The East African Monetary Union: Progress and                         Challenges                  IGC Growth Week, 20 Sept...
Outline1. Context, background and initial conditions2. Pre-conditions for effective monetary union3. Transitional Arrangem...
Part I: Background
1948          The new EACThe EA High           2001Commission          KenyaKenya             TanzaniaTanganyikaUganda    ...
Milestones•   The Treaty for the establishment of the (new) EAC was signed on November 1999    and the EAC was formally la...
EAC Basic Indicators                                        Share of       Head-      Share of             Real GDP       ...
EAMU – anticipated benefits•   EAMU will replace the five individual country currencies with a common currency,    to be m...
Feasibility and initial conditions I: intra-regional trade•        The five countries trade more with non-EAC countries, b...
Feasibility and initial conditions II: external shocks•   The cost of loss of independent    monetary and exchange rate po...
Feasibility and initial conditions III: mitigation Labour mobility• Despite EAC Common Market Protocol, the region does no...
Divergence I
Inflation convergence in the EAC                                              Home CPI relative to Kenyan CPI            6...
Exchange rate convergence in the EAC                                              Home currency per Kenya shilling        ...
Part II: Making it happen
Process and Models•   May 2010 Monetary Affairs Committee (MAC) of the EAC commissions a    study of transition to monetar...
Few global comparisons•   CFA zone, RMA continued colonial-era arrangements: no transition from    independent national cu...
Initial conditions•   All countries moving towards the same fundamental exchange rate    policy – ‘managed float with no p...
EAC Nominal Exchange Rate Indices against US$                                             All currencies indexed to 100 in...
Issues at convergence•    The mechanics of establishing conversion rates    – A variety of empirical ‘equilibrium real exc...
Exchange rate options for the transition phase   •         A transitional arrangement needs to constitute a viable monetar...
Transitional Options• Five options   – From ‘coordinated status quo to ‘full delegation’   • Float   • External Grid   • D...
Option I: A Float SystemDesign• Countries maintain current (managed) floating regimes• Adopt a common inflation target (wi...
Option II: External GridDesign• Each Partner state adopts a crawling (or fixed) band around a global  currency, most obvio...
Option III: Delegated AnchorDesign• Countries delegate one country (explicitly or implicitly) to maintain a  strong domest...
Option IV: Collective Anchor – the ECB proposalDesign• Combines grid (plus band) system of delegated anchor (Option III) b...
Option V: Collective FloatDesign• No explicit commitment to exchange rate arrangements during transition  (as Option I)• E...
Issues in Transition• Properties of alternatives   – Degree of commitment to ER peg       • Can partner states trade-off d...
Key questions for next phase• Should exchange rate commitments be part of the transition process?• What is the appropriate...
Introduction                 Data                     Findings        Conclusion               Agricultural Productivity G...
Introduction                   Data                 Findings                 ConclusionMotivation               80% of Tan...
Introduction                   Data                 Findings               ConclusionMain questions               What was...
Introduction              Data   Findings   ConclusionOutline         1     Data         2     Findings
Introduction                  Data                  Findings          ConclusionData Sources               Household Budge...
Introduction      Data         Findings   ConclusionStructural Change, 1991-2007
Introduction                   Data                 Findings                 Conclusion               Table: Evolution of ...
Introduction     Data   Findings   ConclusionConsumption Growth
Introduction                   Data                  Findings               ConclusionAgricultural Production             ...
Introduction               Data                 Findings             ConclusionAgricultural Production                    ...
Introduction                  Data                   Findings                   ConclusionTerms of trade                  ...
Introduction                    Data                  Findings                   ConclusionAdoption of ’modern inputs’    ...
Introduction                   Data                 Findings                ConclusionConclusion               Occupationa...
Introduction   Data               Findings   Conclusion                      Thank you
Attaining Middle                    Income StatusTanzania: Growth and Structural Transformation Required toreach Middle In...
Outline:1.         Aim of the document2.         Methodology3.         Changes required     i.      Sectoral shares and im...
1. Aim   To analyse the growth path and structural change    required if Tanzania is to become a lower middle income    c...
2. Methodology   Sample: Countries that reached lower middle income    country (LMIC) status between 1960 and 2009   Ana...
(i). Sectoral shares and implied growth                                                             Change                ...
(iii). Employment and Population                                        Tanzania   MMIC    Req. Ann.                      ...
(ii). Macroeconomic Indicators                                   Tanzania 2009    MMICExports (% of GDP)                  ...
4. Conclusions A fall in the share of agriculture and a rise  in the share of manufacturing in GDP Movement of labour fr...
5. Further Issues   The transition is already underway     Growth driven by the service, construction      and mining se...
Thank you very much for your          attention.
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Growth Week 2011: Country Session 5 - Tanzania

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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.

