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Working Paper - 217 - Capital Account Policies, IMF Programs and Growth in Developing Regions
Africa, as other developing regions, has experienced a surge in private capital inflows since the early 2000s (Dorsey et al., 2008; AfDB et al., 2013). Since large capital inflows and their sudden reversals can lead to inflation and major growth and exchange rate volatility and even crisis, they require appropriate policies. Capital controls are one of the measures, but come with substantial cost (Edwards, 1999; Brixiová et. al., 2010; Ncube et al., 2012; IMF, 2013a).
How prepared are the African policymakers for making the most out of capital inflows while mitigating their cost? Until recently, managing volatile capital flows has not created a major policy challenge in Africa, not even during the global financial crisis (Kasekende et al., 2010). This is because the relatively stable Foreign Direct Investment (FDI) inflows account for most of capital inflows to the continent. However, given the trend towards Africa’s deeper integration into the global financial markets, its frontier market countries are likely to become increasingly vulnerable to global financial shocks (IMF 2013a). Effective management of the financial integration and these volatile capital flows is becoming an important policy priority.