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DRC - Emergency Programme to  Mitigate the Impacts of the Financial Crisis (PUAICF)  - Project Completion Report (PCR)
12/06/2014 14:47
DRC - Emergency Programme to Mitigate the Impacts of the Financial Crisis (PUAICF) - Project Completion Report (PCR)
DRC - Emergency Programme to Mitigate the Impacts of the Financial Crisis (PUAICF) - Project Completion Report (PCR)
12/06/2014 11:52
DRC - Emergency Programme to Mitigate the Impacts of the Financial Crisis (PUAICF) - Project Completion Report (PCR)
Working Paper 122 - Welfare Analysis Using Data from the International Comparison Program for Africa
15/01/2014 18:52
Working Paper 122 - Welfare Analysis Using Data from the International Comparison Program for Africa
This paper extends the application of data from International Comparison Program (ICP) to global welfare analysis of a “representative household” in Africa by utilizing changes in demand for broad categories of consumption items in response to changes in prices and income. This is made possible in ICP-2005 by the inclusion of consumption expenditure for 13 broad commodity groupings along with their relative prices for 48 countries covered in the study. These expenditure items are, in principle, comparable and aggregation is allowed by keeping in mind the basic assumption used in the collection of the price and expenditure data. Thus, the study makes comparisons of welfare changes following price or income movements by observing the concentration curve for different commodity groupings. In this setting, the observational units are countries and not individuals and apply to policy dialogues focused on regional issues, such as debt relief, development aid, trade that require the level of aggregation implied by the data. The study explores the welfare changes using a concentration index and simple demand systems for the commodities of interest to recover income and price elasticities that could be used for a wide range of issues that require discussion of household consumption behaviour. First, I work on an aggregated data set that has lost substantial information in the process so that nonlinearity in Engel curves or flexibility in price responses cannot be captured easily from the data. Secondly, the linear expenditure system is popular specification in most global macro and CGE models allowing estimated parameters to have some practical relevance. Third, the full parameters of the LES can be recovered from cross-section data if information on personal savings is available. Finally, interesting welfare measures such as marginal utility of income and direct link with Gini coefficient increase the attractiveness of the LES. The computations indicate that price shocks that affect, for instance, food items may cause the largest welfare loss at the continental level than shocks that lead to a proportional decline in per capita incomes or increase in transport cost through a rise in energy prices. Similar analogy can also be made about the welfare impact of global transfers made possible by proportional price declines through trade liberalization or subsidies (like food aid). Similarly, transfers that favor household expenditure on accessing education are superior to any other means of transfer in terms of improving global welfare since nearly all households in every country spend proportionately the same amount on education than on any other commodity. The paper specifies and estimates the Extended Linear Expenditure System (ELES) using personal savings to identify all the parameters necessary to estimate own and cross price elasticities as well as income elasticities. The results can be valuable inputs to global model analysis such as GTAP which uses ELES to model household behavior. The results from the ELES are intuitive and also support the inference we obtained from the concentration curves. Our estimates of income elasticities for such broad consumption categories as food (0.56), water (0.9), clothing (0.69), health (0.74) and education (0.24) suggest these are necessities while for the rest such as alcohol (1.0), recreation (1.3), transport (1.4) and communications (2.2) are luxuries. The elasticity estimates are strikingly similar to those often obtained from large household surveys for individual countries. The study uses the ELES to examine whether the “utility-consistent” measures of a poverty line are in-line with the popular one dollar a day international poverty line. The study estimates a 1.12 dollar a day subsistence consumption which is very close to the conventional poverty line of 1.08 dollars a day used in 2005. Moreover, the marginal utility of income, sometimes known as the inverse Frisch parameter, which measures “level of development”, suggests a relatively higher ratio of the subsistence component of consumption in total expenditure indicating low level of development in the region.Read more

