Africa’s ‘backwardness’ has saved it from the first-round impact of the global financial crisis that affected the developed markets, South African Reserve Bank Governor, Tito Mboweni, told ┬áthe International Monetary Fund in Washington last┬á week.
“Limited exposure of our banks to the most risky financial transactions in advanced economies has largely protected these banks (in Africa) from the first-round impact of the financial crisis,” Mboweni told the Ninth Meeting of the International Monetary and Finance Committee of the IMF.
He was speaking on behalf of the Africa Group 1 Constituency, which includes Botswana, Burundi, Eritrea, Ethiopia, Gambia, Kenya, Lesotho, Liberia, Malawi, Mozambique, Namibia, Nigeria, Sierra Leone, South Africa, Sudan, Swaziland, Tanzania, Uganda and Zambia.
The limited exposure notwithstanding, Mboweni warned that pressures from the economic slowdown are building on African economies and ‘could subvert our progress towards the achievement of the Millennium Development Goals, generate adverse social consequences, resulting in political and ultimately security crises.’
He said that during the last decade, many Sub-Saharan countries sustained the highest rates of economic growth seen since independence and that the crisis threatens to reverse this positive development.
“Growth in Sub-Saharan countries is estimated to decline from 5.3 percent in 2008 to 2.2 percent in 2009, less than the region’s average population growth rate of about 2.3 to 3.0 percent,” said Mboweni, adding that if the crisis continues unabated, ‘Africa will return to a state of deep poverty affecting around 90 million people.’
To minimise the corrosive effects of the crisis, the governor suggested additional policy advice, technical assistance as well as expanded but accessible Fund resources to Low-Income Countries (LCIs). With regard to the latter point, Mboweni lamented the fact that access to many IMF loans has been unfavourably skewed towards Africa. Access for countries outside Africa has ranged from 500 percent to over 1000 percent of quota while lending to some African countries, even under the high access Exogenous Shocks Facility, has typically been around 25 percent of quota.
However, the situation has changed somewhat. In response to the crisis, the IMF responded by lending from its General Resources Account, doubling access to Fund facilities for emerging markets and low-income countries. While acknowledging that this level of assistance may provide more liquidity to beneficiary countries, Mboweni stated that for the increased financing to have more positive impact, the Fund needs to spearhead the debt relief process by adjusting its Debt Sustainability Framework (DSF) to accommodate the new financing needs of LCIs. (The DSF is an assessment tool that guides the borrowing decisions of a country by matching its financing needs with current and prospective repayment ability.)
The meeting also discussed reforming IMF and what Mboweni said countries in his group would like to see is ‘increased voice and representation of emerging markets and developing countries in the Fund’s decision-making structures.’
To that end he called for a comprehensive reform of the quota formula to improve the indicators of openness and variability; the selection of the head and senior management of the Fund being based on an open, competitive and merit-based process with no consideration accorded to nationality and without compromising representivity.
“We call for a rebalancing of representation on the IMF Board in line with developments in the World Bank and the representation of Africans at all levels in the Fund, including at top management,” he said.
In a highly sophisticated and integrated financial markets system, the crisis was not supposed to catch the world off guard but that is exactly what happened. Mboweni recommended that the Fund should improve on its financial-sector early-warning mechanism to assist in averting future crises while ensuring that countries put in place and observe all the essential prudential and regulatory guidelines.
“We welcome the cooperation of the FSB in this regard,” he added.
The FSB (Financial Stability Board) was convened 10 years ago to promote international financial stability through information exchange and international cooperation in financial supervision and surveillance. It conducted a post-mortem on the crisis and one of its findings as published in its report states: “Weaknesses in public disclosures by financial institutions have damaged market confidence during the turmoil. Public disclosures that were required of financial institutions did not always make clear the type and magnitude of risks associated with their on-and-off-balance sheet exposures. Where information was disclosed, it was often not done in an easily accessible or usable way.”