Information about Sub-Saharan Africa África subsahariana

III. Private Capital Flows to Sub-Saharan Africa: Financial Globalization’s Final Frontier?

International Monetary Fund. African Dept.
Published Date:
April 2008
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Information about Sub-Saharan Africa África subsahariana
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Private capital inflows to sub-Saharan African countries, having more than quadrupled since 2000, represent an increasingly important share of foreign financing to these countries.1 This mirrors the trends among developed and emerging market countries, where capital flows have also surged owing to abundant global liquidity. Private equity and debt flows to sub-Saharan African countries remain small and are estimated at about US$53 billion in 2007, compared with total global capital inflows of about US$6.4 trillion in 2006. In 2006, private capital flows to sub-Saharan Africa overtook official aid for the first time.2 The bulk of these flows went to South Africa and Nigeria, but portfolio flows are also trending up in a small group of other countries—notably, Ghana, Kenya, Tanzania, Uganda, and Zambia—in response to improved risk ratings and attractive yields.

The acceleration of private capital flows to sub-Saharan Africa is an opportunity, especially since aid flows have remained unchanged in recent years (Chapter 1), but it also presents challenges. These inflows provide countries with an alternative source of financing for infrastructure and other investments, and should contribute to higher growth while enhancing prospects for meeting the Millennium Development Goals (MDGs). At the same time, private capital inflows present a challenge to policymakers, because significant inflows could lead to increased macroeconomic volatility and the buildup of balance sheet vulnerabilities, and over time to real exchange rate appreciation and loss of external competitiveness. In the current financial market turmoil, there is also the risk of a significant slowdown or even a reversal of the inflows if global liquidity dries up and with it investors’ appetite for risk.

Some of the policy issues associated with the management of private capital inflows are akin to those induced by official aid, but there are important differences. First, unlike aid, private capital flows end up in the hands of the private sector (e.g., foreign direct investment (FDI) and portfolio equity). While the monetary authority still has to decide on whether or not to allow for absorption of the inflows, the spending decision is now decentralized and further complicates the monetary policy response (Berg and others, 2007). Second, although aid flows may be as volatile as private capital flows, they are not subject to sudden reversals. Avoiding the buildup of vulnerabilities during episodes of private capital inflows becomes paramount.

This chapter first discusses factors behind the distribution and composition of recent private capital flows to sub-Saharan African countries, including macroeconomic performance, capital controls, and financial market development. It then describes the experience with, and the policy challenges raised by, the rapid increase in portfolio flows in some countries, and draws on international experience to provide policy lessons.

Recent Trends in Capital Flows to Sub-Saharan African Countries

Private capital flows to sub-Saharan African countries have increased almost fivefold over the past seven years, from US$11 billion in 2000 to US$53 billion in 2007.3 The increase in portfolio flows to US$23 billion in 2006 was particularly rapid, reaching about 14 times the 2003 level.4 Private debt flows have also increased rapidly since 2004. FDI remained fairly stable at about US$15–21 billion. Nigeria and South Africa together accounted for 47 percent of total FDI flows; South Africa received 88 percent of the portfolio inflows (Figure 3.1).

Figure 3.1.Sub-Saharan Africa: Capital Inflows, 2000–07

Source: IMF, African Department database.

Although relatively small in U.S. dollar terms, FDI and portfolio flows nevertheless represent a nonnegligible share of GDP and base money in about one-third of sub-Saharan African countries, particularly Gabon, Ghana, Kenya, South Africa, and Togo (Figure 3.2). In some countries, foreign holdings of domestic government debt are substantial: about 20 percent of the total in Nigeria, 11 percent in Ghana, 17 percent in Malawi, and over 14 percent in Zambia.

Figure 3.2.Sub-Saharan Africa: Capital Inflows, 2000–07

(Annual averages)

Source: IMF, African Department database.

Beyond South Africa and Nigeria, private capital flows to non-resource-intensive low-income countries as a group have been increasing since 2004, both in dollar terms and as a share of GDP (Figure 3.3). In contrast, capital flows to resource-intensive countries have been declining as a share of GDP due to their rapid economic growth.

Figure 3.3.Sub-Saharan Africa: Total Private Capital Inflows, 2000–07

Source: IMF, African Department database.

Capital inflows have been volatile, as measured by the ratio of the standard deviation of capital inflows to their average (Table 3.1). Total capital inflows to sub-Saharan Africa averaged 4.9 percent of GDP for 2000–07, with a standard deviation of 8.7 percent of GDP. FDI inflows were least volatile for the period whereas debt-creating inflows were most volatile.