Categories: Financial Crisis

Working Paper 118 - Assessment of the Trade Finance Market in Africa Post-Crisis
15/01/2014 18:52
Working Paper 118 - Assessment of the Trade Finance Market in Africa Post-Crisis
The financial crisis of 2008 caused a sharp slowdown in trade beginning 2008 and 2009. The tightening of global credit reduced capital inflows and limited the availability of trade finance. The shortage of trade finance was felt the hardest in Africa. In response, the African Development Bank established a multi-phase USD 1 billion Trade Finance Initiative (TFI). As part of the initiative the AfDB commissioned a series of surveys on African banks providing trade finance between 2009 and 2010. The survey covered a sample of African banks from Senegal, Burkina Faso, Ghana, Nigeria, Egypt, Morocco, Kenya, South Africa, Tanzania and Rwanda. Additionally, the survey covered global trade finance and development finance institutions based in the USA, UK, France, Germany and the Netherlands. &nbsp; The survey participants were asked to provide information on: trade finance related activities; the state of the market for trade finance products; the availability of facilities and changes in those facilities; overall economic activity in their respective markets; and potential role for AfDB to play to facilitate access to trade finance.&nbsp; &nbsp; Bankers contacted throughout the survey indicated that trade with China is constrained by Asian Banks’ unfamiliarity with the continent and its financial institutions. Additionally, they indicated that intra-African trade is limited by weak infrastructural linkages. Studies at the AfDb have shown that the potential for intra-African trade is large. One such study has shown that intra-African trade has more short-term development impact than extra-African trade. The study finds trade finance in Africa is characterized by volatility that is driven by regulatory change, an unstable competitive landscape, new trade patterns and weak global demand for African exports. These elements have intensified the perceived riskiness of African trade finance markets subsequently constraining the growth of trade. Thus, the study proposed the following set of measures to lessen the impact of absence of trade finance due to high risk perception. <ul><li>Support trade financiers through guarantee facilities: African commercial banks cannot access adequate financing due to high perceived risks. Individual guarantees to confirming banks will require a large team to analyze credits and monitor usage/performance.&nbsp; Partial portfolio-based guarantees issued to well- managed commercial banks will stimulate private sector finance to these African countries.</li><li>Support regional integration by providing finance for intra-regional trade: AfDB support for trade finance provision via regional integration initiatives could be in the form of targeted lines or risk participation through financiers of infrastructure projects.&nbsp; AfDB support to trade finance alongside infrastructure investments will act as a catalyst for other private sector agents.</li><li>Support trade diversification via greater cooperation and information sharing with the Asian Development Bank and other trade financiers in the region: Asia-Africa trade is growing rapidly and China is becoming an important trading partner across the continent, even for resource constrained countries.&nbsp; Chinese trade with Africa remains below potential as Chinese banks are unfamiliar with African risks. AfDB should work with Chinese and African financial institutions to promote risk-sharing and better information exchange.</li><li>Improving the information gap regarding trading firms in Africa: Basel II will increase cost of trade finance in Africa due to lack of consistent, portable and validated data on trade asset performance over time. The AfDB should collaborate with AsDB and ICC and develop an African Trade Finance Default Register. </li></ul>Read more

