| AIDE-MEMOIRE Workshop on Financial Systems and Mobilization of Resources in Africa 1
- 3 November 2004 Content I. Background and Justification I. Background and Justification The question of resource mobilization remains central to the fight against poverty in Africa. Yet, this has so far proven to be a most difficult task to address. The major objective of the main development initiative adopted by African Heads of State and Government - referred to as "New Partnership for Africa's Development (NEPAD)" - recognized that in order to achieve substantial progress towards halving the proportion of people living in extreme poverty and suffering from hunger by 2015, African countries will have to attain and sustain a GDP growth rate of at least seven percent per annum; and increase the ratio of investment to GDP to 25 percent per annum from the current African average of 18 percent. However, during 2000-2003, of 53 African countries for which data are available, only seven countries registered a real GDP growth rate of seven percent or slightly higher. Overall, the growth rate of 22 of the 53 countries was less than half the target rate, and was declining in 13 of the 53 African countries. Specific sectoral goals of the NEPAD initiative were based on the United Nations "Millennium Development Goals (MDGs)" endorsed by 189 countries to become a blueprint for poverty reduction for the period 2000-2015. To achieve the required growth rate, NEPAD has estimated that there is an annual resource gap in Africa of 12 percent of GDP or US$64 billion. The resources can be generated either domestically through increased domestic savings and improvements in public revenue collection systems, or from external sources. For several countries, the domestic scope is quite narrow and further hampered by the lack of skilled human resources, inadequate infrastructure, high levels of mortality, incidence of disease such as HIV/AIDs, tuberculosis and malaria. These factors weaken institutions, which result in administrative inefficiencies and prevent stable, legal, economic and political governance frameworks from emerging. In the more extreme cases, political disintegration has occurred leading to instability and armed conflict, which is an additional drain on resources and an extra disincentive for domestic and foreign investment. Despite these constraints, African countries have made progress in creating enabling environments for growth. External financing is needed to supplement domestic resources. This calls for injection of large amounts of funds including ODA into African countries to support national programmes including poverty eradication strategies and to finance basic infrastructure that can spur domestic activity as well as attract foreign investment. However, so far, progress on this front has been slow. The domestic resources presently available to finance investment and public services average around 15 percent of GDP against 35 percent for other developing countries. Similarly, the saving rate is just 10 percent of GNP as opposed to more than 20 percent in other developing countries. Without vital public spending and domestic savings, it is inevitable that public administration, law and order and productivity will suffer. Shallow and undiversified formal sector financial systems, a weak public administration, poorly developed private sectors, and low-income levels characterize a large number of African economies. These stem ultimately from precarious socio-economic conditions preventing domestic income generation. Even with the potential to mobilize resources, an effective system still depends on sound macroeconomic policies, good economic governance, concessional finance, and increased private investment. A key function of the financial system is to facilitate increased savings mobilization and to allocate the increased savings to those private investors capable of generating the highest returns to capital. While savings performance varies between countries, the overall saving rate for Africa during the last four years was, on average, lower than that of other developing countries. African countries will have to double their current rate of savings in order to meet the growing investment needs for their economic and social sectors and to achieve the desired standard of living for their populations within the next 10 to 15 years. This is a daunting task, as existing economic strategy and financial management systems appear to have ignored the private (informal) sector saving potentials. However, the effectiveness of the financial system in stimulating overall savings and investment and the efficiency with which financial institutions allocate these resources across sectors, depend upon the regulatory regime for financial markets and institutions. Regulatory design, both internal incentives and governance structures; and external monitoring and supervision, are key instruments for financial development. Africa's impaired financial system is a significant constraint to stable economic growth. There is a need for intensification of efforts to mobilize resources for development of the following priority sectors and areas identified by NEPAD: (i) infrastructure- especially information and communications technology (ICT) and energy, (ii) human resources (education, skills development and reversal of the brain drain from the continent), (iii) health, (iv) agriculture, (v) access to markets for Africa's exports by enhancing competitiveness and promoting structural diversification. One reason for the low saving rates in Africa may be that the rate of return on savings with the financial institutions may be inadequate. However rates offered by various national savings schemes are reasonably higher if compared to rates offered by commercial banks. African saving institutions, including commercial banks, investment banks and national saving schemes, have not been able to create a savings culture commensurate with the continent's investment needs. The financial system is facing mounting debt management problems, which have been compounded by some unwarranted developments such as scandals, a default culture and capital flight.1 Resource
mobilization activities cannot be geared up unless discipline is
brought to African social and economic behaviour and misuse of resources
is eliminated. Further, leakages of revenue and capital flight should
be prevented. Also, social and economic injustices should be eliminated,