Table 3.1.Private Capital Flows’ Volatility, 2000–07(Capital flows in percent of GDP)
MeanStandard DeviationVolatility
Total inflows4.98.71.8
Private debt0.22.813.0
Source: IMF, African Department database.
Source: IMF, African Department database.

The region’s vulnerability to sudden reversals of private capital inflows seems to be limited by two factors. First, the inflows have been associated with stronger current accounts and a buildup of foreign reserves (Figure 3.4). Second, relatively stable FDI inflows represent about half of total inflows. Because physical investments take time to liquidate, the immediate vulnerability to a sudden reversal seems small. The more volatile portfolio flows are limited to a handful of countries with relatively illiquid markets, and private debt flows are small.

Figure 3.4.Sub-Saharan Africa: Capital Inflows, Current Account, and Reserves, 2000–07

Source: IMF, African Department database.

Factors Influencing Capital Flows in Sub-Saharan Africa

“Push” versus “pull” factors

Both global “push” and local “pull” factors have been at play in the recent episode of capital inflows to sub-Saharan Africa. Although in practice it is difficult to assess their relative importance, such a judgment would help determine whether capital inflows are likely to be permanent or temporary. By their own account, investors’ interest in Africa is driven by strong macroeconomic performance, improved governance and a more stable political landscape, debt relief, and rising commodity prices that have led to improved external and fiscal balances—as well as expectations of appreciating currencies (Goldman Sachs, 2008). In an environment of abundant global liquidity and search for yields, Africa is seen by some investors as the last “frontier” market. This interest is reflected in improved investment ratings and the renewed ability of some countries to tap international capital markets (Gabon, Ghana, and Seychelles have recently issued sovereign bonds internationally), as well as in the rising number of private investment funds dedicated to sub-Saharan Africa.5

The mounting interest of rapidly growing emerging market countries in securing natural resources is an additional factor promoting investment flows to Africa. China has made significant investments in oil and gas, mining, and infrastructure through FDI as well as financing instruments. Chinese companies have successfully bid for oil blocks in a number of countries and embarked on major mining operations such as in the Belinga iron ore project in Gabon. In early 2008, a joint venture agreement was signed by three Chinese parastatals and a Democratic Republic of Congo parastatal to embark on a US$9 billion resource mining and infrastructure project that will be financed by the China Export-Import Bank. Investment is also taking place through the financial sector. China’s ICBC Bank acquired a 20 percent stake in Standard Bank, a leading South African bank with substantial operations all over Africa in a deal valued at US$5½ billion. The two banks plan to establish a joint fund to invest in mining, metals, oil, and gas.

In Nigeria, China Development Bank and United Bank for Africa signed a memorandum of understanding to pursue similar opportunities throughout the continent.

These trends raise two related questions: first, whether Africa is rising to emerging market status, as compared, say, with Asian economies in the 1980s when the term was coined; and, second, whether foreign investors’ interest would survive a global economic downturn. On the first issue, today’s mature African markets seem to compare rather well with ASEAN economies in the 1980s (Box 3.1). This holds promise for the sustainability of private inflows in the medium term, though there are risks of a temporary downturn.

Box 3.1.Transition to Emerging Market Status: Where Does Africa Stand?

The term “emerging market” was coined in 1980 to refer to countries that had stock markets and were in transition toward having the features of the mature stock markets in industrial countries.1 This box suggests that some African countries fit within the emerging market group and supports this view by benchmarking these African economies of 2007 against the ASEAN countries (Indonesia, Malaysia, Philippines, Singapore, and Thailand) of 1980, when the term “emerging market” entered the lexicon.

Selected African countries compare favorably with the ASEAN countries of 1980. The ASEAN countries were already experiencing strong economic growth. Yet, in many other respects, the ASEAN countries looked quite different from what we see today. Inflation rates were still high in some cases, the depth of their financial sectors was limited, foreign direct investment had yet to accelerate, and their financial resources, reflected in international reserves, were adequate but not high. Many African countries have perhaps reached broader macroeconomic stability than the 1980 ASEAN benchmark. Growth is strong, inflation moderate, and international reserves relatively high. Like ASEAN, financial depth remains limited. Foreign direct investment is quite high, although this is in large part a reflection of the larger share of natural resources such as oil in the case of African countries.2 Debt-to-GDP ratios are low.

