The Policy Objectives

412. These actions should be addressed to a number of specific policy objectives or issues virtually all of which have already been highlighted above. These policy issues need tenacious attention by African Governments, Regional Economic Communities (RECs) and the African Economic Community Secretariat (AEC) as well as other continental and regional inter-Governmental Organisations. They are : the need

• to boost the rate of gross domestic savings;

• to boost the rate of gross domestic investment;

• to increase the efficiency of invested capital;

• to correct the structural deficit in Africa's trade with the rest of the world;

• to surmount the "old" external debt;

• to mobilise external resources;

• to lighten the internal public debt burden;

and

• to develop healthy financial intermediaries and dynamic capital markets.

413. The rates of gross domestic investment (GDI) and gross domestic savings (GOS) in proportion to the gross national product have

remained at low levels relative to other developing regions of the world. Since 1980, the African GDI rate has averaged only about 20 percent of gross domestic product (GOP), and only about 15 percent in the sub-Saharan countries. The African GOS rate, on its part, has averaged only about 18 percent of gross national product (GNP), and only about 13 percent in the sub-Saharan countries. By contrast, the fast-growing economies, of China, the Asia-Pacific rim, and the Association of South-East Asian Nations (ASEAN) grouping of countries have maintained savings and investment rates in the range of 30AOpercent over the same period .1ft!

414. Analysis in the preceding section has indicated that capacity building, and accelerated growth in Africa will not bepossible without sustained high rates of domestic savings and investment. To rapidly attain these levels of domestic savings and investment and to sustain them indefinitely are tough challenges which African economic policy must address squarely.

415. The low rates of domestic investment have been the result of poor rates of public, private sector, and foreign direct investment, while the low rates of domestic savings are the result of chronic dis-saving in the public sector, and low savings rates by private sector enterprises and by households. The poor rate of public investment and public sector dis-saving have been due to African countries' high recurrent publicconsumptionexpenditures, loss-making public enterprises that have been sustained by state subsidies, poor controls on spending, corruption within the public sector, and rather low levels of fiscal revenue collection in proportion to the GOP, relative to countries in other regions of the world.

416. In the private sector, the low savings rates of enterprises have been because of low profitability resulting from poor management capabilities, the high costs of doing business due to poor infrastructures, insecurity of property,

ineffectual legal frameworks that do not offer efficient recourse for the enforcement of contractual obligations, high levels of losses to pilferage by employees, and weak demand due to declining personal incomes. In the rural areas, where the bulk of the population live, the low savings rates of households are due to the continued predominance of the.subsistence (i.e., non-cash) mode of production and exchange, the continued low level of integration of the rural economy into the monetised formal economy, and the low level of cash incomes of most African households in view of prolonged economic stagnation. In the urban areas, on the other hand, the high levels of unemployment and the low profitability of informal sector activities tend to leave little surplus that could be saved.

417. Moreover, underpinning the persistence of these structural factors, the financial intermediation infrastructure for effective mobilisation of resources and their efficient allocation continue to be underdeveloped in most of the African countries. The range of institutions as well as the menu of financial instruments and services which they offer are limited. At the same time their operational methods are too costly, bureaucratic, and baffling to the potential clientele with only low levels of functional literacy.

418. Compounding the low rates of domestic investment is the low efficiency of capital, due to the rather poor quality of investments, which results in low rates of return on invested scarce resources. This has manifested itself in the very low rates of utilisation of installed capacity in the African countries, in addition to excessive delays and cost over-runs before completing capital projects and bringing them into full use.

The poor quality of African investments is linked to the inefficiencies of state-owned enterprises; failure to develop the private sector, especially small to medium-scale enterprises;

poor priorities in the national development strategies; distortions created by macro and

micro economic policies; and the extent to which direct intervention by the state, often arbitrary, has supplanted markets in the allocation of scarce investible resources. Acute shortages of foreign currency due to poor external trade performance has also had a negative effect.

