|Short Term Capital & Current Account Sustainability – a Challenge for Africa’s Policy Makers|
The Association of African Central Banks held its 36th Symposium in Algiers, Algeria on 29 and 30 August 2012. The annual symposium is hosted on rotation by central banks in Africa to discuss issues pertinent to the macroeconomic environment of the region. This year the symposium is being hosted by the Bank of Algeria and will see more than 20 Central Bank Governors from the region and 200 financial experts meeting.
One topic of great importance to the central bankers is that of capital flows. Most African countries that have experienced high capital inflows have suffered from overheating, real exchange rate appreciation and current account instability.
In his presentation at the symposium, Dr Ellias Ngalande, the Executive Director of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) pointed out that volatile short term capital and current account sustainability have increasingly become a moot problem among policy makers in Africa.
He said as Africa tries to weather the effects of the Eurozone crisis and take advantage of the post global financial crisis opportunities, the surge in capital flows to emerging markets and indeed capital flight presents challenges and opportunities for policymakers on the continent.
It is evident that a lot of countries have run persistent large current account deficits which have been followed by severe crises, economic slowdowns, and contagion effects. “Central to the debate on the table is clearly the sustainability of the current account deficit in the wake of the surge in hot money across the globe,” Said Dr Ngalande.
Dr Ngalande said although foreign capital inflows have improved growth and investment levels in recipient countries, reversals associated with volatile flows have been extremely damaging. He stated that in 2011, private capital flows to developing countries amounted to US$522.7 billion of which only US$38.3 billion or 6.3% flowed to Africa.
Said Dr Ngalande, “Reflecting this, global foreign direct investment (FDI) inflows rose by 16% from US$1.31 trillion in 2010 to US$1.52 trillion in 2011. The growth in FDI flows in 2011 was mainly attributed to higher absorption in Greenfield investment to emerging markets and developing economies. In Sub-Saharan Africa, FDI inflows followed a similar trend, increasing from US$17.6 billion in 2010 to US$20.8 billion in 2011. Significant inflows to the region were attributable to high economic growth, increased investment opportunities, improvement in creditworthiness, high expected profits and offers of better risk diversification.”
The huge increase in FDI has resulted in transfer of technology, employment creation, tax revenue, fixed capital formation and complemented domestic savings. Dr Ngalande further stated that Africa has much to learn from the experiences of some South East Asian economies, where inadequate regulation and supervision, and poor corporate governance contributed to imprudent lending. “One key lesson for Africa is that capital controls have potential costs through their macro-economic distortions on investment,” said Dr Ngalande.
He also pointed out that within the context of regional integration, common legislation relating to the protection of users and suppliers of financial services would also be helpful. He said regional financial institutions should put in place sound legal frameworks for the conduct of financial transactions and for supervision of banks and similar institutions. He pointed out the importance of strengthening domestic financial markets on the continent through effective supervision and regulations. “Bank liabilities need to be closely monitored and the short term bank liabilities need to be properly regulated. Weak banking systems create loopholes for speculation and reduce the willingness of foreign investors to hold portfolio or fixed assets in a recipient country”, said Dr Ngalande.
He indicated that volatility of short term capital flows to Africa has translated into the instability of macroeconomic variables, which discourages both growth and investment. He said it is crucial that policies be designed – nationally, regionally and internationally – to help attract long-term flows and discourage potentially volatile as well as reversible capital flows. In particular, emphasis should be placed on reforms that encourage more stable flows such as FDI and other long term loans.
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