Regulatory Choices for
Low Income Countries
Layna Mosley
Dept. of Political Science
UNC Chapel Hill
mosley@unc.edu
Introduction
 Recent trend: increased private capital flows to Africa
 Policy question: How can low-income nations best take
advantage of private capital flows?
 Concerns: benefits of capital account openness are
contingent on macroeconomic stability and regulatory
capacity.
 Recommendation: gradual transition to capital account
openness.
 Sequence: regulation prior to liberalization
 Requires increased technical capacity, as well as political will to
regulate.
Private Capital Flows to Africa
 High growth rates (>5% on average) in Africa in recent years
 Strong growth predicted to continue.
 Decline/leveling off in ODA flows (excluding debt relief) to
African nations
 Private investors attracted to high returns, growth foreceasts,
diversification (uncorrelated with other markets),
 Private capital flows
 2006: net private capital flows exceeded bilateral aid grants.
 FDI increased by 44% in 2006 (extractive sector)
 Increased foreign participation in local bond markets (i.e. Kenya,
Nigeria, Zambia)
 17 nations now have sovereign credit ratings (local & foreign currency)
 Development of local stock exchanges (albeit often small)
Legal Capital Account Liberalization
Based on Chinn and
Ito scores
Legal Capital Account Liberalization
Actual Capital Account Openness
Assets and Liabilties as a percentage of GDP
by region
Europe & Central Asia
Latin America & Caribbean
Middle East & North Africa
South Asia
Sub-Saharan Africa
1
2
3
4
1
2
3
4
East Asia & Pacific
1990
1995
2000
2005
1990
1995
2000
2005
1990
1995
2000
2005
year
Graphs by WB Region
Data from Lane & Milesi-Ferretti (2006)
Actual Capital Account Openness
Data from Beck et al (2000)
How to benefit from openness?
 A large literature on the effects of capital account openness on
economic growth.
 Mixed findings
 Different sample countries, time periods, and measurements.
 Variation across type of capital (FDI and equity flows vs. debt)
 Importance of “pull factors,” sometimes generating contagion.
 Central issue: contingent effects
 Thresholds matter (i.e. Kose et al 2006)
 Strong macroeconomic fundamentals » » growth (i.e. Edwards
2008)
 Weakly regulated financial sectors lack capacity to absorb (and
manage) inflows (i.e. Prasad et al 2007)
 Central issue for this paper: regulatory challenges
Regulatory Issues in Africa
 Background
 International attention to standards and codes.
 Issues of compliance (political will) and capacity
 How do African countries, as a group, compare with other
countries?
 Standards example: SDDS (1 subscriber); vs. GDDS
 Governance indicators (Kaufman et al 2007)
 Regulatory quality, rule of law, control of corruption
 Three groups:
 EMBI-Global countries (excluding 6 African EMBI-G)
 Eight African nations w/ increased participation in public debt markets
(Botswana, Gabon, Ghana, Kenya, Nigeria, Tanzania, Uganda and Zambia)
 All other African nations.
Figure 4c: Average Control of Corruption
Africa -- Recent Bond Market Access
-.8
-.6
-.4
-.2
0
African nations
1995
2000
2005
2010
-.6
-.4
-.2
0
EMBI - Global
-.8
Mean for all low & middle income (2006): -0.47
1995
2000
2005
2010
year
Regulatory Issues in Africa
Regulatory Issues in Africa
 ROSCs/FSAPs
 ~650 completed since 1999.
 15 percent have involved African nations
 28African nations; most frequent participants are Tunisia (13
ROSCs covering six areas), Uganda (10 ROSCs, 6 areas) and
Mozambique (9 ROSCs, 5 areas).
 Most frequently assessed areas (for Africa) are data dissemination
and fiscal transparency, followed by banking supervision.
 A subset of recent ROSCs is summarized in the paper
 Six FSAPs (Uganda 2003, Tanzania 2003, Ghana 2003,
Mozambique 2004, Madagascar 2006 and Namibia 2007).
 ROSCs for Botswana (2007, data quality) and Kenya (2008, fiscal
transparency).
Regulatory Issues in Africa
 Lessons and patterns from these ROSCs:
 Progress: banking system supervision (Tanzania); banking sector
diversification (Madagascar); well-developed financial system
(Namibia)
 Many challenges, including
 Banking sector development
 Banking sector weaknesses
 Capital market development
 Debt management
 Financial sector supervision and regulation
 Legal system and corporate governance
 National statistics and accounting systems
Conclusions
 Improve data on the extent, maturity and composition of
capital flows.
 Maintain an awareness of volatility often associated with
(short-term) capital flows.
