IMF gives gloomy picture of Africa’s financial sector

IMF gives gloomy picture of Africa’s financial sector
By Mutale Kapekele in Washington DC
Fri 23 Apr. 2010, 17:40 CAT

THE financial sector in many African countries has remained shallow and vulnerable, the International Monitory Fund (IMF) has observed.

Briefing the press on the regional economic outlook for sub-Saharan Africa, IMF African department director Antoinette Sayeh said in most countries on the continent, the banking sector served only a small proportion of the population and non-bank financial institutions were weak with low supervisory capacity.

Sayeh said there was an urgent need for regulatory capacity to catch up with the increasing depth and breadth of financial sector activities.

“Non-performing loans in the banking sector in Africa have increased in a number of countries in the region, constraining the availability of credit and with a potential to affect public sector balance sheets,” Sayeh said.

“The exceptionally rapid expansion of bank credit to the private sector in the mid-2000s - upward of 40 per cent per annum in many countries - stretched banks’ assessment capacity and regulators’ supervisory competence, increased exposure to asset and capital market volatility, and shifted the balance of final demand in the economy in some countries. It also underpinned a diversification in the institutional structure of financial sectors that substantially complicated the tasks of regulators. Looking ahead, the urgent need is for regulatory capacity to catch up with the increasing depth and breadth of financial sector activity, including through cross-border institutions.”

She said contingency plans should be regularly updated in the light of the clear international financial fragilities that persisted.

“But there is also a need for closer monitoring of the direct macroeconomic consequences of credit and money growth, including their implications for asset prices and spending volatility,” she said.

She also urged African countries to ensure that the costs and benefits of external financial integration remained balanced.

“Increased access to foreign capital can in theory boost economic growth, reduce macroeconomic volatility, and contribute to domestic financial development,” Sayeh said. “At the same time, however, financial opening has also been associated with more frequent and severe economic crises. Crucial factors in determining whether capital flows will aid or hinder development are the adequacy of institutional and policy frameworks.”

She said for many of the region’s low-income countries and fragile states currently marginalised from international capital markets, the challenge was to develop the domestic investment opportunities that could attract foreign capital.

“Experience within sub-Saharan Africa suggests that the reforms needed to unlock an economy’s productive potential - such as promoting trade and financial sector development, encouraging domestic savings and investment, and raising standards of governance and strengthening institutions - are also helpful in attracting private capital inflows and making these flows more productive,” said Sayeh.

“Given the time taken to implement such reforms, these countries should carefully monitor the implications and effects of financial opening. There is reason to be more confident of increases in foreign direct investment, which can result in the transfer not just of resources but also knowhow, and is generally beneficial even for countries with relatively weak economic fundamentals.”