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Growth Week 2011: Country Session 5 - Tanzania

  1. 1. The East African Monetary Union: Progress and Challenges IGC Growth Week, 20 September 2011Christopher Adam – Oxford and IGCPantaleo Kessy – Bank of TanzaniaStephen A. O’Connell – Swarthmore and IGC
  2. 2. Outline1. Context, background and initial conditions2. Pre-conditions for effective monetary union3. Transitional Arrangements • Options • Capital mobility and a grid system • Design considerations • Exit options
  3. 3. Part I: Background
  4. 4. 1948 The new EACThe EA High 2001Commission KenyaKenya TanzaniaTanganyikaUganda Uganda 2007 Burundi Rwanda1967The EAC 2010Kenya CommonTanzania MarketUganda Protocol Targets 20121977 MonetaryThe EAC UniondisbandsKenyatta 2015Nyerere PoliticalIdi Amin Federation
  5. 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. 6. EAC Basic Indicators Share of Head- Share of Real GDP Exports of Popula- EAC5 GDP count agricul- Trade Net ODA per capita goods andCountry 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 36.2 102.0Kenya 1,428 39.8 39.7 46.6 22.6 25.2 13.1 15.4Rwanda 1,032 10.0 7.1 56.9 34.2 11.7 17.5 61.0Tanzania 1,237 43.7 29.7 35.7 28.8 23.2 11.9 37.2Uganda 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, (monthsCountry 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 7.2Kenya 42.7 19.4 5.0 4.0 -4.4 14.0 4.0 4.0Rwanda 16.2 8.3 4.7 5.8 -1.3 10.6 5.8 5.8Tanzania 28.8 13.5 3.5 5.3 -3.5 8.4 5.3 5.3Uganda 20.6 8.2 2.0 6.4 -2.1 9.4 6.4 6.4Source: World Bank, World Development Indicators. All except KEN are HIPC countries.
  7. 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. 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. 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. 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 BurundiCompensatory fiscal structures• Limited capacity at present…
  11. 11. Divergence I
  12. 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. 13. Exchange rate convergence in the EAC Home currency per Kenya shilling 800 600% deviation over decade0 200 400 -200 1980 1990 2000 2010 Year dot: Burundi / diamond: Rwanda / square: Tanzania / +: Uganda
  14. 14. Part II: Making it happen
  15. 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. 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. 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. 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. 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. 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 policyOption Nominal anchor sovereignty1 – Float National money base and/or inflation targets National2 – External grid National exchange rate pegs National but limited Center: money base and/or inflation3 – Delegated anchor Anchor country Periphery: national exchange rate pegs Collectively determined money base and/or Collective with possible4 – Collective anchor inflation targets coexisting with limited mutual reserve pooling exchange rate variability Collectively determined money and/or inflation Weakly collective no5 – Collective float targets reserve pooling
  21. 21. Transitional Options• Five options – From ‘coordinated status quo to ‘full delegation’ • Float • External Grid • Delegated Anchor • Collective Anchor • Collective Float
  22. 22. Option I: A Float SystemDesign• 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. 23. Option II: External GridDesign• 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. 24. Option III: Delegated AnchorDesign• 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. 25. Option IV: Collective Anchor – the ECB proposalDesign• 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. 26. Option V: Collective FloatDesign• 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. 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. 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. 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. 30. Introduction Data Findings ConclusionMotivation 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. 31. Introduction Data Findings ConclusionMain 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. 32. Introduction Data Findings ConclusionOutline 1 Data 2 Findings
  33. 33. Introduction Data Findings ConclusionData 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. 34. Introduction Data Findings ConclusionStructural Change, 1991-2007
  35. 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. 36. Introduction Data Findings ConclusionConsumption Growth
  37. 37. Introduction Data Findings ConclusionAgricultural 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. 38. Introduction Data Findings ConclusionAgricultural 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. 39. Introduction Data Findings ConclusionTerms 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. 40. Introduction Data Findings ConclusionAdoption 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. 41. Introduction Data Findings ConclusionConclusion 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
  42. 42. Introduction Data Findings Conclusion Thank you
  43. 43. Attaining Middle Income StatusTanzania: Growth and Structural Transformation Required toreach Middle Income Status by 2025. Mujobu Moyo (IGC), Rebecca Simson (IGC), Arun Jacob (POPC) and Francois-Xavier de Mevius (POPC)
  44. 44. Outline:1. Aim of the document2. Methodology3. Changes required i. Sectoral shares and implied growth ii. Employment and urban population iii. Macroeconomic Indicators4. Conclusions5. Further issues
  45. 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. 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. 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. 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. 49. (ii). Macroeconomic Indicators Tanzania 2009 MMICExports (% of GDP) 13.20 30.50Imports (% of GDP) 29.00 37.40Trade Deficit (% of GDP) 15.80 6.90GFKF (% of GDP) 25.00 26.60FDI (% of GDP) 3.90 4.50G Dom S (% of GDP) 17.90 21.60Net ODA (% of GNI) 12.90 4.50Rev (% of GDP) 16.20 20.70M2 (% of GDP) 27.50 51.50 Sources: WDI database, ES 2009, own computation
  50. 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. 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
  52. 52. Thank you very much for your attention.

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