mr Singh asked about the percentage shareholding South Africa had in the African Development bank and who the other shareholders were.

Mr Singh asked whether the World Bank lent to government only, or to institutions within a country also.

Mr M Johnson (ANC) asked how parliament could leverage on opportunities such as Chairmanship of the G20. Such instances could be seen as empowering opportunities.

Mr Johnson said that overlapping restrained integration and asked for clarity.

Mr Johnson referred to IMF Article 4, noting that as a country there was a budget surplus and the exposure debt-wise was decreasing, He asked if this was a policy that National Treasury arrived at, and what policies were in place to utilize this surplus.

Minister Manuel responded to the generic questions as follows:

On the issue of challenges, he agreed that it was necessary to look for a measure of integration. Issues on the agenda ten years ago had been taken over by time and circumstance. It was very important to understand that the world was changing and that because there was more money coming in, the outcomes of certain situations should be better and measurable in economic improvements.

On the question of the formula he said that this was made up of the three components, with the customs pool divided. The extent that Customs Duty collected had to be shared was a difficult thing to measure. He said that it was acceptable that the development component was fixed at 15% of the Excise pool. Such discussions were put forward by Treasury and these were going to be resolved by governments.

SADC convergence was an extremely difficult issue. If the Committee was to acknowledge that South Africa was part of Southern Africa, and part of SADC, then it must spend a long time going through the document to understand what the convergence criteria were. Those countries that would be in arrears would have an Article 4, because this was compulsory, and optional to do in terms of the mandate of the IMF.

On the question of AU associates, Minister Manuel said that no country could isolate itself from the global economy. Some countries had to fight harder because there were people who moved faster so economies could not stay in one place.

Minister Manuel explained that the shareholding in ADB was split into two parts; namely regional and non-regional. Regional shareholders were 53 Member states. The ratio was 60% African states for the non-regional part. South Africa was now the second largest shareholder with just over 4%, and it should increase to about 4.8% due to the release of another batch of shares.

Mr L Kganyago, National Treasury, responded to the issues on borrowing. He said that one of the most recent transactions in terms of borrowing was the buying back of short-term debt and rolling that into a bond that matured in 15 years time. It was done as part of a risk mitigation exercise. He said that the risk the country was facing with having a current account deficit was a sudden stop, and this would be addressed by buying of short-term debt. The debt could not be bought if there was no money in the bank. National Treasury was able to buy the debt because it had a fiscal surplus.

Minister Manuel continued by saying that National Treasury could borrow from the World Bank but the problem would be that the interest rates were slightly higher and the cycle of the World Bank was 18 months. South Africa was a middle-income country, and needed to take certain precautions when it came to borrowing. World Bank did lend to other institutions within a country besides government. He said that there was an ongoing debate about sub-national borrowings from the World Bank, because when institutions could not pay back, this fell back on government.

In respect of Article 4, Minister Manuel stated that this was the view of the IMF and National Treasury could disagree with it. He did not believe that it was infallible.

The meeting was adjourned.

 

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