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2009 AEC-Capital Flows and Capital Account Liberalisation in the Post-Financial-Crisis Era
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 to the household sector, company sector, banks and capital markets, as well as the government sector. Financial prices, mainly the exchange rate and stock prices, provide the propagation mechanism for contagion effects of the financial crisis; for example, collapse of the exchange rate, collapse of stock prices, and capital outflows including capital flight. It is argued that while by the end of 2007, remittances and other private capital flows had overtaken official aid as the main source of external finance for Africa, the financial crisis seems to be distorting the pattern and predictability of capital flows into the continent and pose a threat to debt sustainability. Moreover, given the intensity of the financial crisis and the bail out packages for banks in the US and UK, among others, it is unlikely that the Gleneagles commitment of the G-8 heads of state in 2005 to double aid to Africa by 2010 will be met. But perhaps, “the angel is in the details”: the flexibility of individual African countries to manoeuvre out of the crisis will very much depend on financial sector reforms, especially relaxation of controls on portfolio investment and FDI, and capital account liberalisation. Hence, the paper highlights the magnitude and determinants of capital flows into Africa and the capital account liberalisation challenges and policy responses. The paper concludes with lessons and policy agenda for Africa in the postcrisis period; in particular, it emphasizes that policymakers face particular challenges and opportunities in maintaining sound macroeconomic management, transparent capital account policies, debt sustainability and undertaking financial sector reforms in order to attract inflows in a competitive world and to manage the inflows to target economic recovery.