Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: IMF Expertise Helps Bolster Africa's Financial Sector
August 20, 2008
- IMF technical assistance enables cross-fertilization of member countries' skills
- Progress includes reduced inflation, better foreign exchange market functioning
- Case studies show success in financial regulation, banking consolidation
Across Africa, IMF monetary and financial sector experts are helping to develop and strengthen institutions, markets, and capacity to formulate and implement sound monetary and financial policies.
Street-side money trader in Lagos, Nigeria: IMF helped unify country's formal and informal forex markets (photo: Akintunde Akinleye/Reuters)
CAPACITY BUILDING
Positive impact from this help is now reflected in stronger financial systems that support high sustained growth rates.
IMF technical assistance has also enabled cross-fertilization of skills among member countries and helped to disseminate and promote compliance with international standards. Beneficial spinoff includes increased participation of donor agencies in funding the IMF's capacity-building activities.
Supporting improved growth
The stronger financial systems complement the improved macroeconomic environment existing in many sub-Saharan African (SSA) countries. As noted in the IMF's Regional Economic Outlook for SSA, the region in 2007 experienced one of its highest growth rates in decades as real GDP expanded by about 6½ percent, fueled by growing production in oil exporters, improved credit intermediation, and rising domestic investment and productivity across the region.
Several African countries have developed financial markets that now attract institutional financial investors, and are now promising candidates to become part of a second generation of emerging market countries. Finance and Development magazine says trends that heralded the arrival of institutional investors in emerging markets in the 1980s are visible in parts of SSA today—growth is taking off, the private sector is the key driver of that growth, and financial markets are opening up.
While solid global demand for commodities, greater flows of capital to Africa, and debt relief have helped increase resources and lift growth, impetus was also supplied by successes in stabilizing economies and implementing structural reforms, including in the monetary and financial sector. Specific areas of progress include:
• Reducing and containing inflation. Capacity to manage liquidity has improved and—helped by the development of monetary instruments, strengthened liquidity forecasting, and policy formulation processes—has contributed importantly to lowering trend inflation in many countries. Many SSA countries have successfully upgraded their payment and settlement systems and now have real time gross settlement, thus improving the efficiency with which central banks can manage liquidity. They have also established money and debt markets, although further progress would be desirable in the functioning of these markets.
• Functioning of foreign exchange markets. In the foreign exchange area, significant progress has been made in unifying previously segmented markets and in reducing or unifying parallel markets. Many SSA countries now have functioning interbank markets for foreign exchange, although these markets are still largely inefficient, transactions are low, and forward markets and hedging instruments such as derivatives are yet to develop.
• Strengthened financial sectors. Strengthened supervision and recapitalization have improved the resilience of banks to shocks and enhanced credit intermediation, although some structural weaknesses are yet to be addressed and financial systems in several countries remain underdeveloped. While bank regulation and supervision have also improved significantly, full compliance with international standards is yet to be attained in several countries and notable weaknesses remain in the subregions of the Economic and Monetary Community of Central Africa and the West African Economic and Monetary Union.
• Rebuilding in post-conflict countries. Capacity-building efforts continue to restore basic banking and payment system functions in post-conflict economies where the central bank or central monetary authorities have ceased to exist and public institutions and banks have been destroyed or severely damaged. Post-conflict countries such as Burundi, Central African Republic, Democratic Republic of Congo, Cote d'Ivoire, Eritrea, Liberia, and Sierra Leone together account for about one-quarter of all IMF technical assistance to SSA.
Upscaling technical assistance
As SSA countries strengthen their financial systems and infrastructure and achieve macroeconomic stability, new challenges are emerging and IMF assistance is now focusing on financial sector issues. Many countries need help in dealing with the liquidity impact of either donor aid inflows or those associated with high oil and other commodity prices.
Modernization of monetary policy frameworks has become a priority for many countries, and several—Ghana, Nigeria, Botswana, and Uganda—have shifted to, or expressed interest in, implementing inflation targeting (IT) regimes. The IMF is assisting countries with the requirements for adopting IT, including designing the IT frameworks, enhancing data quality, developing inflation forecasting models, and setting communications strategies.
