Southern African Development Community (SADC) Developments: briefing

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Finance Standing Committee

10 September 2007
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Meeting report

FINANCE PORTFOLIO COMMITTEE
11 September 2007
SOUTHERN AFRICAN DEVELOPMENT COMMUNITY (SADC) DEVELOPMENTS: BRIEFING

Chairperson: Mr N Nene (ANC)

Documents handed out:
SADC Finance and Investment Protocol presentation
SADC Monetary Union Presentation
Consolidated Text of the Treaty of the SADC
SADC Regional Indicative Strategic Development Plan

Audio recording of meeting [Part 1][Part 2]

SUMMARY
National Treasury provided a briefing on the 2006 Southern African Development Community (SADC) Finance and Investment Protocol that aimed to harmonise the finance and investment policies of SADC member states. This was one of the milestones of the 1999 Regional Indicative Strategic Development Plan that had key targets over the next 15 years for trade, economic liberalisation and development. The objectives for the Protocol and the Development Plan included deepening regional integration and accelerating economic growth and development. Building strong infrastructure linkages, improving fiscal reforms, public debt reduction and the development of regional industrial policy mechanisms were identified as major challenges.

The Protocol’s annexures were looked at in some detail, particularly taxation cooperation. This aimed to develop good tax policy design practices, improve efficiency of tax collection and the training of tax officials and to reduce obstacles to intra-SADC trade and investment. It was important to ensure the appropriate use of tax incentives between SADC member states, and avoiding harmful tax competition. The intended output of the SADC tax treaty policies was to create for both direct and indirect taxes, a network of SADC-specific tax agreements to minimise on juridical double taxation and address fiscal evasion through the facilitation of exchange of information and mutual assistance in tax administration.

The South African Reserve Bank spoke on the SADC Monetary Union which aimed to establish a framework for co-operation and coordination in the promotion of exchange controls for current and capital and financial account transactions.

Committee questions focussed on the role of parliamentarians in regional integration, the role of the SA Tax Institute, macro convergence indicators, comparisons between the EU experience and SADC, the SADC Stock Exchange and progress and feasibility of integration by 2008.

MINUTES
SADC Finance and Investment Protocol (FIP)
Mr Neil Cole (Chief Director: International Economics in Treasury) said the purpose of the FIP signed by South Africa in October 2006 was to harmonise the finance and investment policies of SADC member states. This was in line with the Regional Indicative Strategic Development Plan (RISP) for SADC adopted in 1999 with key targets over the next 15 years in terms of trade, economic liberalisation and development.

The objectives of the FIP and the RISDP included deepening regional integration and accelerating economic growth and development. Building strong infrastructure linkages, improving fiscal reforms, public debt reduction and the development of regional industrial policy mechanisms were identified as major challenges.

The FIP covered the creation of a favourable investment climate, achieving macroeconomic stability and convergence and collaboration on tax and monetary matters. With regards to investment, it was important to develop a SADC Investment Zone to attract investment. Investment policies and laws needed to be harmonised and fairness, equity and transparency was required when dealing with investors. Cooperation in terms of investment involved the creation of support mechanisms for least- developed countries and adherence to international agreements.

The purpose of macroeconomic convergence was the promotion of economic stability-oriented policies. A surveillance unit was to be established to monitor convergence and develop a database, coordinate macroeconomic planning capacity and submit assessments on convergence status of member states of SADC. A peer review panel was to be established to issue explanatory communiqués on assessments.


Mr Martin Grote (Technical Tax Specialist: Treasury) focussed on the taxation cooperation amongst SADC member states by means of a Memorandum of Agreement signed by the SADC Committee in August 2002. The aim of taxation cooperation was to develop good tax policy design practices, improve efficiency of tax collection and the training of tax officials and to reduce obstacles to intra- SADC trade and investment. A comprehensive, publicly accessible tax database was published on the SADC website, which provided an essential analytical tool to provide tax information. The development of tax policy expertise was initiated with the aim to provide support for life-long training in tax design, policy development and revenue administration. Member states undertook to actively support exchanges of personnel and information, mutual assistance and training workshops. It was important to ensure the appropriate use of tax incentives between SADC member states, and avoiding harmful tax competition. The intended output of the SADC tax treaty policies was to create for both direct and indirect taxes a network of SADC-specific tax agreements to minimise on juridical double taxation and address fiscal evasion through the facilitation of exchange of information and mutual assistance in tax administration.

Mr Cole said that in terms of cooperation of Development Finance Institutions a Memorandum of  Understanding was adopted, which focused on the sharing of information, capacity building and aligning practices. MOUs which were outstanding included anti-money laundering, project preparation and development facility, accounting and auditing standards and a SADC Banking Association. SA ratification of the SADC FIP would be a signal to other SADC member states to expedite the process.

SADC Monetary Union: briefing by South African Reserve Bank
Mr Mshiyeni Belle (Head: International Relations: Research Department) focussed on the SADC Monetary Union. The Committee of Central Bank Governors (CCBG)
was established in August 1995 to achieve closer co‑operation among central banks leading to regional economic integration. Its mandate was to ensure the development of well‑managed financial institutions and markets, and cooperation on international and regional financial relations, as well as monetary and foreign exchange policies. CCBG produced reports and publications on recent economic developments and statistics for SADC macroeconomic convergence.

