Capital flows and current account sustainability in African economies

Workshop

21 - 22 September 2005

Accra, Ghana

Provisional Programme

Background and introduction

Described as excessive, a striking feature of the balance of payments in African countries is the recurrence of current account deficits. Associated with this persistent external imbalance is the anomaly of current account fluctuations symptomatic of the extreme trade volatility witnessed in many African countries. Yet, the balance of payments can play an important role in the growth performance of countries through its effect on growth of demand. A healthy balance of payments permits lower interest rates necessary for investment, while current account imbalances-surpluses or deficits-affects the balance of payments and creates an imbalance in government savings, borrowing and assets acquisition.

Generally speaking, economists do not agree on the role and importance of current account deficits. There is widespread concern that prolonged current account deficits may become unsustainable, crowd out domestic savings, or lead to macroeconomic instability. This is especially the case when they are financed with short-term debt or foreign-exchange reserves, and when it reflects high consumption spending.

The surge in capital flows to developing countries since the 1990s has introduced the issue of the importance of capital flows to the sustainability of the current account in these countries, in light of rising international interest rates and the threat of volatility of capital flows. Certainly, the effect of capital flows in current account sustainability depends to a large extent on the type, sustainability, and source of flows, and on international interest rates. Recipients of capital flows can be vulnerable to sudden changes in domestic or external environment. The policy response to the capital flow fluctuations, therefore, depends on the sustainability of current account deficits.

Given that African countries are plagued by persistent current account instability, recurrent current account deficits, and erratic capital inflows, and given that current account sustainability is important for economic progress, the natural questions to be posed are: 1. do current account deficits matter in the case of Africa, and 2. are African current account deficits different? Is the sustainability of current accounts important in the case of African countries? If so, what are the indicators of current account sustainability in African countries? What role do capital flows and other factors (including exchange rate, macroeconomic stability, economic structure, domestic saving, and debt) play in current account sustainability in African countries? As African countries seek to generate sustainable growth and mobilize resources needed to reduce poverty and achieve the Millennium Development Goals, these important questions deserve answers.

It is important to understand how African countries can establish the policy prerequisites that will allow them to exploit the gains and minimize the risks associated with increased financial integration and improved current account sustainability. Within this context, the proposed workshop is timely and pertinent. The workshop will provide participants with a better understanding of the role capital flows play in enhancing the sustainability of current accounts. It will also provide an opportunity to explore ways of improving current account sustainability. It will serve as a platform for sharing experiences between African countries through country case studies, lessons learned, and best practices.