and the economic condition of the masses improved substantially. However, an acceleration of economic growth through increased savings mobilization will not be sufficient to alleviate poverty in Africa. Poverty reduction requires particular patterns of economic growth and institutional structures of which the main components are (i) rural development in general, and the enhancement of productivity and incomes in peasant agriculture in particular; and (ii) growth of labour intensive small and medium-scale enterprises in rural and urban areas. It is therefore necessary to identify the particular types of financial services required to support rural development, the growth of SMEs, and the productivity and earnings capacity of the poor, including female farmers and entrepreneurs. In view of the vulnerabilities of African countries to supply side shocks, and the concomitant effects on the financial system, the development of a sound, stable and resilient financial system is imperative in order to avoid disruptions caused by the breakdown of financial intermediation - breakdowns which have led to reduced confidence in the financial system in general and the banking system in particular. The insolvency of some banks and the ensuing loss of domestic savings, and bank restructuring costs added to fiscal pressures and eroded macroeconomic stabilization. The primary objective of this workshop is to review the critical issues facing African policy makers in mobilizing resources to finance development. The secondary objective is to identify and improve the forms of financial intermediation by promoting sound, well functioning and resilient financial systems, as well as promote a broadening and deepening of capital markets to exploit alternative sources of funding. This would entail the development of competitive, stable, and broad based financial systems to support enhanced resource mobilization and sustainable economic growth. Hence, the workshop seeks to identify the financial sector policies needed to support financial stability and security, and pro-poor patterns of growth in Africa. The workshop programme will build on past reforms in order to improve governance in the banking system with the objective to strengthen financial intermediation. In addition, the programme will seek to spell out broad reforms to address regulatory and legal deficiencies in the non-bank financial sector and capital markets, and introduce the basic financial infrastructure required to develop contractual savings institutions, namely, pension and insurance systems. The workshop will also seek to draw on the experiences of other developing countries, which have been more successful in utilizing their financial systems for their economic development. The experiences of Asian countries are particularly pertinent. Thus, the intended outcome of the workshop is to provide practical advice on financial sector policies and reforms required by policymakers in Africa. The programme will aim to provide policy advice on such issues as: (i) restructuring, consolidating and strengthening the efficiency and regulation of the domestic banking and non-banking financial sectors (NBFIs); (ii) boosting domestic savings through enhancing the access of small and medium scale enterprises to credit, (iii) the provision of financial services to meet the needs of poor people, (iv) developing the government securities market; (v) facilitating the development of the capital and equity markets; and (vi) promoting the institutional investor sector. A study of resource mobilization should first of all focus on the causal relationship between the financial sector and real sector development. A core set of financial services and the institutional structures that have been more successful in providing them must be identified to foster poverty-reducing growth. Focus studies within each theme will clarify the key issues to be explored in country-based research. The link between the financial sector, growth and poverty reduction will be explored:
The experiences of other developing countries, particularly those of Asia, will also be studied to see what lessons may be drawn for Africa, using comparative approach. In-depth research will be conducted on issues such as: the causes and solutions to the problems of bank and non-bank financial institutions' failures in Africa; the link between banking instability and macroeconomic performance in Africa; the impact of the ownership structure of banks on banking sector performance in Africa; building early warning indicators of banking sector instability in African countries; and identifying economic reforms necessary to make the financial systems an effective agency for domestic resource mobilization in poor African economies that have difficulties attracting foreign capital 1.
Domestic financial resource mobilization to promote poverty reducing
growth in Africa: Constraints, strategies and policies.
2.
The Role of financial systems in development. 3. Regulation Policy and Supervision of the Financial Sector. Under this theme, there will be discussion of the impact of the ownership structure of privately owned banks on their performance in Africa; of reform and restructuring of other financial institutions such as central banks, government-owned banks, insurance companies and other financial institutions, particularly in countries recovering from conflicts; research on encouraging diversification of institutions and markets that will induce greater efficiency in the intermediation process, while introducing and enforcing international prudential norms and regulatory standards to improve the system's resilience; and financial sector stability analysis. 4.
Private Resource mobilization through capital and equity markets. 5.
Finance for the Poor. V. Participation and Format of the Meeting Extensive consultations with representatives from Central Banks, Ministries of Finance, Ministries of Economic Planning, Non-Bank Financial Institutions, African Securities and Exchange Commissions, African Stock Exchanges, Ministries of Justice, Ministries of Health and Social Affairs, and Social Security Insurance General Offices, the African Development Bank, the African Union, and African universities will provide a framework for the meeting. Contacts Mr.
J.K. Thisen, Mr.
Nii Wallace-Bruce Venue: InterContinental Hotel, Nairobi Dates: 1-3 November 2004
1 According to various national and international estimates, between $50 billion to $100 billion have been transferred abroad. This capital flight has severely curtailed the value of African currencies and shattered the investment environment. |
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