In the banking sector, the importance of maintaining financial stability has increased need for relatively specialized skills, and several countries are turning to the IMF for assistance on a range of banking topics such as stress testing, the Basel II capital adequacy rules, and risk-based supervision.
Growth of capital markets
The growth of capital markets and the nonbank financial institutions (NBFIs) has added another dimension to the Fund's capacity-building activities in SSA. A common feature is the growth of deposit taking NBFIs such as credit cooperatives and microfinance institutions. These sectors, while still small, may pose risks to financial stability and the IMF has been supporting countries in improving their supervision and regulation, among them Benin, Burkina Faso, Cote d'Ivoire, Guinea, Senegal, and Togo.
In Botswana, Malawi, Mauritius, Namibia, Rwanda, and Swaziland, the IMF has also provided assistance related to supervisory structures, governance, and regulatory framework for pensions and insurance. In addition, the IMF has been responding to countries' needs to strengthen regulation and risk management in securities markets, and provide advice in the management of public assets and liabilities.
Case study: Rwanda
Rwanda's economy and its financial sector all but collapsed following the 1994 genocide. In the aftermath of this conflict, the Bank of Rwanda (BNR) embarked on far-reaching reforms that included liberalizing the economy. A flexible exchange rate regime was quickly adopted, but new risks emerged for monetary management.
The BNR did not have adequate monetary instruments to cope with the large amount of foreign aid. The Ministry of Finance faced challenges issuing treasury bills for monetary policy purposes and the BNR's financial situation was weak, ruling out the use of central bank bills or remunerated deposits as monetary instruments. At the same time there were few profitable lending opportunities for newly formed commercial banks.
In parallel with IMF financing under the Poverty Reduction and Growth Facility, the Fund provided extensive technical assistance to the BNR to build capacity in key central banking operations and support functions. Support focused on areas including monetary operations and bank liquidity management, internal audit, monetary policy research, foreign exchange operations, foreign reserve management, and banking supervision.
Core functions restored
This support was funded by a mix of donor funding and IMF resources, and was provided from Washington and through the IMF's African Regional Technical Assistance Center in Dar es Salaam Tanzania, notably through the placement of long-term experts, expert visits, advisory missions, and offsite assistance in drafting financial legislation.
To date, the BNR has made good use of IMF assistance. The BNR—the main regulator and supervisor of the financial sector—has restored all its core functions, although it still faces formidable challenges, including the shallowness of the financial sector; a shortage of human capital; and the need to further strengthen institutional, legal, and judicial frameworks.
Significant progress has also been made in central bank operations, although further improvements are needed, including in bolstering the internal audit function. Even though Rwanda continues to receive IMF technical assistance in traditional areas such as bank supervision and payment systems, focus has shifted to the nonbanking sector, improving exchange rate management, and development of interbank foreign exchange and capital markets.
Case study: Nigeria
Technical assistance was intensified after Nigeria's 2002 Financial Sector Assessment Program and has combined traditional capacity-building with targeted assistance. In particular, the IMF supported a homegrown financial sector restructuring program and helped build capacity to implement policy changes in an increasingly market-oriented economy.
In mid-2004, the Central Bank of Nigeria (CBN) started reforms to consolidate the banking system through increased capitalization and greater reliance on market-based monetary management. IMF assistance sought to minimize the risks and costs associated with the program.
IMF support focused on key elements of the consolidation program, including how to set up the institutions overseeing the process, establishing sound accounting standards to value banks' assets, dealing with banks unlikely to meet minimum capital requirements, and strengthening the CBN's legal powers to close insolvent banks.
Costs of bank liquidation
The authorities also needed help with the legal processes for establishing an asset management company to minimize the budgetary costs of liquidating some banks, and with reforming the supervision of consolidated banks. In addition, the IMF helped unify the foreign exchange markets, enhance the balance sheet position of the central bank, and strengthen the CBN's capacity to build a monetary policy framework and intervene in the foreign exchange markets.
Although challenges remain in maintaining bank soundness, the authorities concluded the banking consolidation program within the planned timeframe. The formal and informal markets for foreign exchange have been successfully unified, while the other projects have achieved varying degrees of success.
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