419. The African countries also suffer from an intractable structural imbalance in their external trade. This is due to the slow progress towards the diversification of their production and export bases away from total dependence on primary commodities towards processed goods and manufactures with more added value. It is also due to their declining competitiveness within the global economy, which has resulted in the steady loss of market share of some exports previously dominated by African countries.

Consequently, Africa's terms of trade. have fallen steeply since 1980. In order to check the deficit on the trade account, imports have had to be severely compressed, resulting in the contraction and stagnation of African economic output over the last decade and a half.

420. A consequence of the chronic trade deficits as well as the poor development policies and poor management of scarce external resources in the past, is that African countries are now weighed down by a heavy external debt burden. On the internal front, decades of dis-saving by the state and its sponsored public enterprises has resulted in massive internal public and public-guaranteed debt on the books of national banks and private sector suppliers of goods and services. In some countries, government employees have had to go for months without pay, which has sapped morale and created socio-political tensions. With the net worth of African financial institutions severely reduced by large amounts of non-performing assets, enterprises threatened with bankruptcy by bad debts owed by the state, and government workers unable to pay their family bills, in a number of countries, the financial system has been under severe strains.

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421. In the three decades since African countries gained their independence, the public sector has been dominant over the African financial sector. This was in' pursuit of the policy objective of gaining,national control over lI'sector considered to be strategic, but dominated during the colonial era by financial institutions owned by foreign interests. Severe .restrictions were placed on entry into the sector by private interests, during the period when governments experimented with,", African socialism' . This resulted in the monopolistic structure of the financial institutions, segmented along 'specific lines' of business' -commercial, agricultural, industrial, construction, and so on.

422. In spite of the establishment of Development Banks to finance long-term capital projects and supply working capital to specific production sectors of the economy, there has been a predominance of short-term financing especiallyin favour ofexternal trade activities.

PurtheroH'lre,'" the modern financial intermediaries have largely failed to spread to the rural areas (where the bulk of the African people Jive) and to operate there profitably by tailoring financial instruments and services to the cultural arid economic circumstances that actually prevail in Africa.

423. The failure to develop strong and quasi-independent Central Banks had .lli'.Q consequences: The Central Bank's lack of authority over the conduct of monetary policy resulted in a permissive fiscal policy (characterised by chronic large deficits) and an accommodative money supply which fuelled inflation - hyper-inflation, in a number of

countries - and played havoc with the value of African currencies throughout the last two decades. The Central Bank's inability to develop credible capacities to exercise supervisory and regulatory powers over the other financial institutions resulted in the proliferation of imprudent 'banking practices that have practically wiped out the capital base of most African financial institutions and undermined their credibility as safe depositories for savings.

In a number of countries, there have been spectacular failures' of financial institutions at great cost to the tax-payer and depositors.17/

424. All these factors have resulted in the under-development of financial intermediation capacities in Africa for the mobilisation of domestic savings and their efficient allocation to productive uses. Annex 2 at the end of this chapter provides a comprehensive list of financial intermediary institutions that a dynamic market economy would be expected to-have.

425. The vacuum left unfilled by formal sector financial institutions in Africa has been partially filled by informal sector financial arrangements.

Examples of these abound : such as ~

collection in West Africa, and the

illIDIl2

and

MlIi!:

in ruralareas and the informal sector in

Ethiopia, as well as different forms of informal savings and credit associations and welfare arrangements in other countries. Money lenders charging interest rates as high as lOOper cent over short repayment periods abound every where, to whom people are forced to resort when they cannot obtain interest-free loans from relatives and friends.

,.

BOX5

FINANCIAL SECTOR REFORMS AND MOBILIZATION OF RESOURCES FOR DEVEWPMENT: THE EXPERIENCE OF KENYA

Kenya, unlike many other African countries,hasmany ofthe elements needed for the development of vibrant financial and capital markets. These elements include a significantly diversified financial structure, a

relatively competent staff of the Central Bank, and a relatively Unfettered regulatory framework.

