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Victor Murinde Birmingham Business School University of Birmingham Capital Flows and Capital Account Liberalisation in the Post-Financial Crisis Era: Challenges,

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Presentation on theme: "Victor Murinde Birmingham Business School University of Birmingham Capital Flows and Capital Account Liberalisation in the Post-Financial Crisis Era: Challenges,"— Presentation transcript:

1 Victor Murinde Birmingham Business School University of Birmingham Capital Flows and Capital Account Liberalisation in the Post-Financial Crisis Era: Challenges, Opportunities & Policy Responses 1

2 Introduction African economies enjoyed huge increases in private capital inflows during 2000-2007 All change: The global financial crisis and uncertainty The complexity of capital flows and capital account liberalisation in Africa in the post- financial crisis period 2

3 The route map of the presentation Capital flows: The flow of funds framework The global financial crisis and recent financial crises Capital flows, the typology of capital controls and capital account liberalisation in Africa Policy and research challenges 3

4 Capital flows: A flow-of-funds framework A “…main function of the flow of funds accounts is to reveal the sources and uses of funds that are needed for growth …” (Klein, 2000, p.ix). Flow of funds models: why agents in one sector hold specific assets and substitute assets within their portfolio. Balancing domestic assets with foreign assets Important assets: private non-bank lending, corporate debt and equity, FDI, ODA (aid), and remittances. 4

5 Table 1: Flow of Funds Framework Household Sector Company Sector Banks Sector Government Sector Foreign Sector HPBGF 1. Income-expenditure 1.1 Income (Y)YHYH YPYP 1.2 Taxes (T)THTH TPTP TGTG 1.3 Consumption (C)CHCH CPCP CGCG CFCF 1.4 Investment (I)IHIH IPIP IGIG IFIF Net acquisitions (S)SHSH SPSP SGSG SFSF 2. Assets and liabilities: Balance-sheet accounts 2.1 Capital (K)KHKH KPKP KGKG KFKF 2.2 Loans (L)LHLH LPLP LBLB LGLG LFLF 2.3 Domestic money (M)MHMH MPMP MBMB MGMG 2.4 Foreign money (R)RGRG RFRF Net worth (W)WHWH WPWP WBWB WGWG WFWF 5

6 The Global Financial Crisis: What do we know? Mexican Peso crisis December 1994 1997 East Asia financial crisis Russian financial crisis of August 1998 Current global financial crisis When the crises occurred, key financial prices (exchange rates, stock prices, short-term interest rates, asset prices) deteriorated in the large African economies. Lessons and uncertainty in capital flows. 6

7 Table 7: Impact of the crisis on selected African financial markets in an international context Country/ Region Index nameIndex codeBenchmark 31.07.2008 Value at end week 12.02.2009 Losses during financial crisis (%) AFRICA Cote d'Ivoire BRVM Composite Index BRVM CI242.54169.34-30.18 EgyptCASE 30 IndexCASE 309251.193600.79 -61.08 KenyaKenya Stock IndexKSE4868.272855.87-41.34 MauritiusMauritius All SharesSEMDEX1735.771005.69-42.06 MoroccoCasa All Share IndexMASI14134.710352.81-26.76 NigeriaNSE All Share IndexNSE52916.6623814.46 -55.0 South AfricaAll Share IndexJALSH27552.6520650.38-25.05 TunisiaTunis se Tnse Index STKTUNINDEX3036.873049.60.42 7

8 Table 7: Impact of the crisis on selected African financial markets in an international context (Cont ’ d) Country/ Region Index nameIndex code Benchmark 31.07.2008 Value at end week 12.02.2009 Losses during financial crisis (%) BRIC BrazilBovespa IndexIBOVESPA5950541674-29.97 RussiaRTS IndexRTSI1966.68624.21 -68.26 IndiaBSE SENSEX 30BSESN14355.759634.74-32.89 ChinaShanghai CompositeSHANGHAI COMPOSIT2775.722320.79-16.39 OECD UKFTSE IndexFTSE 1005411.94189.6-22.59 USADow Jones IndustrialDJ Index11378.027850.41-31 FranceCAC 40 IndexCAC404392.362997.86-31.75 JapanNikkei 225 IndexN22513376.817779.4-41.84 8

9 Table 8: Exchange rates for selected African countries CountryDec-06Dec-08Feb-09 % change (Dec 2008 - Feb 2009) Botswana 6.037.527.965.89 Ghana 0.923531.211.3411510.84 Nigeria 126.5130.75145.3511.17 South Africa 6.97379.30359.94986.95 Tanzania 113.209128.03130.2461.73 (local currency per US Dollar) 9

10 Capital Flows and Capital Account Liberalisation in Africa The current trends in capital controls and capital account liberalization in Africa Table 2 shows the typology of controls on portfolio investment and FDI in Africa Table 3 presents examples of capital account liberalisation process Do these matter? 10

11 Table 2: Typology of controls on portfolio investment and FDI in African countries Control type / Country DebtEquity and FDI InflowsOutflowsE&FDI InflowsE&FDI Outflows No controls Uganda Bonds: no controls Bonds: no controls Shares: no controls Shares: no controls Money market securities: no controls Money market securities: no controls FDI: no controls FDI: no controls Derivatives: no controls Derivatives: no controls Zambia Bonds: no controls Bonds: no controls Shares: no controls Shares: no controls Money market securities: no controls Money market securities: no controls FDI: no controls FDI: no controls Derivatives: no controls Derivatives: no controls 11

