“Capital Flows and Development of African Economies: Towards an Action Plan for Financing Investment in Africa”

Speech by Hakim Ben Hammouda, Director, TFED

Zanzibar, Tanzania
24-25 April 2007

Ladies and Gentleman, dear participants,

Firstly, let me begin by welcoming you to Zanzibar, one of the beautiful pearls of the Indian Ocean. You have come in some cases long distances to attend this ECA meeting on “Capital Flows and Development of African Economies: Towards an Action Plan for Financing Investment in Africa”. Thank you for your commitment to attending such ECA meetings. Many of you are familiar faces, having participated in ECA's Capital Market Project, which concluded last year with the All-Africa Forum in Nairobi. Welcome to you all.

While the following point is not new, we can reflect on its implication for this meeting:

African countries need to mobilize both domestic and external resources in order to accelerate economic growth, reduce poverty, and make progress towards meeting all the Millennium Development Goals. However, as a consequence of low domestic savings in addition to inadequate external capital flows, investment ratios in sub-Saharan countries remain at lower levels than in other developing regions. Overcoming this financing gap is a major challenge for African policymakers, and in response, governments need to consider various instruments and mechanisms for attracting both domestic and foreign investment.

This is evident through out Africa: investment by both the government and the private sector, utilizing both domestic and foreign resources, has been inadequate. As you well hear later on this morning from my colleague, it is therefore a positive sign that external sources of financing have been improving in recent years. FDI reached US$39 billion in 2006, reflecting the continuing buoyancy of commodity prices and stronger economic performance on the continent. Official development assistance had increased up to 2005 but suffered a set back in 2006. Donors need to increase assistance, and not just in terms of debt relief and emergency assistance that pushed up the aid levels in the first place.

In comparison, domestic resource mobilization has not taken off in a big way. Domestic savings have increased in oil-exporting countries, but this has not yet translated into a significant increase in growth-promoting investment. We must start devoting more of our efforts to this dimension.

President Frank D. Roosevelt said at the beginning of the New Deal when many of his policies had been condemned by the Supreme Court: "What this country needs" - he stated - "is bold experimentation. If we fail the first time, then we have to try a second approach and a third if necessary; we have to try again and again until we solve the problem."

Attempts have indeed already been attempted in Africa to increase domestic savings and investment. However, previous reforms, including financial sector liberalization, have failed to make any appreciable headway into solving this dilemma. Capacity, resource, technology and other infrastructure impediments still constrain further financial deepening and development in most African countries.

Therefore, the challenge remains. Governments together with the private sector, regional and international partners, need to increase efforts to mobilize resources, above all from domestic sources, by improving governance and public financial management, expanding the banking system, undertaking pension reform, developing capital markets including stock exchanges and bond markets.

With respect to the capital markets, we met in Nairobi last year to discuss whether regional integration is the way forward for capital market development in Africa. The key messages emanating from this forum were:

•  In spite of recent growth, most African capital markets are small and shallow. One solution to this situation is the regional integration of these markets.

•  There are various approaches to regional integration in terms of sequencing, developing standards in participating countries and the degree of harmonization.

•  Information dissemination and education campaigns are key to improving the functioning of capital markets in Africa. These efforts must be underpinned by research on issues relating to regional integration.

•  All partners have a role to play in pushing the agenda forward, including conducting a study to identify areas for further analysis and promoting research and training for stakeholders. It is also essential that the regional economic communities be brought on board to contribute to the agenda.

Elsie Addo has prepared a background paper on this topic, which she will discuss further later in the day.

While capital market development is a fundamental part of mobilizing resources, we must also consider other innovative approaches to financing investment. These include venture capital/private equity, particularly for SMEs, and microfinance, topics we will be hearing more about over the next two days.

I also refer you to ECA's Economic Report on Africa 2006, which has been distributed. This report analyses all these issues and provides recommendations for governments to implement. The Economic Report on Africa 2007, which was recently released, has also been provided to you. This report focuses on the need for diversification in Africa, an objective that sorely requires much higher rates of both public and private investment.

Returning to the task ahead, let us remind ourselves why we are here and what the objectives of this meeting are.

The main theme of this expert group meeting is financing investment in Africa. In this respect, we will focus on capital market development, measures to support investment in Africa, and recent trends in other financing instruments, such as options for SMEs, venture capital and pension funds in Africa. So you see we are both building on the meeting in Nairobi and trying to explore new areas of financing that deserve further attention.

Based on the presentations and ensuing discussions, we hope to come up with some concrete recommendations to promote financing of investment in Africa, drawing on experiences from the continent and other regions. Tomorrow we will meet to focus our energies on translating these recommendations into an action plan identifying potential projects for ECA to implement along with all our partners to pursue, leading to stronger collaboration between the United Nations, African Union Commission, African Development Bank, the RECs, together with African governments, practitioners, the private sector and research institutions.

Let us come away from this meeting having found at least one concrete proposal that we will develop together into a project that will assist in promoting the financing of investment in Africa.

I wish you successful deliberations and fruitful, concrete outcomes from the meeting.