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FINANCIAL SERVICES LIBERALISATION FORUM (1-2 July 2013)

FINANCIAL SERVICES LIBERALISATION FORUM (1-2 July 2013). Financial Services as Trade Infrastructure in Regional Integration. By M. B. Mpofu Chairperson, SADC Working Group on Exchange Control Capacity Building. INTERVENTIONS. Underlying Premises for Exchange Controls

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FINANCIAL SERVICES LIBERALISATION FORUM (1-2 July 2013)

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  1. FINANCIAL SERVICES LIBERALISATION FORUM (1-2 July 2013) Financial Services as Trade Infrastructure in Regional Integration By M. B. Mpofu Chairperson, SADC Working Group on Exchange Control Capacity Building

  2. INTERVENTIONS • Underlying Premises for Exchange Controls • Exchange Control Developments in the Region • Impact of Exchange Controls and Liberalizing Financial Services • Potential Benefits of Liberalisation of Financial Services • Potential Costs of Liberalisation of Financial Services • Policy Recommendations • Conclusions 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  3. 4. Exchange Controls – Underlying Premises • Exchange controls often persist owing to their existence and entrenched interests. Controls often persist long after their effectiveness has dissipated. The Exchange Control Department in central banks often has an interest in keeping them going. • Exchange controls do not protect the level of official reserves. During the early years of African countries’ independence when their economies were relatively closed, there was a very high repressed demand for foreign exchange and foreign assets; and often a competition for scarce foreign exchange between the public and private sectors. 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  4. 4. Exchange Controls – Underlying Premises • In order to protect foreign reserves for use by the State, exchange controls were then aimed at restricting outflows not desired by the State. • Today, foreign reserves are viewed primarily a reflection of the efficacy of economic policies. Healthy foreign reserves reflect good economic policies, whereas declining reserves are a warning signal of underlying problems—not the cause. • The costs of maintaining too high levels of foreign reserves in a developing nation need also be considered. 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  5. 4. Exchange Controls – Underlying Premises • Exchange control should shift to financial surveillance. Today, there is a policy shift away from the traditional exchange control framework to regulations aimed at macro financial prudential management, anti-money laundering, and fighting the financing of terrorism. The more pressing concerns now for Central Banks are to manage financial stability, prevent financial contagions, and fight tax evasion. • Member States must accept that there will be different costs and benefits from capital account liberalisation. The larger financial centres may initially benefit more from capital mobility, but there is a role for regional financial centres. Similarly, an open capital market makes it easier for poorer countries in the region to mobilize capital within the region and at more competitive rates. 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  6. 4. Exchange Controls – Underlying Premises • Illegal and fraudulent transactions will still exist regardless of exchange controls. Tax evasion, money laundering, and business fraud are traditional problems within the financial system, and cannot be eliminated by exchange controls, nor are they an excuse for maintaining exchange control. However, exchange controls do raise the cost of executing such illegal transactions and therefore partially discourage them. • A parallel foreign exchange market (black market) is another sign of a distorted or disequilibrium official foreign exchange market. As such, the parallel market provides some indication of the amount of over/under-valuation of the exchange rate. Understanding the demand side of the parallel market provides insight on the reasons for its existence. Exchange controls do not eliminate parallel markets, but often create them.

  7. 4. Exchange Controls – Underlying Premises • A high level of dollarization is another indication of a problem or failure in exchange rate policy. Most countries that became highly dollarized had high levels of inflation, exchange rate misalignment, fiscal dominance, weak monetary policy, and high levels of exchange controls. • More liberalised countries must be allowed to retain their capital market rules for their residents, even after joining a more restricted SADC capital market. • A regional capital market may have repercussions on the movement of people. 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  8. Forms of Exchange Control Barriers to Trade in Financial Services Financial Services Areas that are affected by Exchange Controls or Foreign Exchange Regulations • equity participation; • maximum equity participation permitted in an existing domestic bank. For example, ownership to a maximum of 49 per cent of a bank • joint ventures (foreign banks only); • Bank entry is only through a joint venture with a domestic bank • no entry is allowed through a joint venture with a domestic bank 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa 8

