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Layna Mosley Dept. of Political Science UNC Chapel Hill Regulatory Choices for Low Income Countries.

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Presentation on theme: "Layna Mosley Dept. of Political Science UNC Chapel Hill Regulatory Choices for Low Income Countries."— Presentation transcript:

1 Layna Mosley Dept. of Political Science UNC Chapel Hill Regulatory Choices for Low Income Countries

2 Introduction Recent trend: increased private capital flows to Africa Policy question: How can low-income nations best take advantage of private capital flows? Concerns: benefits of capital account openness are contingent on macroeconomic stability and regulatory capacity. Recommendation: gradual transition to capital account openness. Sequence: regulation prior to liberalization Requires increased technical capacity, as well as political will to regulate.

3 Private Capital Flows to Africa High growth rates (>5% on average) in Africa in recent years Strong growth predicted to continue. Decline/leveling off in ODA flows (excluding debt relief) to African nations Private investors attracted to high returns, growth foreceasts, diversification (uncorrelated with other markets), Private capital flows 2006: net private capital flows exceeded bilateral aid grants. FDI increased by 44% in 2006 (extractive sector) Increased foreign participation in local bond markets (i.e. Kenya, Nigeria, Zambia) 17 nations now have sovereign credit ratings (local & foreign currency) Development of local stock exchanges (albeit often small)

4 Legal Capital Account Liberalization Based on Chinn and Ito scores

5 Legal Capital Account Liberalization

6 Actual Capital Account Openness Data from Lane & Milesi-Ferretti (2006)

7 Actual Capital Account Openness Data from Beck et al (2000)

8 How to benefit from openness? A large literature on the effects of capital account openness on economic growth. Mixed findings Different sample countries, time periods, and measurements. Variation across type of capital (FDI and equity flows vs. debt) Importance of pull factors, sometimes generating contagion. Central issue: contingent effects Thresholds matter (i.e. Kose et al 2006) Strong macroeconomic fundamentals » » growth (i.e. Edwards 2008) Weakly regulated financial sectors lack capacity to absorb (and manage) inflows (i.e. Prasad et al 2007) Central issue for this paper: regulatory challenges

9 Regulatory Issues in Africa Background International attention to standards and codes. Issues of compliance (political will) and capacity How do African countries, as a group, compare with other countries? Standards example: SDDS (1 subscriber); vs. GDDSSDDS Governance indicators (Kaufman et al 2007) Regulatory quality, rule of law, control of corruption Three groups: EMBI-Global countries (excluding 6 African EMBI-G) Eight African nations w/ increased participation in public debt markets (Botswana, Gabon, Ghana, Kenya, Nigeria, Tanzania, Uganda and Zambia) All other African nations.


11 Regulatory Issues in Africa

12 ROSCs/FSAPs ~650 completed since 1999. 15 percent have involved African nations 28African nations; most frequent participants are Tunisia (13 ROSCs covering six areas), Uganda (10 ROSCs, 6 areas) and Mozambique (9 ROSCs, 5 areas). Most frequently assessed areas (for Africa) are data dissemination and fiscal transparency, followed by banking supervision.assessed areas A subset of recent ROSCs is summarized in the paper Six FSAPs (Uganda 2003, Tanzania 2003, Ghana 2003, Mozambique 2004, Madagascar 2006 and Namibia 2007). ROSCs for Botswana (2007, data quality) and Kenya (2008, fiscal transparency).

13 Regulatory Issues in Africa Lessons and patterns from these ROSCs: Progress: banking system supervision (Tanzania); banking sector diversification (Madagascar); well-developed financial system (Namibia) Many challenges, includingchallenges Banking sector development Banking sector weaknesses Capital market development Debt management Financial sector supervision and regulation Legal system and corporate governance National statistics and accounting systems

14 Conclusions Improve data on the extent, maturity and composition of capital flows. Maintain an awareness of volatility often associated with (short-term) capital flows. Debt management offices Rollover and currency risk. How to attract longer-term investors? Take sequencing seriously Need for targeted, substantial technical assistance. Avoid one size fits all prescriptions.