'Notwithstanding these positive attributes, Kenya's financial system portrayed the usual weaknesses that characterize African financial systems including: a relatively controlled and fragmented financial system;

differences in regulations governing banking and non-bank financial intermediaries which resulted in fragmentation and fragility of the financial system; lack of autonomy of the Central Bank; weak supervisory capacities ofthe Central Bank to carry out its surveillance role and enforce banking regulations; differentiated interest rate structure between banks and non-banks which produced fragmented credit markets; and inappropriate Government policies which contributed to the poor performance of the financial sector and an accumulation of non-performing loans.

Against this background, the Kenyan Government embarked in the mid-1980s on financial sector reforms designed to promote in the country a more efficient and market-oriented financial system; improve the mobilization, allocation and utilization of financial resources; increase the efficiency of the process of financial intermediation in the country; and develop more flexible instruments of monetary policy. The focus

of the reforms were to be on relaxing controls on interest rates; developing

ami

initiating the use of indirect monetary policy instruments; strengthening the framework for supervision of financial institutions;

restructuring troubled financial institutions and development finance institutions; and developing capital markets.

The reforms were reinforced in the early 1990s with further changes in the legal and regulatory framework, institutional changes and enhanced with programmes offinancial restructuring. Changes in the . legal and regulatoryframework included amendments to the Central Bank of Kenya Act, the Banking Act, the

. Capital markets Authority Act, and directives for non-banks to convert into banks.

The Revised Banking Act of1991 enhanced significantly the role of the Central Bank of Kenya in the inspection offinancial intermediaries; established stringent reporting, auditing and provisioning requirements;

stipulated capital adequacy requirements and exposure limits; and also stipulated assessment of penalties against non-compliance with the Banking Act. Changes were also made to the Capital Markets Authority Act, through the1994 Amendment Act, and Rules and Regulations Revisions.

'Institutional reforms have also included trying to eliminate fragmentation offinancial marketsbyrequiring non-bank financial institutions to convert themselves into commercial banks and/or merge with their parent companies. Thishasbeen done in order to bring non-banks under the Revised Banking Act. The requirements for entry into the financial sector have been more stringent.

151

426. Informal sector financial arrangements are clearly inefficient, offer no guarantee of protection to savers beyond personal trust based on reputation, offer negative real rates of return to savers while borrowers may be charged exorbitant real interest rates. However, the fact that they continue to thrive indicates that there is a great unmet need for intermediation and other financial services in all segments of the African population. It also suggests that the informal arrangements evolved traditionally have certain attributes which formal sector institutions would do well to adapt and adopt, if they are to become more successful in the African rural and informal-sector economies.

On the other hand, informal-sector financial markets, especially those handling increasing numbers of clients and large volumes of money, should gradually be brought under appropriate levels of regulation and supervision while keeping the paper-work to a minimum.

427. In the financial sector as in the general case of enterprise development, the thrust of economic policy in Africa should now be to nudge 'informal' entrepreneurial activities into the realm of formal sector structures where they have ample room to grow, expand, and choose to diversify or to specialise on core activities, and where they would be in a position to respond efficiently to policy signals. To bring this about, cumbersome regulations, burdensome taxes, and corrupt bureaucracies will need to be overhauled, reduced, and reformed respectively, to remove the incentive to operate in the 'informal' or 'underground' economy.

428. The policy objectives spelled out in the Matrix section at the end of this chapter therefore aim to correct the policy failures of the last three decades : in the areas of macro-economic policy, the incentives structure, trade policy, the management of external liabilities and domestic public debt, and the institutional framework for robust intermediation.

(a) Policy Measures and Actions at the National Level

429. Economic structural reforms currently under way in most African countries are aimed at removing distortions, increasing the role of the private sector, restructuring public enterprises and privatising those which are no longer considered strategic or whose objectives can be served under private sector ownership.

All these reforms aim ^to boost efficiency and competitiveness of the African economies and, if they are successful, will result in an increase in the rate of return on investing in this continent.