The scale of the policy challenges and the environment for the emerging markets in Africa is, however, dramatically different from that facing ASEAN in 1980. First, consider the nature of investment vehicles and financial technology. Portfolio flows in the ASEAN countries were largely about equity markets using conventional “buy and hold” strategies and, in some instances, sovereign foreign currency issues. These flows were relatively long term and grew steadily. Today, institutional investors in Africa are involved in a broad range of financial market activities, including domestic bond and foreign exchange markets, through both physical and derivative instruments. Second, a big-bang introduction of financial technology contrasts with the ASEAN emerging market experience; they saw financial market complexity grow in a measured way over many years. Financial technology is transferred to today’s emerging markets more or less simultaneously with its development in more sophisticated markets. Hence, complex financial instruments are being introduced into African markets that are at a far less mature stage in market and economic development. The “technology transfer” from emerging markets elsewhere into the nascent emerging markets of Africa is limited only by the severe constraints of market depth as well as the regulatory and market infrastructures.

Selected Economic Indicators: ASEAN 1980 and Africa 2007
ASEAN 1980Selected African Countries 20071Sub-Saharan Africa 2007
GDP (growth rate in percent)
Inflation (average in percent)
Financial depth (M2/GDP in percent)27.227.952.4
Size of government (expenditure, percent of GDP)19.422.825.1
International reserves (months of imports)3.610.05.8
Debt (percent of GDP)3.49.923.2
Foreign direct investment ($ billion)22.613.031.8
Portfolio flows ($ billion)20.20.918.8
Sources: IMF, International Financial Statistics, African Department database.

Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda, and Zambia.

For sub-Saharan Africa, 2007 data are IMF staff estimates.

Sources: IMF, International Financial Statistics, African Department database.

Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda, and Zambia.

For sub-Saharan Africa, 2007 data are IMF staff estimates.

Africa’s candidates for emerging market status are thus following the path of earlier emerging markets but at a much faster pace. This investor interest will continue to bring tremendous opportunities to African economies that can attract these flows. Yet the changed global environment poses a significant challenge for policymakers to keep pace with these developments. The failure to maintain macroeconomic, regulatory, and supervisory policies commensurate with rapidly changing financial markets raises the possibilities of market volatility and setbacks.

Note: This box was prepared by David Nellor.1 Staff of the International Finance Corporation initiated the term “emerging market.”2 In the case of ASEAN economies, capital inflows mostly financed export-oriented manufacturing sectors. Inflows may have initially been small but, together with other policies, they helped progressively increase value added and export competitiveness.

On the second point, Africa is clearly participating in the global surge of private capital flows to emerging and developing economies,6 but domestic pull factors are also important. Preliminary econometric analysis indicates that domestic characteristics have helped attract private capital flows to sub-Saharan Africa (Box 3.2). Results of simple cross-country regressions underscore the importance of solid economic performance, but suggest that capital market infrastructure, market size, and the business environment also influence investor decisions to allocate capital to the region. This is consistent with the results of similar studies using large samples of developing countries (Alfaro, Kalemli-Ozcan, and Volosovych, 2005b; Faria, Minnoni, and Zaklan, 2006; Faria and Mauro, 2004; and IMF, 2007d), which have found that the level of economic development or growth performance and the quality of institutions are important determinants of capital inflows.

Box 3.2.Domestic Determinants of Private Capital Inflows to Sub-Saharan African Countries

The estimation results for the determinants of total capital flows and foreign direct investment (FDI) are shown below. Regarding total capital flows, the preferred specification (table, fourth column) includes macroeconomic performance (both real GDP growth and fiscal balance), the index of securities market development, and a dummy for South Africa and Nigeria (a proxy for market size). The preferred model for FDI is somewhat different: there, growth performance, the quality of the business environment, and a dummy variable for oil producers are significant. The Chinn-Ito (2007) measure of capital account openness is never significant (but is correctly signed), possibly reflecting low effectiveness or weak implementation of capital account restrictions.

The different roles of institutions and financial market development are worth highlighting. The development of securities markets appears to have a significant impact on the allocation of capital flows, but particularly portfolio inflows. Market size, proxied by a dummy variable for South Africa and Nigeria matters for total flows but not for FDI. On the other hand, after controlling for oil-producing countries, the quality of the business environment (proxied by the World Bank’s 2007 Doing Business Index1) seems to matter more for FDI.

