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This paper invokes a flow-of-funds framework to scope the challenges, opportunities, and policy responses regarding capital flows and capital account liberalisation as Africa emerges from the global financial crisis. The framework is used to highlight the transmission of the financial crisis from the foreign sector (the rest of the world) to the household sector, company sector, banks and capital markets, as well as to the government sector. Financial prices, mainly the exchange rate and stock prices, provide the propagation mechanism for contagion effects of the financial crisis, such as collapse of the exchange rate, collapse of stock prices, and capital outflows. The paper considers the current trends in capital controls and capital account liberalisation in Africa. It also reviews the magnitude and determinants of capital flows into Africa, and the capital account liberalisation challenges and policy responses. Forecasts are generated for four types of capital flows, namely FDI, debt, aid, and remittances for selected African countries. The paper concludes with lessons and policy agenda for Africa in the post-crisis period.
In particular, it emphasises that policy makers face particular challenges and opportunities in maintaining sound macroeconomic management and transparent capital account policies. They have to undertake financial sector reforms in order to attract inflows in a competitive global environment, and to manage the inflows to target economic recovery.
AEC 2009-Concept Note (35 kB)