The aim of the SADC Monetary Union was to establish a framework for co-operation and coordination in the promotion of exchange controls for current- and capital and financial account transactions. Co-operation in the area of Information Communication Technologies was considered important. Ideally, SADC member states should have
efficient banking regulatory and supervisory system, based on internationally accepted principles. There should also be co-operation amongst member Stock Exchanges. In order to strengthen the SADC Banking Association, member states should converge on stability-oriented economic policies, which included, restricting inflation to low and stable levels, maintaining prudent fiscal stance and avoiding large financial imbalances in the economy.

An important objective was the creation of an area where tariffs and quotas were abolished for imports from member countries, while national tariffs and quotas against third countries were retained. An Free Trade Area (FTA) implementation study undertaken since April 2007 aimed to inform member states on tariff reduction schedules and progress on the implementation of adopted customs instruments to enable movement of goods

In terms of banking supervision, discussion should still happen to determine whether supervision would remain with central banks or whether an independent regional body should be established.

Earnest discussion was required to determine the road map towards the realisation of a SADC monetary union at summit level. A peer review mechanism could be the body that would decide conditions for entry into the Monetary Union.

Discussion
Mr D Gibson (DA) wanted to know how the SADC FIP fitted in with the negotiation of the Economic Partnership Agreements (EPAs) especially with regards to excise duties. He said that Parliament was being left out the loop while officials were negotiating EPAs. He asked at what stage Parliament would be involved to consider the terms that were being negotiated.

Mr Grote said that it was a common practice for bureaucrats to drive regional integration projects. He referred to the European Union (EU) where integration was mostly driven by officials. The EU recognised that they did not refer enough to the political processes within member states. SADC aimed to raise a domestic debate amongst member states. Tax was being pushed to the sidelines during regional negotiation, with for instance the EU. The tax base should not be eroded given that Africa’s participation in the world trade was currently lower than in the past. The highest trade costs were found in sub Sahara Africa. Infrastructure needed to be improved in order to facilitate trade and a critical mass of revenue collection was needed. If roads in West Africa were upgraded, trade would increase by 400% and better roads in Kenya would result in a trade increase of 3 000%. In Singapore the transportation transaction of containers cost $380 while in Southern Africa the cost was $1 500.
 
Mr Singh (IFP) referred to the huge quality and capacity gaps in terms of taxation identified by Treasury. He wanted to know if there was a list that compared the tax status and institutional frameworks of SADC countries.

Mr Grote said that they have a tax database. Underperforming jurisdictions within SADC had too many tax instruments, which were not managed properly. Attempts were made to convince jurisdictions to cut down on tax instruments but Treasury did not have a lot of say on sub regional taxes. Treasury has information on tax good practice as well as SADC administrative capacity and systems being employed.

Mr Cole referred to the SADC Trade Protocol being driven by the Department of Trade and Industry (Dti) where economic partnership agreements would be discussed. An audit was undertaken to check where the 14 SADC countries were in terms of the SADC Trade Protocol. The intention was to have a SADC free trade area by 2008. The countries which were on schedule were the Southern African Customs Union (SACU) countries, which included Botswana, Lesotho, Namibia, Swaziland and South Africa. There were a few countries, like Malawi, which had to reduce up to 50% of their tariffs before 2008.

Mr K Moloto (ANC) referred to an internal financial service centre, which was established by one of SA’s neighbours. Given its tax rate of 50%, Mr Maloto wanted to know what the impact on neighbour countries would be.

Mr Grote replied that there was a SADC country, which offered a zero rate tax for non-residents, which was regarded as hugely offensive by other member states, given that portfolio flows were diverted. Fortunately, internationally pressure was put on the jurisdiction that provided zero tax rate. A tax exchange information agreement was used to identify SA residents who invested within the zero rate tax country. Tax competition should be expected amongst member states and that it was not necessarily a bad thing.

Ms J Fubbs (ANC) asked for clarification on the role of the SA Tax Institute in terms of achieving economic harmonisation and growth in SADC.

Mr Grote said that the SA Tax Institute was started of in 2002. The Institute was offering over 10 modules focusing on tax issues. It was renamed as the African Tax Institute because a lot of students north from SADC attended the Institute. The Institute was currently self-funding through contributions from students and foundation money was being encouraged from the corporate world. The Institute was being kept as an academic intervention and was not linked to SADC.

Mr Nene referred to double taxation agreements that could be based on either the UN model or the OECD model. He wanted to know to what extent agreements would be a requirement for countries that were signatories to the Protocol and the Treaty.

Mr Grote said that they followed the OECD model. A lot of the aspects of the UN model, which should benefit the capital importing country, had been amplified. The host country should have a right to tax for revenue generated in the exploration phase. Treasury’s approach was that permanent establishment required a more extensive interpretation. The taxing of royalties was changed to allow more benefits for the host country. Treaties provide a model but bilateral agreements were also important.

