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This study examines capital flows and shifts in capital account and exchange rate regimes in African countries over the past two decades. The evidence shows that official lending to Africa has declined while the volume of private capital flows remains low and significantly below the levels observed in other developing regions. Private capital inflows to Africa are limited due to several factors, including the weakness of the macroeconomic environment, underdeveloped financial systems, high country risk, and exchange rate misalignments. The focus of policy reforms must be on alleviating these constraints in order to attract more foreign capital and overcome the shortage of development financing. Many African countries have pursued reforms aimed at liberalizing their capital account and exchange rate regimes. However, liberalization has not been accompanied by systematic gains income growth, price stability, and trade performance. African countries must pay serious attention to the scope, speed, and sequencing of capital account liberalization to minimize potential adverse effects of openness. It is desirable for countries to maintain selective discretionary control over capital movements and exchange rate markets in order to hedge against adverse shocks to the economy and to maintain macroeconomic and financial stability. To attract foreign capital, any move toward capital account openness and exchange rate liberalization must be supported by reforms aimed at improving credibility of macroeconomic policy and establishing an investment-friendly environment. These reforms will not only attract foreign capital but also encourage domestic investment. An important aspect of capital movements in Africa is the high level of capital flight. There is an urgent need for policies to stem further hemorrage of capital from Africa and induce the repatriation of private capital held abroad. This will require not only improvement of the macroeconomic conditions to ameliorate incentives for domestic investment, but also reform of the political and legal systems to improve accountability and credibility of economic policy.
An authoritative assessment of the debate over the role of volatile private capital flows and their impact on developing countries. The book outlines the long history of concern about these issues, going back to preparations for the Bretton Woods agreement. It assesses their acceleration with the growth of international capital and looks at key case studies from Latin America, Asia and Africa to assess the possibilities and problems for national and international policy responses.
This paper reviews the exchange regimes of five emerging market countries in the Middle East and North Africa region-Egypt, Jordan, Lebanon, Morocco, and Tunisia-and one oil-exporting country-Iran-to see whether they need to consider adopting more flexible arrangements as they further open their economies to trade and capital flows.
We focus on the management of highly persistent shocks to aid flows, including PRSPrelated increases in net inflows, in three "post-stabilization." African economies with de jure flexible exchange rates. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and what is the role of temporary sterilization? We analyze these issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government's seigniorage requirement. This creates a strong link between official aid flows and private capital flows. When the credibility of policymakers' commitment to low inflation is firm, some degree of dirty floating, with little or no sterilization of increases in the monetary base, is the most attractive approach in the short run.
We document the behavior of macro and credit variables during episodes of capital inflows reversals in economies with different degrees of exchange rate flexibility. We find that exchange rate flexibility is associated with milder credit growth during the boom but, even though smaller than in more rigid regimes, it cannot shield the economy from a credit reversal. Furthermore, we observe what we dub as a recovery puzzle: credit growth in economies with more flexible exchange rate regimes remains tepid well after the capital flow reversal takes place. This results stress the complementarity of macro-prudential policies with the exchange rate regime. More flexible regimes could help smoothing the credit cycle through capital surchages and dynamic provisioning that build buffers to counteract the credit recovery puzzle. In contrast, more rigid exchange rate regimes would benefit the most from measures to contain excessive credit growth during booms, such as reserve requirements, loan-to-income ratios, and debt-to-income and debt-service-to-income limits.
This publication contains seven papers presented at a workshop jointly organised by UNCTAD and the Government of Egypt, held in Cairo on 20-21 March 2001. Subjects discussed include: corporate governance in emerging markets; the OECD experience with capital account liberalisation; capital account management in India and Malaysia; the Chinese economy, financial sector restructuring and international investment; post-crisis financial reforms in South Korea; public debt and macroeconomic management in sub-Saharan Africa; capital flows, capital accounts and foreign exchange regimes in Africa.
The essays collected in this volume discuss the impact of increased capital mobility on macroeconomic performance.
External sector policies and exchange rate policy are central to a country's economic performance and to the IMF's surveillance functions. The papers in this book, edited by Richard Barth and Chorng-Huey Wong, were presented at a seminar on Exchange Rate Policy in Developing and Transition Economies held by the IMF Institute. They analyze choices of exchange rate regimes, issues affecting management of exchange regimes, and specific types of regimes, including case studies from the former Soviet Union, Africa, Asia, and Latin America.
Using recent advances in the classification of exchange rate regimes, this paper finds no support for the popular bipolar view that countries will tend over time to move to the polar extremes of free float or rigid peg. Rather, intermediate regimes have shown remarkable durability. The analysis suggests that as economies mature, the value of exchange rate flexibility rises. For countries at a relatively early stage of financial development and integration, fixed or relatively rigid regimes appear to offer some anti-inflation credibility gain without compromising growth objectives. As countries develop economically and institutionally, there appear to be considerable benefits to more flexible regimes. For developed countries that are not in a currency union, relatively flexible exchange rate regimes appear to offer higher growth without any cost in credibility.
The paper examines the experiences of nine African countries that have introduced floating exchange rate regimes in the 1980s. The various types of market arrangements are explored, focusing on the roles of market participants. After a review of exchange rate developments under the regimes, some related concerns with respect to urban income and employment, resource allocation, and short-term instability are analyzed. In the light of this analysis, the paper suggests some policy recommendations aimed at ensuring the success of the floating regimes.