Victor Murinde

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Capital Flows and Capital Account Liberalisation
in the Post-Financial Crisis Era Challenges,
Opportunities Policy Responses

• Victor Murinde
• Birmingham Business School
• University of Birmingham

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

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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

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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.

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Table 1 Flow of Funds Framework
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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.

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Table 7 Impact of the crisis on selected African
financial markets in an international context
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Table 7 Impact of the crisis on selected African
financial markets in an international context
(Contd)
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Table 8 Exchange rates for selected African
countries
(local currency per US Dollar)
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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?

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Table 2 Typology of controls on portfolio
investment and FDI in African countries
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Table 2 Typology of controls on portfolio
investment and FDI in African countries (Contd)
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Table 2 Typology of controls on portfolio
investment and FDI in African countries (Contd)
Source Adapted from IMF (2009), Table A3.1, page
69-70.
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Table 3 Examples of Capital Account
Liberalisation Process
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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
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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

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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.

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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.

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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.

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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

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Thank you for your attention