Domestic Determinants of Private Capital Inflows to Sub-Saharan African Countries, 2000–06
Total Private Capital Inflows1FDI Inflows1
Output growth20.
Fiscal balance, excl. grants20.
Securities markets30.770.000.710.000.660.00
Capital account openness-0.170.34-0.170.38-0.120.54-0.070.84
Business environment-0.010.51-0.000.98-0.030.01
S. Africa and Nigeria dummy2.280.05
Oil producer dummy0.850.272.580.02
Adjusted R-squared0.280.550.550.580.30
Sources: IMF, African Department database; IMF staff estimates.

Total private capital inflows comprise FDI, portfolio, and debt inflows. Both explanatory variables have been averaged over 2000–06 and are measured in logarithmic units of their U.S. dollar values. Coefficient estimates (coeff.) and significance levels in percent (prob.) reported for various specifications.

2000–06 annual averages. Fiscal balance measured as a percent of GDP.

The index measures the development of countries’ treasury bill, treasury bond, corporate bond, and equity markets. For each market, the index receives a value of 1 if the market is well developed (otherwise zero). We sum the index values across the four markets for each country.

Sources: IMF, African Department database; IMF staff estimates.

Total private capital inflows comprise FDI, portfolio, and debt inflows. Both explanatory variables have been averaged over 2000–06 and are measured in logarithmic units of their U.S. dollar values. Coefficient estimates (coeff.) and significance levels in percent (prob.) reported for various specifications.

2000–06 annual averages. Fiscal balance measured as a percent of GDP.

The index measures the development of countries’ treasury bill, treasury bond, corporate bond, and equity markets. For each market, the index receives a value of 1 if the market is well developed (otherwise zero). We sum the index values across the four markets for each country.

1 Available on the Internet at

The surge in private inflows is too recent to draw definitive conclusions about its impact on macroeconomic stability and growth, but the results are encouraging: the factors that drive capital flows have also been empirically associated with improved productivity and growth (Alfaro, Kalemli-Ozcan, and Volosovych, 2005b), and with lower macroeconomic volatility (IMF, 2007c). There is also evidence that the composition of capital flows matters, with FDI and portfolio equity investments found to be more stable and associated with positive growth outcomes relative to debt-creating flows. More specifically, the recent literature on the growth benefits of capital flows suggests that they depend on a number of factors: (i) initial conditions or thresholds, in terms of macroeconomic stability, domestic financial markets development, and quality of institutions (governance and protection of property rights); (ii) the composition of capital inflows; and (iii) the macroeconomic policy response to the inflows, and in particular whether large overvaluations and their detrimental effects on exports and production structure can be resisted or avoided (Box 3.3; Edison and others, 2004; Gourinchas and Jeanne, 2007; IMF, 2007f; Kose and others, 2006; and Prasad, Rajan, and Subramanian, 2007). Similar factors have also been shown to affect the impact of capital flows on macroeconomic volatility and crises in developing countries. Although the overall empirical evidence is mixed (Edwards, 2005; Kose, Prasad, and Terrones, 2007; and Kose and others, 2006), some studies suggest that, above a certain level of institutional quality and governance, capital mobility is associated with lower volatility of both consumption and output growth (Alfaro, Kalemli-Ozcan, and Volosovych, 2005a; Bekaert, Harvey, and Lundblad, 2006; IMF, 2007c). Conversely, in countries with underdeveloped financial systems, low governance, and trade restrictions, capital flows may be associated with greater economic volatility and a higher probability of crisis (IMF, 2007d).

Box 3.3.Are Capital Flows Good for Growth?

Evidence from aggregate data

The evidence from empirical studies using aggregate data is inconclusive with some puzzling results (Edison and others, 2004; Kose and others, 2006; IMF, 2007d; and Prasad, Rajan, and Subramanian, 2007, provide comprehensive reviews of the empirical literature on the economic impact of capital flows). Not only does capital flow from poor to rich countries (the Lucas paradox: see Alfaro, Kalemdi-Ozcan, and Volosovych, 2005b, for a discussion), but among developing countries, it also flows more to countries with a lower marginal product of capital and lower productivity growth (the allocation puzzle: see Gourinchas and Jeanne, 2007). The fastest-growing developing countries are those that use foreign capital the least—i.e., the ones with a current account surplus. This suggests a stronger link between savings and growth than between investment and growth.1 A possible explanation of this puzzle is trade: fast-growing countries also are the ones that experienced a takeoff in their export sector-associated with capital outflows (Gourinchas and Jeanne, 2007). If capital inflows lead to higher prices for nontraded goods owing to absorptive capacity constraints, and thus to overvaluation, they will have a negative impact on growth (Kose and others, 2006; Prasad, Rajan, and Subramanian, 2007).