Categories: Financial Crisis

DRC - Emergency Programme to Mitigate the Impacts of the Financial Crisis (PUAICF) - PPER
15/01/2014 18:52
DRC - Emergency Programme to Mitigate the Impacts of the Financial Crisis (PUAICF) - PPER
DRC - Emergency Programme to Mitigate the Impacts of the Financial Crisis (PUAICF) - Project Completion Report (PCR)
15/01/2014 18:52
DRC - Emergency Programme to Mitigate the Impacts of the Financial Crisis (PUAICF) - Project Completion Report (PCR)
Working Paper 190 - Early Warning Systems and Systemic Banking Crises in Low Income Countries: A Multinomial Logit Approach
23/12/2013 16:15
Working Paper 190 - Early Warning Systems and Systemic Banking Crises in Low Income Countries: A Multinomial Logit Approach
The global financial crisis has stimulated new interest in models aimed at providing early warning about the risk of a systemic banking crisis based on early warning systems (EWSs). While most of the focus has been on advanced economies; which have been at the epicenter of the recent turmoil, the relevant empirical literature has devoted inadequate attention to low income countries (LICs). This paper aims at filling this gap by building an early warning system (EWS) for predicting systemic banking crises in LICs. Our contribution to the literature is twofold. The first and more obvious is to build a body of literature on LICs and banking crises in Sub-Saharan Africa (SSA). The second contribution is methodological and refers to the use of the multinomial logit model in EWS, which is shown to improve upon the widely-used binomial model in terms of number of crises correctly called and number of false alarms produced. This paper estimates an EWS for predicting systemic banking crises in a sample of 35 low income countries in Sub-Saharan Africa. Since the average duration of crises in this sample of countries is longer than one year, the predictive performance of standard binomial logit models is likely to be hampered by the ‘crisis duration bias’. The bias arises from the decision to either treat crisis years after the onset of a crisis as non-crisis years or remove them altogether from the model. To overcome this potential drawback, we propose a multinomial logit approach, which is shown to improve the predictive power compared to the binomial logit model. The results of the study show that banking systems in SSA LICs are more likely to collapse when economic growth declines two years prior to the crisis. Undiversified economies contribute to a build-up of banks’ exposures to a few sectors and customers so that credit risk is magnified during an economic downturn. Sectoral concentration of loans ranges from 50-70 percent in SSA LICs, with the majority of loans being provided to just one or two economic sectors. Such undiversified banking systems are more vulnerable to sector-specific shocks, which exert pressure on bank profitability and solvency with a time lag due to the provisioning rules that tend to delay recognition of losses. The paper also shows that banking systems that engage in excessive credit activity relative to the deposit base one year before a crisis are more likely to experience sustained systemic crises. Banks in SSA LICs tend to rely heavily on volatile customer deposits for funding. In particular, checking accounts, which are typically perceived as the most unstable category of deposits, represent the bulk of total deposits in many countries. On the other hand, savings accounts, which are normally a stable source of funding for banks in advanced economies, exhibit a relatively high turnover in SSA LICs due to the low income of most depositors. Liquidity risk in SSA LICs’ banking system is exacerbated by the high degree of dollarization which characterizes these economies. The findings also indicate that banking systems that are characterized by excessive direct FX risk through currency mismatches between the value of their assets and liabilities are more likely to experience a distress; especially one year prior to the crisis. In SSA LICs, rapid fluctuations of the exchange rate, which often reflect thin FX markets, expose commercial banks to potentially sizeable losses, threatening the soundness and the stability of the banking system. Exposure to direct FX risk is intensified by the absence of derivatives markets, which limit hedging opportunities. Both the liquidity position and the currency mismatch of the banking system deteriorate once a crisis occurs due to a generalized loss of confidence and pressures on the exchange rate. Moreover, we find that negative credit growth and high banking system capitalization are associated with the crisis regime relative to tranquil times. Credit growth indicates that a credit crunch increases the likelihood of remaining in a state of crisis; on the other hand, a positive and significant coefficient for leverage is a sign that the recapitalization of banks lowers the probability of remaining in a crisis. The results have important policy implications at a time when financial regulators and central banks in SSA LICs are reassessing their financial regulatory agenda in the context of recent reforms spurred by the global financial crisis. In particular, the findings underscore the importance of implementing an effective macro-prudential framework for monitoring systemic risk arising out of credit concentrations as well as from maturity and currency mismatches. Many LICs in SSA already use a number of tools which are now considered of macro-prudential nature such as reserve requirements, caps on FX positions and limits on loan concentration. With a history of recurrent banking crises arising from specificities of their economies and financial markets, several SSA LICs have adopted financial regulations beyond traditional capital adequacy rules. Nevertheless, most countries do not have a macro-prudential framework in place and often regulators have no explicit objective to prevent the build-up of systemic risk.Read more
Financial Inclusion in Africa
10/12/2013 17:06
Financial Inclusion in Africa
Economic Brief - Accelerating the AfDB’s Response to the Youth Unemployment Crisis in Africa
23/09/2013 15:59
Economic Brief - Accelerating the AfDB’s Response to the Youth Unemployment Crisis in Africa
Economic Brief - Additionality of Development Finance Institutions in Syndicated Loans Markets in Africa
19/11/2012 12:06
Economic Brief - Additionality of Development Finance Institutions in Syndicated Loans Markets in Africa
AEC 2012 - Central Bank’s Response to Economic Crises from a Developing African Economy Perspective Lessons from Kenya’s Experience
16/10/2012 14:02
AEC 2012 - Central Bank’s Response to Economic Crises from a Developing African Economy Perspective Lessons from Kenya’s Experience

Categories: Kenya, Financial Crisis

Economic Brief - African Systemic Financial Crises
30/09/2012 23:00
Economic Brief - African Systemic Financial Crises
A Comparison of Real Household Consumption Expenditures and Price Levels in Africa 2012
11/05/2012 15:55
A Comparison of Real Household Consumption Expenditures and Price Levels in Africa 2012
Africa Emerging Issues - November 2011
28/11/2011 11:03
Africa Emerging Issues - November 2011