Mr Gibson asked for the latest macro economic convergence indicators for SADC member states indicating their current status and their expected status in future.

Mr Belle said that he would make the economic convergence indicators available to the Committee.

Ms Fubbs asked Mr Belle to reflect on challenges given the Europe central bank’s experience of integrating less developed states into a partnership with more developed states. It took the Europeans 15 years to develop their integration agreement whereas Southern Africa expected to do it within 8 years.

Ms Makoto (ANC) asked if Southern African countries have been able to reach projected targets to have a SADC Monetary Union by 2008. She also wanted to know what progress has been made, given that there were still issues that were not resolved.

Mr Maloto (ANC) wanted clarification on Page 58 of the Protocol on Finance and Investment’s
Agreement on Principle 2(e) where it stated:” lending by central banks to government shall be discouraged”.

Mr Maloto wanted more information regarding progress made and cooperation in terms of establishing one stock exchange for SADC.

Mr Belle said that the SA stock exchange was trying to entice other stock exchanges to join it but there has not been convergence. There were other countries that entertained the idea of establishing their own stock exchanges. They faced major challenges given the cost of setting up a stock exchange.

Mr Maloto also wanted to know who were members of CMA.

Mr Belle indicated that the CMA consisted of SA, Nambia, Lesotho and Swaziland.

Mr Gibson asked if everything was on track for establishing SADC economic integration in 2008.

Mr Cole said that there were many challenges facing SADC countries in achieving regional integration. Two countries, Angola and the Democratic Republic of Congo (DRC), had not made any offers regarding a phase down of their tariffs. Four countries (Malawi, Mozambique, Tanzania and Zimbabwe) were behind in their tariff phase-down initiatives. Countries that opted to backload, would need to find a replacement source for revenue. There was mixed optimism regarding the feasibility of the 2008 integration. The establishment of a Customs Union in 2010 was also considered to be a major challenge. The WTO has a rule that countries could only belong to one regional free trade area. Many SADC countries belonged to different regional communities which complicated matters.

Mr Belle said that maintaining credibility was very important if one wanted to establish a monetary union. A major challenge would be to let go of SA’s monetary policy. In the EU a deal had to be made between the major economies, France and Germany.

Mr Belle said that an important issue was how SA would be able to retain some governance in a regional structure. If there was, a good legal basis governance would be protected.

Mr Belle said that in the near past there was a difference between targets set by the Association of African Banks and the African Union (AU). Governors of African Banks were arguing for gradual development of regional economic areas.

Mr Gibson asked what progress had been made in the rest of Africa in the development of free trade areas.

Mr Belle replied that the Economic Community of West African States (ECOWAS) had postponed the issue of a single currency twice. They failed to meet convergence criteria. The Common Market for Eastern and Southern Africa (COMESA) made some progress in terms of a monetary intervention. Some member countries were however in both SADC and COMESA. The East African Community also aimed to have monetary union.

Mr Gibson referred to efforts from Ghana to establish an African Monetary Union. He wanted to know if the detailed work regarding road maps and convergence criteria, similar to SADC, were being done in other African countries.

Mr Cole replied that COMESA was moving towards establishing a Customs Union. Countries like Algeria, Morocco, Egypt, Libya, Tunisia in North Africa has no timetable in place for establishing an FTA. Within West Africa an FTA was launched in 2004. The Economic Community for Central African States were cooperating regarding monetary matters as opposed to trade. The East Africa Community aimed to launch a customs union in 2008 and they also launched a FTA. Eight regional communities had been identified and they seemed to be moving towards FTAs and Customs Unions.

Mr M Johnson (ANC) asked about the role parliamentarians had to play in monitoring and implementing regional integration.

Mr Nene said that the Portfolio Committee had to discuss how it would be able to meaningfully engage in the integration process.

Mr Johnson referred to conflicting ideas regarding the accuracy of data amongst Southern African stakeholders. He wanted to know what the nature was of the conflicting ideas amongst SADC statisticians.

Mr Belle replied that data accuracy continued to be a problem within the region. Data collection took too long and that there were differences in country specific data. Cooperation was required on an official level. Ideally there should not be conflicting data. SADC statistics agencies were improving their data.

Mr M Mbili (ANC) referred to some people who said that SA was playing a big brother role during SADC negotiations. He wanted more information on the problem issues of regional integration.

Mr Belle replied that SA was viewed as a major player within the region. Perceptions about SA depended on how SA projected itself. It had been working with central banks and assisted with training and capacity building. It might be easier to move with other SADC countries given SA’s supportive role within the region.

Other questions for which there was no response in the joint response to all questions were:
- Mr Mbili referred to some countries that were slow in modernising. He asked if this was by default or did institutional capacity problems need to be addressed. He wanted to know what SA was doing, given that the country was in a better position than other neighbouring countries.

- Mr Sogoni (ANC) asked which one of the economic convergence targets for 2008 might not be achievable. He referred to external reserves which had a three month target in 2008.

The meeting was adjourned.

 

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