FDI and growth

Stock market liberalizations have been found to reduce the cost of capital and to have a positive impact on investment and growth (Bekaert, Harvey, and Lundblad, 2005; Henry, 2006). In a rare study of African stock markets, Collins and Abrahamson (2005) show that the cost of equity has declined in most sectors and countries, owing to improved risk perceptions. There is also evidence that countries with a higher share of FDI in external liabilities experience faster growth (IMF, 2007b; Moran, Graham, and Blomström, 2005).

Indirect or collateral benefits of capital flows

Klein (2005) finds support for a model in which institutional quality intermediates the impact of capital account liberalization on growth by affecting the extent to which savings are protected from expropriation and the premium borrowers pay for funds from abroad. In countries with better institutions, capital account openness has a significant positive impact on growth (see also IMF, 2007c). Using firm-level data, Alfaro and Charlton (2007) find a significant relationship between entrepreneurial activity and both de jure and de facto international capital integration. Their results suggest that foreign capital may improve access to capital either directly or through improved domestic financial intermediation.

Institutional and financial development threshold

Bekaert, Harvey, and Lundblad (2005) find that the largest growth response to equity market liberalizations accrues to countries with better legal systems, above-average financial development, and better-quality institutions in terms of investor protection and accounting standards. Similarly, Chinn and Ito’s (2006) findings suggest that financial openness spurs equity market development only if a threshold level of legal development has been attained. Using industry-level data, Prasad, Rajan, and Subramanian (2007) indicate that for countries that have above-median levels of financial development, foreign capital aids the relative growth of those industries dependent on finance. But for countries below the median for financial development, the effect of foreign capital inflows is diametrically opposite.

1 The allocation puzzle continues to hold after taking into account official aid flows, which are negatively correlated with productivity growth. Adjusting for aid, capital flows are at best unresponsive to differences in long-term productivity growth (Gourinchas and Jeanne, 2007).

Trends in capital controls and capital account liberalization7

Capital flows to sub-Saharan African countries are surging in an environment of significant de jure capital account restrictions—de facto financial integration seems to be outpacing de jure capital account openness.8 The regulatory framework for capital account transactions in most sub-Saharan African countries still largely reflects the perceived need to limit outward capital mobility in the context of historically low reserves. As a result, developing countries, including those in Africa, tend to restrict capital flows more than higher-income countries where financial systems are developed and policies are more market oriented. However, this is gradually changing even in Africa.

At present, frameworks for regulating capital account transactions in sub-Saharan African countries remain highly complex and nontransparent, limiting their effectiveness. Combined with administrative weaknesses and limited capacity to monitor the inflows, this has led to uneven and inconsistent application of exchange controls. Inconsistencies between different regulations have also made capital controls relatively easy to circumvent. This could explain why it is difficult to establish an empirical relation between capital controls and capital flows in sub-Saharan Africa (as shown in Box 3.2). In practice, countries that have received the bulk of portfolio inflows include those that have no capital controls (Uganda and Zambia) as well as those where debt and equity flows are subject to comprehensive de jure controls (e.g., Mozambique; details are provided in Table A3.1), which suggest that other factors are also important for guiding capital inflows.

Although there has been no coherent policy approach toward capital account liberalization, there is nevertheless evidence that longer-term transactions have often been liberalized before short-term flows. For example, more African countries have liberalized bond transactions than money market transactions. Furthermore, there is some indication that in Africa FDI inflows have been liberalized more often than other inflows and outflows, compared to other regions. The speed of capital account liberalization has differed significantly between countries. Some African countries liberalized in one go (Uganda), others more gradually (Ghana, Nigeria, and Zambia), and the rest barely at all (Angola, Burundi, Ethiopia, and Mozambique). In a third group of countries, some transactions have been liberalized de jure, but in practice restrictions remain (foreign exchange shortages have forced Seychelles and Zimbabwe to limit the repatriation of profits or investments).