Categories: Financial Crisis

Working Paper 136 - Determinants of Foreign Direct Investment Inflows to Africa, 1980-2007
19/09/2011 00:00
Working Paper 136 - Determinants of Foreign Direct Investment Inflows to Africa, 1980-2007
This paper examines the factors that determine FDI flows to African countries. FDI plays an important role in Africa’s development efforts, including: supplementing domestic savings, employment generation and growth, integration into the global economy, transfer of modern technologies, enhancement of efficiency, and raising skills of local manpower. In the context of falling foreign aid due to the recent financial and economic crisis, as well as the current Euro-debt crisis, a detailed analysis of the aid-FDI nexus in the development cooperation relationship is indeed an enriching and useful exercise. Africa has never been a major recipient of FDI flows and lags behind other regions of the world. After almost ten years of growth, FDI inflows to Africa fell from a peak of US$72 billion in 2008 to $59 billion in 2009 - a 19 percent decline compared to 2008 - due to the financial and economic crisis. By 1990, Africa’s share of global total FDI was a mere 1.37 percent compared to Asia’s 10.9 percent and by 2009 while Africa’s share was just 5.27 percent, Asia received 27 percent. Just as FDI inflows to Africa represent a low percentage of the global total, they also represent a low percentage of its GDP and gross capital formation. A major concern regarding FDI inflows into the Continent is that the overwhelming majority of these go into natural resources exploitation. Between 1998 and 2009, the top ten country recipients are Egypt, South Africa, Nigeria, Sudan, Angola, Congo Republic, Morocco, Tunisia, Algeria, and Chad. Of these top recipient countries, most of the flows into oil, gas and mining projects. Indeed, the primary sector has been the largest recipient of accumulated FDI outflows to Africa. For example, the distribution of FDI by industry shows a concentration in the mining industry in terms of value In the analysis, we perform pooled ordinary least squares (OLS) estimations and feasible generalized least squares (FGLS) for the cross-sectional time-series linear model, using country level data. For robustness check, we take cognizance of the view that FDI decision may be made based on historical data and hence use a one-period lag of independent variables for re-estimation by OLS/FGLS. For further robustness check and to take care of any possible endogeneity in the aid variable, we also estimated the data using the two-step (IV) efficient generalized method of moments (GMM). Our estimation results from cross-country regressions for the period 1996-2008 indicate that: (i) there is a positive relationship between market size and FDI inflows; (ii) openness to trade has a positive impact on FDI flows; (iii) higher financial development has negative effect on FDI inflows; (iv) the prevalence of the rule of law increases FDI inflows; (v) higher FDI goes where foreign aid also goes; (vi) agglomeration has a strong positive impact on FDI inflows; (vi) natural resource endowment and exploitation (such as oil) attracts huge FDI; (vii) East and Southern African sub-regions appear positively disposed to obtain higher levels of inward FDI. The result suggests that African countries that receive high level of foreign aid also receive high levels of FDI flows. A good reason for this is the positive “infrastructure effect” by which aid improves African countries’ economic and social infrastructure and hence raising the marginal product of capital in those countries. The study finds that FDI is negatively correlated with financial development. African countries should improve the quality of domestic financial systems (including integrating them into global financial markets) to make it more attractive to invest there. Moreover, enhanced regional cooperation and integration will increase market size in Africa and help attract investors. This is all the more important given our finding that large market size attracts FDI to Africa. Good governance infrastructure and institutional quality, especially the rule of law, attract FDI to Africa. They also create conditions for the emergence of domestic conglomerates.Read more