  9. Forms of Exchange Control Barriers to Trade in Financial Services Financial Services Areas that are affected by Exchange Controls or Foreign Exchange Regulations • raising of funds by banks; • Banks restricted from raising funds from domestic capital markets • lending of funds by banks; • Banks not permitted to lend to foreign clients 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa 9

  10. Forms of Exchange Control Barriers to Trade in Financial Services • Barriers to international trade in services are erected at a point in the transaction where the government can exercise some control over the transaction. • Exchange Control Authorities can limit; • (a) the purchase of foreign exchange needed to pay for imported services; • (b) the movement of all people, information, goods, and money across the border; • (c) the sale of services inside the country by a foreign business; • (d) the employment of foreign service workers in the importing country; or • (e) the consumption of services required to meet regulatory requirements. 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa 10

  11. Forms of Exchange Control Barriers to Trade in Financial Services • Comprehensive foreign exchange control systems on international flows of information, people, money, and goods are likely to be insufficient and ineffective as long as they are not totalitarian. • Hence most barriers to trade take the form of regulatory measures limiting the right of foreign companies to sell services in the local market or handicapping their sales effort. • Controls on sales in the importing country can cover most potential trade in services since the close interaction required between the buyer and the seller of services makes it difficult to buy such services at a distance. 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa 11

  12. Observations • Banking Need for a sectoral agreement that might be negotiated on international trade in banking services. To provide (a) freedom to establish branches, agencies, subsidiaries, or other facilities, (b) regulatory symmetry with respect to domestic and foreign competitors, which would include the right to manage local currency issues, (c) freedom to import critical resources, including travel and resettlement of professional staff, and the ability to process data locally or abroad, (d) symmetry with respect to the application of foreign exchange controls, and (e) equality of access to domestic client groups. 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa 12

  13. WHAT HAPPENS IF A COUNTRY LIBERALIZES ITS EXCHANGE CONTROL? • Would the country benefit from the liberalization process or end in financial crisis or currency crises? • Analysis is not clear because: • aggregate data hides important heterogeneities. • indicators of capital account liberalization are sometimes crude, binary and ignore variations in the degree of C/A restrictiveness. • Costs and benefits are difficult to isolate because liberalization often goes in line with other macroeconomic reforms.

  14. GENERAL ARGUMENTS AGAINST LIBERALIZATION OF CURRENT ACCOUNTS • Restrictions are difficult to justify in market-based economies • Controls usually justified as tools to: • conserve FOREX reserves • protect domestic industries against competition • prevent capital flight • improve BoP statistics. • curb illegal transactions such as tax evasion • Controls are largely ineffective as they: • create economic distortions with tangible costs • result in black market exchange rates, parallel markets, overvalued exchange rates etc.

  15. ARGUMENTS FOR LIBERALIZATION OF CURRENT ACCOUNTS • Justification for liberalization: • create proper prices and efficient resource allocation. • eliminate bureaucratic burden associated with administering ExCon. • Some SADC MS have accepted IMF Article VIII • builds investor confidence • encourages capital flows (ceteries paribus) • Private sector bear all costs.

  16. COSTS AND BENEFITS OF LIBERALIZATION OF CAPITAL ACCOUNTS • Capital Account Liberalization remains a challenge: • Is like “automobile for growth” since it improves productivity & ability of capital to get from one place to another. • Creates possibility for “crashes”. • Benefits outweigh costs.

  17. Costs Benefits COSTS AND BENEFITS OF LIBERALIZATION OF CAPITAL ACCOUNT • Vulnerability to crisis. • Asset bubbles and misallocation of resources . • Reduced freedom to use monetary policy. • Currency appreciation or depreciation with implications for exchange rate competitiveness. • Increased capital inflows • Promotes global allocation of resources. • Risk diversification. • Deepens domestic capital markets. • Disciplines domestic policy. • Raises productivity and growth.

  18. COSTS AND BENEFITS OF CAPITAL ACCOUNT LIBERALIZATION- EMPIRICS • Empirics point towards conditions necessary to reap benefits of Capital Account liberalization. • The level of financial development • Fiscal discipline • confidence in markets • Evidence further show that Capital account liberalization enhances stock market liquidity with positive effects on growth. • Improves access to well functioning capital markets.

