Single Currency in the SADC Zone: Is It Necessary to Adjust the Convergence Criterion Relating to the Budget Deficit? Is the Norm Relating to the Budget Balance Pro-Growth?

Abstract

With a view to the introduction of a single SADC currency, this study uses a non-linear Hansen (1999) model to estimate the budget deficit threshold that maximizes economic growth and whose observance by countries is conducive to the convergence of economic cycles. The analysis covers the fifteen countries in the Eurozone over the period 2000-2019. The results of this empirical analysis reveal that the budget deficit threshold that should not be exceeded to support growth and whose observance is favourable to the convergence of econo mic cycles is 10.92% of GDP over the entire estimation period, within an interval of [10.89; 10.98]. As a result, compliance with the conver gence criter ion limiting the budget deficit to 3% of GDP is not optimal and not conducive to the convergence of economic cycles. Furthermore, the resu lts show that since the start of public debt relief in the SADC region in 2006 (a period of substantial debt reduction in SADC countries), the budget deficit threshold that must not be exceeded has been 5.58% of GDP, within a range of [5.48 to 5.98]. Thus, the current convergence criterion on the budget deficit (3% of GDP) seems rigorous and restrictive in terms of fiscal discipline and could therefore be adjusted to 5.58% of GDP. Under the current SADC framework, the additional margin of around 2.5% of GDP could be used to finance the fight against terrorism, economic transformation, the fight against Covid-19 and investment in human capital.