15 Conclusions Time horizons Some international codes and standards may be inappropriate for the least developed countries (i.e. Basel II). Meeting international standards may mean foregoing the shorter- term benefits of capital account openness. Policy issue: might capital account openness facilitate regulatory improvements? Domestic politics: will the losers from openness use regulatory issues as a justification for continued closure?

16 SDDS Subscribers GDDS Subscribers Total Countries Income Category Low34256 Lower Middle162352 Upper Middle171636 High OECD22023 High non-OECD4415 Region Europe & C. Asia36648 M. East & N. Africa4718 Asia and Pacific8823 South Asia158 Latin America & Caribbean102034 Sub-Saharan Africa14147 Participation in IMF-Sponsored Data Standards

17 AreaNumber of ROSCs (Number of Countries) Most Recent ROSC Anti-Money Laundering/CFT5 (5)Madagascar (2006) Banking Supervision17 (13) Namibia (2007) Data Dissemination27 (19)Chad, Botswana (2007) Fiscal Transparency22 (17) Kenya (2008) Insurance Supervision5 (5)Morocco (2003) Monetary and Financial Policy Transparency 13 (10)Rwanda, Namibia (2005) Payments Systems5 (5)Mozambique (2004) Securities Regulation6 (5)Uganda, Morocco, Kenya (2003) Total100 (28) ROSC Assessments, African Nations

18 Broad CategorySpecific Issues Banking sector developmentLimited role for banking sector in the economy (Ghana, Tanzania, Uganda) Access to financial services very limited (Ghana, Madagascar) Highly concentrated banking system; finances only 10% of new loans (Mozambique) Weak competition in banking sector, but public concerns about foreign participation (Ghana) Tendency toward short-term bank loans (Uganda) Banking sector weaknessesHigh level of past due loans (Ghana) Banks tend to invest in short-term government securities (Ghana) High ratio of non-performing loans (Madagascar, Mozambique) Lack of diversity in bank holdings; holding a large proportion of government securities, therefore exposed to interest rate risk (Uganda) Capital market developmentCredit to private sector is very small, short-term (Tanzania) Limited investment opportunities in domestic financial markets, perhaps suggesting a need for asset securitization (Namibia) Lack of liquidity in domestic stock market (Uganda, Tanzania, Mozambique) Financial system provides little long-term financing to the economy (Madagascar) Public pension fund heavily invested in government securities (Tanzania); in short-term bank deposits and treasury bills (Uganda); or in assets abroad (Namibia) Underdeveloped payments systems (Madagascar, Uganda) Debt ManagementVery underdeveloped markets for medium and long term debt; little market for treasury bills with maturities greater than 91 days (Ghana) Lack well-developed market for longer-term bond issues, or for secondary trading in government debt (Tanzania, Uganda) Small interbank lending market; scarcity of credible counterparties (Tanzania, Uganda) Need to develop a strong government securities market (Mozambique) Monetary and fiscal policy managementNeed a sterilization plan to deal with effects of foreign capital inflows (Tanzania)

19 Financial sector regulation and supervisionPolitical independence of bank regulator sometimes questionable; some scope for intervention from Minister of Finance (Tanzania, Uganda). Financial regulator lacks technical resources and skilled staff (Madagascar, Namibia, Tanzania, Mozambique) Weak enforcement of prudential regulations (Ghana) Lack of regulatory capacity in NBFI sector (Namibia); or in pensions and insurance (Madagascar, Mozambique) Loan classification regulations do not meet international standards (Mozambique) Banks require greater guidance on prudential requirements (Uganda) Legal system and corporate governanceWeak corporate governance procedures (Ghana, Mozambique) Local firms financial reporting practices need improvement (Ghana, Madagascar, Mozambique) Efficiency of legal system, contract enforcement (Tanzania) Need stronger minority shareholder protections (Uganda) National statistics and accounting systemsMoving toward, but not in, conformity with international fiscal transparency standards (Kenya) Timeliness and periodicity of economic data (Botswana) IAS not yet implemented, and may not be appropriate for smaller firms (Mozambique)

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