The complexity of capital controls in sub-Saharan Africa has probably contributed to shaping the composition of inflows, and Ghana’s example illustrates that a deliberate and well-sequenced capital account liberalization strategy can successfully tilt the composition of inflows toward longer-term maturities. Successful capital account liberalizations (e.g., Ghana, but also Nigeria and Zambia) have been part of an overall macroeconomic and financial sector reform strategy, consistent with the IMF’s integrated approach to sequencing of capital account liberalization (Ishii and Habermeier, 2002; Figure 3.5).9 That is, less volatile flows and those that are most beneficial for growth (such as FDI inflows) should be liberalized first, while longer-term capital flows and perhaps limited short-term flows would be liberalized in the second stage. Full liberalization would be achieved in the final stage.

Figure 3.5.Sequencing of Capital Account Liberalization

Capital and financial market development

Even with excess global liquidity, portfolio flows to sub-Saharan Africa have been concentrated in the relatively small number of countries that have more sophisticated financial markets. South Africa, which has the most developed capital and financial markets, attracts substantial portfolio capital into its equity and debt markets, including some from Global Emerging Markets (GEM) portfolio funds. The other current favorites include Botswana, Ghana, Kenya, Nigeria, Uganda, and Zambia.10 In these countries, foreign investors target selected equity and bond issues, including initial public offerings by private enterprises and long-term bond issues. A recent wave of cross-border banking investments and the emergence of global banks suggest potential for increasing integration in international capital markets (Box 3.4).

Box 3.4.Recent Cross-Border Banking Investments

Cross-border foreign direct investment (FDI) in the banking sector, although still small in volume, along with the emergence of global banks in sub-Saharan Africa, may strengthen regional financial market development and integration in a way that extra-continental investments have not.

Within the envelope of flows into the banking sector, the major recipients and sources of FDI are South Africa and Nigeria, followed distantly by Kenya; Togo is a source but not a recipient. South Africa was a major recipient, mainly because Barclays Bank (U.K.) acquired a controlling stake in the bank ABSA South Africa in 2005, and the Industrial and Commercial Bank of China recently invested in South Africa Standard Bank (Stanbic). South Africa is also an important source of outward investments into sub-Saharan Africa, largely through the sustained expansion by Stanbic, which recently made acquisitions in Ghana, Kenya, Malawi, Nigeria, and Uganda.

Nigeria attracted substantial inflows into its banks after the consolidation and recapitalization of its banking system, completed in December 2005. At the same time, Nigerian banks have expanded rapidly into the rest of west Africa. Kenya has been a recipient of foreign investment from Stanbic and an outward investor into Sudan through the expansion of Kenya Commercial Bank and into Rwanda through the expansion of FINSA. Togo is an investor through the expansion of Ecobank Transnational Incorporated, which is present in 16 sub-Saharan African countries. Other emerging players include the Bank of India and the Moroccan Attijari-Wafa Bank.

Cross-border banking investments in sub-Saharan Africa have been boosted by mergers and acquisitions, associated with privatization, regulatory changes for minimum capital, and intensified domestic competition. Privatization of state-owned banks provided opportunities for attracting foreign investment in Uganda, Mozambique, Ghana, Kenya, and Zambia. The increase in minimum regulatory capital in Nigeria, Ghana, and Zimbabwe also forced foreign bank subsidiaries to attract additional equity injections from parent companies and to seek mergers and acquisitions. Intensified competition in both South Africa and Nigeria pushed these countries’ major banks to seek greater opportunities outside their national borders and has resulted in additional mergers and acquisitions.

The degree of capital and financial market development is an important factor in attracting portfolio capital (Table 3.2). Where the financial sector is sufficiently developed, foreign investors can channel their capital through a variety of instruments, including equity shares, government bonds, corporate bonds, and collective investment schemes (CIS), which they can buy on first issuance or subsequently in the secondary market. Where markets exist, capital inflows will depend on such factors as the depth and liquidity of the markets, and the perceived risks and returns on investment (which could be affected by information asymmetries). The October 2007 Global Financial Stability Report shows that, in a panel of 15 industrial and 41 emerging economies, capital inflows increase along with market liquidity and financial openness (IMF, 2007c).

For the vast majority of sub-Saharan African countries, the absence of capital and financial markets, the lack of depth and liquidity where there are such markets, and the absence of debt management and issuance strategies seem to be the main constraints on portfolio flows. Of the 44 sub-Saharan African countries, only 22 have established equity markets, and of these, only 9 markets have more than 20 listings.11 Besides the small size of the overall market, the small volume of issues in the primary markets limits entry. The modest capitalization of listed equities also limits the foreign funds that can come in through equity markets. As for government securities, about 30 sub-Saharan African countries issue or have issued treasury bills and 20 issue bonds. However, bond markets for the most part consist of only a handful of small issues, and there are no meaningful secondary markets. Thirteen sub-Saharan African countries have issues of corporate bonds, often stocks of foreign banks, but there are no real markets and there is no secondary trading.

