Reform of the International Financial System and the Policy Implications for Africa

1. Reform of the International Financial System and the Policy Implications for Africa PRESENTATION BY EMMANUEL NNADOZIE DIRECTOR, ECONOMIC DEVELOPMENT AND NEPAD DIVISION ECONOMIC COMMISSION FOR AFRICA (ECA) FIFTH HIGH-LEVEL DIALOGUE ON FINANCING FOR DEVELOPMENT NEW YORK, USA 7-8 DECEMBER, 2011

2. Outline In view of the2007-2009 financial crisis and renewed calls for a reform of the existing International Financial Architecture (IFA), this presentation analyses of the emerging IFA from the perspective of its implications for Africa and is organized as follows: • Evolution of the IFA • Critiques of the IFA from the recent Global Financial Crisis • Alternative reform proposals • Africa’s concerns • Africa’s position and recommendations • Towards a regional financial architecture for Africa

3. Evolution of the IFA Bretton Woods system • Exchange rate rigidity • Asymmetry of adjustment to global imbalances 1980s Debt Crisis • Debt restructuring negotiations, stabilization and adjustment programmes The Asian financial crisis • 1999 Cologne reforms • HIPC debt initiative • Establishment of the Financial Stability Forum

4. Critiques of the IFA from the recent Global Financial Crisis 1. The Underlying Development Model In the presence of uncertainty and market failure for example, the adoption of the efficient free market model will not only be inefficient but can exacerbate rather than prevent financial crisis. 2. Dealing with global imbalances A key factor in the 2007-2009 global financial crisis has been attributed to increasing global imbalances and the attendant problem of unwinding these imbalances in an orderly manner. 3. Supervision and regulation of the international financial system Strong financial sector regulation is needed as the market could not be relied upon to self-regulate. The regulation should be based on global coordination, rather than the imposition of one set of regulatory standards by the developed countries on the developing countries. In existing global regulatory bodies, concerns of developing countries are often unrepresented or under-represented.

5. Critiques of the IFA from the recent Global Financial Crisis 4. Governance of the international financial architecture The emerging IFA has also been criticized for not being sufficiently representative of all countries in the governance of its respective institutions. Any future governance format must therefore ensure inclusiveness and adequate representation of developing countries, including least-developed countries (LDCs). 5. Reserve currency status of the US dollar and Euro The United States and EU, as primary issuers of reserve currency, have already experienced serious debt problems. There is reasonable concern that the instability in these currencies may trigger further in stability in the international financial system. 6. Exchange rate regime and capital controls The issue of unwinding global imbalances is linked to the exchange rate regime. The IMF has placed the blame for global imbalances squarely on the government policy in Asia to undervalue their exchange rates as part of an export-led growth strategy.

6. Alternative reform proposals Radical reform proposals United Nations expert panel on the reform of the international financial architecture (the Stiglitz Panel) • Feasibility is questioned due to the absence of broad consensus among key governments and that the options currently available are either normatively undesirable or politically problematic; Incremental reform proposals This G20 has taken the position that the reforms of the international financial architecture would proceed on an incremental basis.

7. Issues of Concern to Africa What Africa wanted • The incremental approach won but Africa needed to find a way to voice its views and position which it felt were not being considered • Africa was asking for two things in particular • Support to deal with the crisis it did not create • A move towards a more inclusive international financial system

8. Issues of Concern to Africa What was promised? • The London and Pittsburgh G20 declarations included a number of important measures of significance for African countries. • The IMF, World Bank and the AfDB responded in various important and in most cases commendable ways to Africa’s needs in the post-crisis period • From the point of view of developing countries in general and African countries in particular the London G20 Summit agreement was a step in the right direction. • However, as always, the devil was in the details • The gap between pronouncements made by the G20 declarations and what is actually implemented or delivered on the ground is quite wide and got wider as the years went by and as we moved further away from the immediate post-crisis period

9. Issues of Concern to Africa • The concern of African countries is that the IMF will continue to impose procyclical conditions on African countries that are currently forced to borrow from it • Lack of voice and effective representation still looms large in spite of the increases in quota and voice • On the issue of supervision and regulation, the Basel II and III frameworks poses many problems for African countries due to their complexity, compliance const and implementation capacity as well as capacity of African banks to compete with bigger and more established international banks • Membership of FSB is still an issue—i.e. lack of African representation • In fact the argument is that that the FSB deliberations ignores the peculiarities of the risks financial systems face in low-income countries which could stifle their development • The risk of creating a two-tier financial jurisdiction with countries whose financial systems meet the FSB regulations in one tier and those which do not (majority of African countries) in another, with adverse effects on capital flows and invests through the banking system on Africa • Protectionism is on the rise and Doha is still not concluded

10. Africa’s position and recommendations For Africa, it is important that in the short term Africa injects itself into the incremental reform process as quickly as possible, while the ultimate goal may be the architecture set out by the Stiglitz Panel. • Increasing financial resources of international financial institutions • Speedy implementation of the IMF review of the restrictive Debt Sustainability Framework of the IMF and World Bank; • Clarification on the modalities of access for the $50 billion set aside for low-income countries (LICs) at the London Summit; • General capital increase for the African Development Bank is needed and a lot of progress has been made in this regard; • Strengthening financial supervision and regulation • Africa’s voice should be heard as the modalities for implementing the Basel II capital framework and other prudential regulations; • Africa’s representation on the Financial Stability Board should be reviewed; • The issue of access to financial services by the poor and SMEs should be placed at the top of the agenda.

11. Africa’s position and recommendations • Reform of the international financial institutions • Africa should continue to argue for increased voice and representation (additional Chairs) on the IMF and World Bank Boards; • Africa should also argue for the requirement that a majority of countries as well as a majority of voting power is required to pass some measures; • Resisting protectionism and promoting global trade and investment • Africa should press for the speedy implementation of the decision to increase trade finance and a clarification of the sources of funds; • Market access should be increased for African countries to expand their exports; • African countries need to decide on their main priorities for the WTO negotiations so that they can push through their main interests; • Alternative world reserve currency • Africa should support the continued issue of new special drawing rights (SDRs) as an alternative world reserve currency. However, new SDR issues should be aligned with support for development, giving larger allocations to those with the highest demand for reserves. • Taxing financial transactions or institutions

12. Regional financial architecture for Africa To complement efforts at the global level, African countries should quicken the process of putting in place a regional financial architecture to deal with future financial crises. African countries should inter alia: • Aggressively regulate and supervise financial systems to ensure that banks manage risks prudently to ensure accountability, transparency and responsibility in banking operations; • Undertake financial reforms to Improve bank competitiveness as well as to enhance mechanisms for crisis prevention, management and resolution at the regional or continental level; • Erect an incentive structure for sound corporate finance to avoid high leverage ratios and excessive reliance on foreign borrowing; • Develop and formalize the role of microfinance institutions and rural financial markets; The Pan-African financial institutions that have been established by the AU (the African Monetary Fund, African Investment Bank and the African Central Bank) should become operational as soon as possible.

13. Thanks!