12 Table 2: Typology of controls on portfolio investment and FDI in African countries (Cont ’ d) Control type / Country DebtEquity and FDI InflowsOutflowsE&FDI InflowsE&FDI Outflows Minimal controls Nigeria Bonds: no controls Bonds: no controls Shares: no controls Shares: no controls Money market securities: controls Money market securities: controls on resident purchases abroad FDI: no controls, only registration FDI: no controls Derivatives: no controls Derivatives: no controls South Africa Bonds: controls on resident sale or issue abroad Bonds: controls Shares: controls on resident sale or issue abroad Shares: limits on resident purchases abroad Money market securities: controls on resident sale or issue abroad Money market securities: controls FDI: no controls FDI: controls Derivatives: controls on resident sale or issue abroad Derivatives: controls 12

13 Table 2: Typology of controls on portfolio investment and FDI in African countries (Cont ’ d) Control type / Country DebtEquity and FDI InflowsOutflowsE&FDI InflowsE&FDI Outflows Controls Cameroon Bonds: controls Bonds: controls Shares: controls on issuing, advertising, and sale of foreign securities of more than CFAF 10 million Shares: no controls Money market securities: controls Money market securities: controls FDI: no controls if below CFAF 100 million FDI: no controls if below CFAF 100 million Derivatives: Not applicable Derivatives: Not applicable Source: Adapted from IMF (2009), Table A3.1, page 69-70. 13

14 Table 3: Examples of Capital Account Liberalisation Process Status/ Sequencing Fully OpenPartially OpenFairly Open One-step opening Uganda (1997) Liberalization part of a broad package of market- oriented reforms, privatization and trade liberalization Sequenced opening Zambia (1990-95) 1993-94: liberalization of capital transactions 1995: banks allowed to accept foreign currency deposits Liberalization part of broad reforms focused on economic stabilization, competitiveness, and debt restructuring, accompanied by financial market reforms Ghana (1995-2006) Mid-1990s: partial liberalization of portfolio and direct investment 2006: Foreign Exchange Act, allowing non- residents to buy government securities with maturities of three years or longer, minimum holding period of one year Liberalization following economic stabilization and debt restructuring: parallel reforms in the primary government debt and stock markets; efforts to develop interbank money and foreign exchange markets and to strengthen financial sector supervision and soundness Cameroon (2000 to present) 2000: Harmonization of national foreign exchange regulations and liberalization of capital flows within CEMAC Prudential limits on banks' net open foreign positions Residents' foreign exchange deposits prohibited Continued administrative restrictions remain on most capital outflows No immediate plans for further opening 14

15 Table 3: Examples of Capital Account Liberalisation Process Status/ Sequencing Fully OpenPartially OpenFairly Open Sequenced opening Nigeria (1985-2006) Economic reforms initiated in the mid-1980s and subsequently reinvigorated in the mid-1990s, starting with treatment of dividends and profit repatriation, then later removal of controls in other areas such as derivatives and real estate; some remaining administrative restrictions Foreign exchange market reformed at various points from the mid-1980s to wholesale Dutch auction system initiated in 2006, along with growing importance of interbank market, and the effective unification of the parallel and official exchange rates Tanzania (1990) 1990: start of FDI liberalization 1997: full liberalization of FDI flows 1998: supporting foreign exchange regulations Continuing restrictions on portfolio investments (government securities) FDI liberalization coinciding with privatization program, creation of one-stop shop, and investment promotion policy Senegal (1999 to present) 1999: elimination of controls on inward FDI and foreign borrowing by residents Continuing administrative restrictions remain on capital outflows to non-WAEMU countries Source: IMF (2009), Table A3.2, p71; and Ndikumane (2003), Table A2, pp 56-59 on the evolution of these figures 15

16 What really matters? PULL FACTORS: for total capital flows into Africa include: macroeconomic performance (both real GDP growth and fiscal balance), the index of securities market development, and a dummy for South Africa and Nigeria. But for FDI: growth performance, the quality of the business environment, and a dummy variable for oil producers. Remittances: (push and pull factors) foreign income and booming sector; financial sector reforms But, institutions also matter for capital inflows to Africa The variable for capital account liberalisation is not significant in a model of the determinants of capital flows 16

17 Capital account liberalisation challenges and policy responses The policy challenges associated with private capital inflows have been similar across countries (Table 10) The policy responses have varied depending on the institutional factors as well as the monetary and exchange rate regime. Lesson: African countries should redesign their capital account liberalisation regimes, alongside their institutional and financial sector policies in order to tilt the composition of inflows toward longer-term flows. 17

18 Conclusion: Lessons and Policy Agenda for Africa – Short run The African regional networks of national finance ministers and central banker governors is timely: but publish the news. Improve the capacity to monitor movements of the main financial prices that provide the propagation mechanism for contagion effects, namely exchange rates and stock prices. Improve the capacity to monitor inflows Keep fiscal expenditures steady during episodes of large capital inflows; this has been shown to help recovery in the aftermath of the crisis. 18

19 Conclusion: Lessons and Policy Agenda for Africa – medium and long term ADB: A regional strategy is desirable Pay attention to ‘ pull ’ and ‘ push ’ factors for each of the 4 types of capital flows (FDI, GPI, debt, and remittances) Countries also need to implement supportive institutional and regulatory reforms that will strengthen their capacity to manage capital inflows and the associated vulnerabilities. There is no “one-size-fits-all” prescription. 19

20 Hence, the research challenge Further research: the flow of funds framework, with asset demand equations for capital flows (FDI, debt, aid and remittances) against each type of economy (resource-rich, non-oil exporting, other) and the pull factors that maximise capital flows for the economy. Stochastic simulations of: (a) response of flows to ‘pull’ and ‘push’ factors post-crisis; (b) policy response 20

21 Thank you for your attention 21


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