Except for South Africa and a few other sub-Saharan African countries (e.g., Botswana, Nigeria, and Tanzania), local equity and bond markets are dominated by domestic institutional investors—pension funds and insurance companies—whose main objective is to match the maturity of their liabilities with longer-term assets. This has often led to buy-and-hold strategies that slow the development of liquid markets. These investors have traditionally invested in real estate, term bank deposits, and treasury bills. Financial sector reforms in many sub-Saharan African countries have altered the landscape for investors by bringing into the market local asset management firms, among others. This tends to increase trading activity and liquidity in local equity and bond markets.

Besides the limitations posed by the size of capital markets in sub-Saharan African countries, other factors complicate transactions in these markets. Although many countries have already strengthened the regulation and supervision of capital markets, much more needs to be done to adequately address investor needs:

  • In equity and corporate bond markets, progress in enforcing accounting and auditing standards has been slow, undermining the value of disclosed information, and in most of the countries there are no rating agencies to provide information on the credit risk of corporate issuers.
Table 3.2.Private FDI and Portfolio Inflows and Capital Market Development
Capital Market Structure1
Capital inflows as a percent of GDPAll four marketsTreasury bill and treasury bond markets, and corporate bond or equity marketsTreasury bill and treasury bond marketsTreasury bill marketNo markets
Less than 2BeninSenegalEthiopiaBurundi
Burkina FasoGuinea3Cameroon
MauritiusGuinea-BissauCentral African Rep.
2–5Botswana3Cape VerdeCôte d’Ivoire3,4Congo, Democratic Rep.3Eritrea
KenyaSierra Leone
South AfricaTogo
5–10Namibia3Angola3São Tomé & Príncipe3
Nigeria3Gambia, The
Above 10Chad3
Congo, Republic of3
Equatorial Guinea3
Sources: Lukonga (forthcoming); IMF African Department database; and IMF staff calculations.

For each country, only well-developed markets have been considered.

A market for treasury and corporate bonds was established in January 2008.


Côte d’Ivoire does not have a treasury bill market, but it does have an equity market.

Sources: Lukonga (forthcoming); IMF African Department database; and IMF staff calculations.

For each country, only well-developed markets have been considered.

A market for treasury and corporate bonds was established in January 2008.


Côte d’Ivoire does not have a treasury bill market, but it does have an equity market.

  • Until recently domestic government securities markets have been dominated by short-term treasury bills that domestic banks purchase for liquidity management purposes. Development of long-term bond markets has intensified in the last few years but secondary trading is still limited or nonexistent.

Evidence from Country Case Studies

The case-study countries—Cameroon, Ghana, Nigeria, Senegal, Tanzania, Uganda, and Zambia—represent sub-Saharan Africa’s main regions and cover francophone (Cameroon and Senegal) and anglophone countries, and resource-rich (Cameroon, Ghana, Nigeria, Senegal, and Zambia) and resource-poor countries (Tanzania and Uganda).12 They have also been chosen for the diversity of their experience in terms of type and volume of capital inflows, capital account liberalization, and financial market development. In most of them, capital flows have risen sharply in recent years although they are not always accurately captured in official data (Figure 3.6).13 This section first looks at the determinants of the size and composition of capital flows in the case-study countries, then discusses the policy challenges and policy responses, and concludes by drawing preliminary conclusions about their economic impact.

Figure 3.6.Selected Sub-Saharan African Countries: Composition of Capital Flows

(Percent of GDP)

Source: IMF, African Department database.

The case-study countries are at different stages of capital account liberalization (Table A3.2), ranging from significant restrictions (Cameroon and Senegal) to partial opening (Ghana, Nigeria, and Tanzania) to full openness (Uganda and Zambia). Ghana is in the midst of a gradual well-sequenced opening that started in the 1990s with partial liberalization of portfolio and FDI flows and continued in 2006 with the partial opening of the government securities market to foreigners. Nigeria’s liberalization started in the mid-1980s with FDI flows and is now almost complete. Tanzania liberalized FDI flows in the 1990s but maintains restrictions on portfolio flows. In Cameroon and Senegal, capital account regulations have not changed in years and there are no plans for further opening. Among the liberalizers, Nigeria, Uganda, and Zambia opened their capital accounts in the mid-1990s—Uganda in a one-shot episode, and Nigeria and Zambia more gradually. In all the countries except Cameroon and Senegal capital account liberalization was part of a more comprehensive reform process.

