Victor Murinde Birmingham Business School University of Birmingham

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

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

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

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.

5. Table 1: Flow of Funds Framework

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.

7. Table 7: Impact of the crisis on selected African financial markets in an international context

8. Table 7: Impact of the crisis on selected African financial markets in an international context (Cont’d)

9. Table 8: Exchange rates for selected African countries (local currency per US Dollar)

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?

11. Table 2: Typology of controls on portfolio investment and FDI in African countries

12. Table 2: Typology of controls on portfolio investment and FDI in African countries (Cont’d)

13. Table 2: Typology of controls on portfolio investment and FDI in African countries (Cont’d) Source: Adapted from IMF (2009), Table A3.1, page 69-70.

14. Table 3: Examples of Capital Account Liberalisation Process

15. Table 3: Examples of Capital Account Liberalisation Process Source: IMF (2009), Table A3.2, p71; and Ndikumane (2003), Table A2, pp 56-59 on the evolution of these figures

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

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.

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.

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.

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

21. Thank you for your attention