  19. SADC VIEWS ON COSTS AND BENEFITS OF CAPITAL ACCOUNT LIBERALIZATION Private Sector views • positive move towards greater integration. • liberalization has reduced waiting time for AD approvals. • serves as stimulus for FDI. • repatriation increases costs. • costs raised through documentations compliance (F178).

  20. PROGRESS IN LIBERALISATION OF EXCHANGE CONTROLS IN SADC • On overall, the Composition of exchange controls index shows that the current account is not yet completely liberalized across SADC member states and a number of countries have restrictions above average. • It is also noted from this decomposition that only fully liberalized countries have completely liberalized exchange controls on services transactions

  21. PROGRESS IN LIBERALISATION OF EXCHANGE CONTROLS IN SADC • Since end-2010, a major current account liberalisation has occurred in Mozambique (May 2011) and a significant relaxation of controls and floating of the Kwacha occurred in Malawi (May 2012).

  22. HIGHLIGHTS OF PROGRESS ON EXCON LIBERALIZATION • All SADC MS had made recognizable progress in liberalization of ExCon on current accounts. • Seychelles fully liberalized in 2008, Zimbabwe and Mozambique made substantial initiative & Malawi floated its currency in May 2012. • Liberalization characterized by delegation of ExCon regulations to Authorized Dealers. • MS have largely liberalized goods and services transactions

  23. 14. Exchange Control Developments in the Region • In order to compare progress in liberalisation of exchange controls across SADC member states, an Index of Exchange Control Restrictiveness was computed. This index was computed from the IMF AREAR data set for all SADC member states for the years 2000, 2005, 2011 and 2012. • A high index score depicts a high level of Exchange Control Restrictions. • Study conducted by Mark Ellyne and Emmanuel Letete Consultants engaged by the SADC Secretariat. 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  24. PROGRESS IN LIBERALIZATION OF EXCON

  25. REMAINING EXCON RESTRICTIONS IN SADC IN 2011 • Commendable progress on goods restrictions • Service restrictions remain high in non-fully liberalized MS (Angola, Malawi & CMA) • Capital Accounts remain closed across all non-fully liberalized MS • Restrictions in liberalized MS for prudential regulations and monitoring

  26. STATUS OF REMAINING EXCON ACROSS SADC

  27. Components of Exchange Controls In SADC Countries 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa 27

  28. 14. Exchange Control Developments in the Region 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  29. Liberalisation of Exchange Controls in Zimbabwe 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa 29

  30. PRIVATE SECTOR QUOTES

  31. Liberalisation of Exchange Controls in Zimbabwe • Zimbabwe is more liberalized than the average level of SADC countries. • Particularly for goods and services (current account) • Capital restrictions remain for prevention of capital flight. 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa 31

  32. Liberalisation of Exchange Controls in Zimbabwe • No restrictions or prohibition on remittance of dividends, profits (income) or royalties. • No ceilings on direct foreign investment outflows. • No Ceilings on overseas portfolio investments. • No restrictions on payments for imports • No surrender of hard-currency export receipts to the central bank. • No limitations on prepayments for imports. • No restrictions on holding of FCAs by individuals with local financial institutions. • No retrictions on amount of forex that can be imported. 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa 32

  33. 11. Impact of Liberalizing Financial Services B Barriers to Domestic Firms Barriers to Cross-Border Supply Barriers to Commercial presence Liberalisation External Liberalisation: Trade Liberalisation Entry of Foreign Firms Entry of domestic firms Internal Liberalisation: Benefits of Competition policy Increased Competition Higher Growth Greater Efficiency More Choice Less Poverty 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  34. Indicators of Financial Sector Development in SADC Source: World Development Indicators, 2011 and Authorities across SADC countries, IMF, African Department database, April 2012 and Regional Economic Outlook, Sub-Saharan Africa, Sustaining growth amid global uncertainty. Notes: Asterick * indicates that information was collected from World Bank Development Indicators and access and use of financial infrastructure was collected from FinMark Trust survey quoted in Schoombee (2011). Mkt Cap = market capitalization ratio to GDP.