430. Financial sector reforms, particularly, which are being implemented in a number of countries, have been aimed at removing financial repression and strengthening the financial sector institutional base. For example, the powers of Central Banks to supervise and regulate the other financial institutions have been strengthened; and their role in shaping and administering monetary policy has gained new recognition. South Africa has gone the farthest, by entrenching in the interim Constitution which governs the Government of National Unity to 1999, the autonomy of the South African Reserve Bank to conduct monetary policy towards the objectives of price and exchange rate stability.

431. These reforms should, in due course, result in increased incentives for private savings, a more sound .financial sector institutional base for more effective intermediation between savers and investors, and a more efficient allocation of scarce financial resources. But still more needs to be done, in all African countries, to strengthen the capacities and status of African Central Banks to play the role of leading advisors to Governments on monetary policy, as its executors through efficient open market interventions, and as the regulators and supervisors over the financial

~I

-system. Commitment to these reforms should therefore be intensified.

432. Policy measures and actions which African Governments should implement to achieve the policy objectives that have been identified in Section B are given in the Matrix section.

(b) Complementary Actions at the Regional Level

433. Policy measures and actions at the national level will not be fully successful unless they are complemented by actions at the regional level, however. This is because of the small scale of most African economies, which does not allow sufficient room for institutional diversification and economies of scale within the financial sector.

434. It is also because of the need for the African financial sector to be brought to a stage of sophistication and competitiveness where it can be fully integrated into the global financial and capital market which has already taken shape ahead of the Twenty-first Century. This integration is a sine qua non for Africa to tap larger net transfers of resources from global savings to help finance capacity building. The quickest approach to the goal of integrating Africa into the global market is to remove barriers to cross-border financial intermediation in Africa, allowing larger regional intermediaries to emerge, grow, and compete across the continent, as a prelude to playing in the "big league" of the global financial and capital market.

435. External resource transfers to Africa will corne only if there are attractive profit opportunities. The size of the market and the ease with which it can be serviced is an important factor in this regard. An efficient regional infrastructure of financial intermediaries is one of the key elements of a

large regional market. It has to be borne in mind, however, that such an infrastructure cannot possibly function efficiently while a multiplicity of non-convertible currencies remains across Africa, each currency guarded jealously by arbitrary control regulations at the national level.

436. Currency convertibility, managed exchange rate systems between sub-regional groupings of countries as a prelude to full monetary union and the launching of regional currencies with the goal of reducing fifty-odd African currencies to no more than 5-10 currencies of the Regional Economic Communities (RECs), as a stepping stone to full monetary integration across the continent and a pan-African currency unit of the African Economic Community (AEC) - these are not issues that individual countries can tackle on their own. The right place where these problems can be solved is within the framework of sub-regional and continental inter-Governmental organisations set up by member States to spearhead regional and continental economic integration.Ij,'

437. The rapid changes that are in train in the goo-political and economic system call for a fundamental re-thinking of the goals and process of regional and continental economic integration in Africa. For example, African States have entered into sovereign commitments to trade Iiberalisation, on acceding to the Final Act of the Uruguay Round in April 1994 at Marrakech, Kingdom of Morocco. There is now an urgent need to review the Abuja Treaty in the light of the Final Act of Uruguay Round, to harmonise African countries' commitments to economic integration and to global trade Iiberalisation. In

437. The rapid changes that are in train in the goo-political and economic system call for a fundamental re-thinking of the goals and process of regional and continental economic integration in Africa. For example, African States have entered into sovereign commitments to trade Iiberalisation, on acceding to the Final Act of the Uruguay Round in April 1994 at Marrakech, Kingdom of Morocco. There is now an urgent need to review the Abuja Treaty in the light of the Final Act of Uruguay Round, to harmonise African countries' commitments to economic integration and to global trade Iiberalisation. In

Dans le document A framework agenda for building and utilizing critical capacities in Africa (Page 151-182)