Categories: Financial Crisis

Working Paper 131 - Linking Research to Policy: The AfDB as Knowledge Broker
23/06/2011 08:23
Working Paper 131 - Linking Research to Policy: The AfDB as Knowledge Broker
The main objectives of the paper are to discuss the Bank’s catalytic role as a “Knowledge Broker” that can actively translate, disseminate and share information to key stakeholders to provide timely and relevant advice to clients to complement its traditional lending activities; and the Bank’s comparative advantage as a “Knowledge Broker” as it mainstreams knowledge management strategy to institutionalize knowledge and a learning culture within the institution. Partnering and supporting country level think tanks or policy research institutions results in country ownership of the policy processes and can substantially enhance the Bank’s knowledge work at the country level. This is particularly important for the Bank’s decentralization roadmap, which acknowledges the limited capacity of Field Offices to conduct analytical work for policy dialogue and Bank operations. National and Regional level think tanks have a good&nbsp; understanding of the underlying political economy shaping their respective country policies. Partnering with them could greatly improve results based CSPs, private sector analytical work and also underpin policy based lending. <b>Policy Discussion</b> <ol><li>Invest in building stronger in-house analytical capacity. Having analytical staff in-house helps transmit knowledge within the organization, ensures that the analytical capacity can be drawn at short notice and provides potential opportunities to engage recipient government policy makers.</li><li>Public policies work best when they are designed and implemented by local actors. Strengthen partnerships with local institutions that can undertake the research and analysis needed by policymakers (policy research institutes, think tanks).&nbsp; Therefore, provide increased financial resources to country level think tanks and policy research institutions and regional research networks with emphasis on supporting and leveraging knowledge at the country level.</li><li>The Bank should institutionalize a competitive visiting researchers program (for young scholars) as well as a visiting senior researchers fellows program for (senior experienced academics) to support research on African development. </li><li>Making use of ICT, E-Learning and Video Conferencing to convene policymakers and experts to discuss topical and relevant policy issues.</li><li>Draw on all the rich knowledge that the Bank generates to optimize operation. </li><li>Encourage more south-south exchanges and global learning of best practices.</li></ol>Read more

Categories: Financial Crisis

Working Paper 124 - Post-Crisis Prospects for China-Africa Relations
23/06/2011 08:20
Working Paper 124 - Post-Crisis Prospects for China-Africa Relations
This paper discusses how China’s relationship with Africa is contributing to its overall development and emphasizes the central role of the Forum on China-Africa Cooperation (FOCAC). The principal conclusion is that while China is likely to remain engaged with Africa in the medium term, to reap the full benefits, African countries need to transform this engagement into additional development opportunities.&nbsp; &nbsp; China’s rapid growth has transformed its relationship with Africa.&nbsp; Industrialization has boosted China’s demand for oil and minerals (e.g. iron ore, bauxite, nickel, copper), which Africa can satisfy. China is now Africa’s third largest trading partner and the Chinese government’s going global strategy has encouraged Chinese companies to become multinationals. The China-Africa relationship could be described as “commodities-for-infrastructure”, although a shift to broader cooperation on development is now evident. As a Chinese scholar puts it, “Relations with Africa are still the most important and reliable part of China’s foreign relations with developing countries” (Zhang, 2007). If there was anxiety in Africa that the global financial crisis might reduce China’s interest in the continent, Chinese President Hu Jintao provided some political reassurance during his visit in February 2009, as he committed to ‘fully and punctually implement measures agreed at the Beijing Summit of the Forum on China-Africa Cooperation, seek China-Africa pragmatic relations and promote the further development of our new strategic partnership’ (Ministry of Foreign Affairs, 2009). At the FOCAC meeting in November 2009, China reaffirmed its commitment to maintain the level of ODA and investment flows to Africa in the wake of the financial crisis, and pledged $10 billion in concessional loans to Africa, as well as a loan of $1 billion for small-and medium-sized African businesses. As noted above, China is also providing substantial debt relief to 33 African countries.&nbsp; China’s commitment to maintaining development assistance is particularly welcome, as there is a risk that ODA flows might be reduced by traditional development partners due to the deterioration of their national budgets. <br />Also, in what it called &quot;a major step for Sino-African co-operation&quot;, the China-Africa Development Fund (CADFund) opened its first representative office in Africa on 16th March 2010. According to the CEO of the fund, &quot;The fund will boost economic development in Africa by encouraging investment by Chinese enterprises.&quot; Finally, the growing importance of China should not mask the continuing importance of Africa’s traditional development partners among the industrial countries, who still provide the lion’s share of ODA and investment. Moreover, traditional development partners provide some forms of aid, such as general budget support, which are highly effective and efficient and are not provided by China or other emerging developing country donors, underlining the complementarily of traditional development partners with emerging development partners, such as China.Read more

Categories: China, Financial Crisis

Leveraging Migration for Africa Remittances, Skills, and Investments - 2011, WB, AfDB
06/04/2011 16:20
Leveraging Migration for Africa Remittances, Skills, and Investments - 2011, WB, AfDB

Categories: Financial Crisis

Market Brief - Africa Economic Financial Brief 6-10 December 2010
17/12/2010 12:52
Market Brief - Africa Economic Financial Brief 6-10 December 2010

Categories: Financial Crisis

Market Brief - Africa Economic Financial Brief 22-26 November 2010
09/12/2010 13:19
Market Brief - Africa Economic Financial Brief 22-26 November 2010

Categories: Financial Crisis

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