  35. 12. Potential Benefits of Liberalisation of Financial Services • Comparative impact on domestic firms and potential for productivity; • Access to new financial instruments reducing costs and risks for business; • Access to international saving; • Reduction in overhead expenses and profit-taking by domestic banks due to increased competition by foreign banks; • Increased efficiency and diversity of financial services; 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  36. 12. Potential Benefits of Liberalisation of Financial Services • Spill-over effects of foreign bank entry, such as the introduction of new financial services and of modern and more efficient banking techniques, and the improvement of domestic bank management; • Improvement in bank regulation and supervision due to the entry of new financial service providers and new financial services; • Less interference by Governments in the financial sector, to cover up bad practices; • Training by foreign banks, resulting in more experienced personnel in the financial sector of a country; 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  37. 12. Potential Benefits of Liberalisation of Financial Services • The presence of foreign banks stimulates domestic investment in the host countries; • Foreign banks may attract (other) foreign direct investments and enhance a country’s access to international capital; • Well capitalized foreign banks may be able and willing to keep lending to domestic firms during adverse economic conditions, while domestic banks would probably reduce the credit supply; • Foreign bank entry leads to better lending terms (lower interest rates, lower fees, longer maturities) for all but larger firms. 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  38. 12. Potential Benefits of Liberalisation of Financial Services • Some of the greatest advantages of market liberalisation in services, come from transfers of soft elements, such as information, know-how and technology; • In addition, the entry of foreign financial institutions brings potential improvements in general management, accounting, database processing, and corporate governance. These would all be beneficial to the consumer; • Foreign firms, subject to supervision and regulation in their home countries can raise the standards of supervision; 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  39. 13. Potential Costs of Liberalisation of Financial Services • Failure of domestic firms and risk of contagion; • Market segmentation and reduction in services to SMEs; • Promotion of destabilizing capital flows; • Foreign firms cut and run; • Domestic banks are not able to cope with increased competition, and may stop operating, which can cause disruptions and political concerns about increased foreign control of the financial market; • Foreign banks will not provide additional credit during an economic downturn in a host country; 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  40. 13. Potential Costs of Liberalisation of Financial Services • Domestic banks are not able to cope with increased competition, and may stop operating, which can cause disruptions and political concerns about increased foreign control of the financial market; • Trying to cope with increased competition from the foreign banks and implementing new techniques may raise costs for local banks in the short term, which they would then finance by raising their profit margins, in turn leading to price increases for consumers; • Foreign banks' entry into the market of loans to corporations does not decrease the margins and profits in the personal loan market; 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  41. 15. Policy Recommendations • Bind unilateral reforms, where politically feasible, in WTO – the gains to a country from an efficient financial system far outweigh any potential gains from keeping an inefficient and restricted system in place. • It was for this reason that most SADC countries embarked on liberalization in the first place. • As such, it makes little sense to go ahead with liberalization, regardless of the GATS process; and • Consider extending GATS commitments to insurance in those countries where no commitments have been made. 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  42. 15. Policy Recommendations • As exchange controls are reduced, there is a need to increase the functions and oversight capacity of other regulators, including the financial intelligence unit and banking supervision. • Member States need to standardise prudential regulations and supervision of financial institutions—both banks and nonbanks. Many SADC countries lack regulations and regulators for nonbank financial institutions. • Member States need to determine what other regional institutions are needed to promote and supervise financial and capital market reforms and development. 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  43. 15. Conclusions • While international trade theory literature often suggests that multilateral liberalization maximizes economic benefits, research has shown that regional cooperation among developing countries has the potential to support national development strategies. • It is also important to take into account the positive political economy aspects of regionalism, which can include the provision of regional public goods, a reconfiguration of policy space, preferential rule-making and special financing facilities. 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  44. 15. Conclusions • When compared to other regions, SADC has a relatively small weight of intraregional trade (due mainly key impediments to trade such as poor infrastructure – both soft and physical – which increases transport costs substantially, in turn reducing the competitiveness of the traded goods). • In the case of trade in financial services, specific infrastructure such as telecommunications, finance, logistics or professional services but also adequate investments policies and trade-supportive regulations are needed for the development of intraregional trade 26-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

  45. 15. Conclusions • For the integration process to produce the desired results and to be viable, legitimacy and trust are crucial. • Common regional policies and institutions may be needed to ensure that greater income divergence does not occur, thereby triggering some negative reactions on the part of disadvantaged members. Thank You 19-Nov-14 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa

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