 Debt management offices
 Rollover and currency risk.
 How to attract longer-term investors?
 Take sequencing seriously
 Need for targeted, substantial technical assistance.
 Avoid “one size fits all” prescriptions.
Conclusions
 Time horizons
 Some international codes and standards may be inappropriate for
the least developed countries (i.e. Basel II).
 Meeting international standards may mean foregoing the shorterterm benefits of capital account openness.
 Policy issue: might capital account openness facilitate
regulatory improvements?
 Domestic politics: will the “losers” from openness use regulatory
issues as a justification for continued closure?
Participation in IMF-Sponsored Data
Standards
SDDS
Subscribers
GDDS
Subscribers
Total Countries
Income Category
Low
Lower Middle
Upper Middle
High OECD
High non-OECD
3
16
17
22
4
42
23
16
0
4
56
52
36
23
15
Region
Europe & C. Asia
M. East & N. Africa
Asia and Pacific
South Asia
Latin America & Caribbean
Sub-Saharan Africa
36
4
8
1
10
1
6
7
8
5
20
41
48
18
23
8
34
47
ROSC Assessments, African Nations
Area
Number of ROSCs
(Number of Countries)
Most Recent ROSC
5 (5)
Madagascar (2006)
Banking Supervision
17 (13)
Namibia (2007)
Data Dissemination
27 (19)
Chad, Botswana (2007)
Fiscal Transparency
22 (17)
Kenya (2008)
5 (5)
Morocco (2003)
13 (10)
Rwanda, Namibia (2005)
Payments Systems
5 (5)
Mozambique (2004)
Securities Regulation
6 (5)
Uganda, Morocco, Kenya
(2003)
Anti-Money Laundering/CFT
Insurance Supervision
Monetary and Financial Policy
Transparency
Total
100 (28)
Broad Category
Banking sector development
Banking sector weaknesses
Capital market development
Debt Management
Monetary and fiscal policy management
Specific Issues
Limited role for banking sector in the economy (Ghana, Tanzania, Uganda)
Access to financial services very limited (Ghana, Madagascar)
Highly concentrated banking system; finances only 10% of new loans
(Mozambique)
Weak competition in banking sector, but public concerns about foreign
participation (Ghana)
Tendency toward short-term bank loans (Uganda)
High level of past due loans (Ghana)
Banks tend to invest in short-term government securities (Ghana)
High ratio of non-performing loans (Madagascar, Mozambique)
Lack of diversity in bank holdings; holding a large proportion of government
securities, therefore exposed to interest rate risk (Uganda)
Credit to private sector is very small, short-term (Tanzania)
Limited investment opportunities in domestic financial markets, perhaps
suggesting a need for asset securitization (Namibia)
Lack of liquidity in domestic stock market (Uganda, Tanzania, Mozambique)
Financial system provides little long-term financing to the economy
(Madagascar)
Public pension fund heavily invested in government securities (Tanzania); in
short-term bank deposits and treasury bills (Uganda); or in assets abroad
(Namibia)
Underdeveloped payments systems (Madagascar, Uganda)
Very underdeveloped markets for medium and long term debt; little market
for treasury bills with maturities greater than 91 days (Ghana)
Lack well-developed market for longer-term bond issues, or for secondary
trading in government debt (Tanzania, Uganda)
Small interbank lending market; scarcity of credible counterparties (Tanzania,
Uganda)
Need to develop a strong government securities market (Mozambique)
Need a sterilization plan to deal with effects of foreign capital inflows
(Tanzania)
Financial sector regulation and supervision
Political independence of bank regulator sometimes
questionable; some scope for intervention from Minister of
Finance (Tanzania, Uganda).
Financial regulator lacks technical resources and skilled staff
(Madagascar, Namibia, Tanzania, Mozambique)
Weak enforcement of prudential regulations (Ghana)
Lack of regulatory capacity in NBFI sector (Namibia); or in
pensions and insurance (Madagascar, Mozambique)
Legal system and corporate governance
Loan classification regulations do not meet international
standards (Mozambique)
Banks require greater guidance on prudential requirements
(Uganda)
Weak corporate governance procedures (Ghana, Mozambique)
Local firms’ financial reporting practices need improvement
(Ghana, Madagascar, Mozambique)
Efficiency of legal system, contract enforcement (Tanzania)
Need stronger minority shareholder protections (Uganda)
National statistics and accounting systems
Moving toward, but not in, conformity with international
fiscal transparency standards (Kenya)
Timeliness and periodicity of economic data (Botswana)
IAS not yet implemented, and may not be appropriate for
smaller firms (Mozambique)