The stages of financial market development also differ among the seven countries. Ghana, Nigeria, Tanzania, Uganda, and Zambia are developing their markets rapidly (Lukonga, forthcoming). They have, to varying degrees, made progress in building all segments of the financial market: government securities, corporate bonds, equity, and interbank money and foreign exchange markets. Secondary markets, however, are virtually nonexistent and instruments and trading are thin in some primary markets. All five countries have active government securities markets, offering both short- and medium-term maturities. Corporate bond markets are very thin in all countries, and equity markets tend to be concentrated, with little primary trading and no secondary markets. At the other extreme are Cameroon and Senegal, where a number of markets are missing and others are in their infancy. There is a functioning regional bond market in the WAEMU, of which Senegal is a part, but the CEMAC has no such market. There are also embryonic regional stock markets in both regions but both Senegal and Cameroon have minimal activity. Interbank money markets are equally embryonic, and there is no interbank foreign exchange market in either country.

Capital market infrastructure and, in some countries, the process of capital account liberalization seem to have affected the composition of inflows in the countries studied.

The bulk of FDI flows to sub-Saharan Africa were driven by the expectation of high returns from exploitation of natural resources, as was true to some extent in Cameroon, Ghana, Nigeria, Senegal, and Zambia. In Senegal, the combination of debt relief and a significant improvement in investors’ perceptions of the business environment led both to a substantial increase in FDI volumes and to diversification of FDI to other sectors of the economy. By contrast, in Cameroon, the poor business environment and underdeveloped financial sector limited FDI to oil projects. In Nigeria, the sheer size of the oil sector explains why the country is the largest single FDI recipient in sub-Saharan Africa (Figure 3.1 above). In the two nonmineral exporters, Tanzania and Uganda, early efforts to improve the legal framework for private domestic and foreign investment, together with macroeconomic stability, were quite successful in attracting substantial amounts of broad-based FDI. Interestingly, a significant share of FDI appears to be directed to manufacturing, which has been associated empirically with a positive effect on economic growth (Aykut and Sayek, 2007).14

Portfolio flows went to countries with better-developed financial markets. In particular, the availability of investment vehicles (mostly government securities), together with the expected return on such instruments has been important. In Tanzania, because nonresidents are not allowed to hold government securities, resources from foreign investors were invested in treasury bills and bonds indirectly, with commercial banks serving as intermediaries. In Ghana, the surge in portfolio inflows coincided with the opening of the government securities market to foreign investors, and in Zambia, with the introduction of longer maturities for government bonds. In Nigeria, portfolio flows followed large debt relief/debt restructuring operations and renewed confidence in the country’s economic prospects. In Cameroon and Senegal, embryonic capital markets and capital account restrictions mean there is no investment outlet for portfolio flows.15

Private debt-creating flows are significant only in Senegal, where they amounted to 2–3 percent of GDP a year in the first half of the decade; they rose sharply in 2006 along with the increase in FDI.

In most case-study countries there are significant shortcomings in the capacity of the authorities to adequately monitor the private inflows, in particular portfolio and debt-creating flows. Foreign resources channeled through local intermediaries to purchase government securities cannot be monitored in Tanzania and Uganda, but the data are of reasonably good quality in Ghana (unlike other private flows), albeit available only with long lags.16 Nigeria has only limited capacity to monitor portfolio inflows, while Zambia is the only country in the case-study group where private capital flow data are compiled, including for portfolio flows, by the central bank and the stock exchange on a monthly basis. All countries except Nigeria and Senegal have received assistance from the Foreign Private Capital Capacity Building Program (FCP CBP) to introduce broad-based enterprise and bank surveys in order to improve their capacity to monitor private flows (Box 3.5).

Box 3.5.The Foreign Private Capital Capacity-Building Program

The Foreign Private Capital Capacity-Building Program helps developing country governments build capacity to monitor and analyze the effects of foreign private capital to facilitate the design of policy responses and promote sustainable development. The program, which is donor-financed and demand-driven, is implemented by Development Finance International, a small technical assistance organization based in London, in conjunction with regional institutions such as the Central Bank for West African States, the Macroeconomic and Financial Management Institute of East and Southern Africa, and the West African Institute for Financial and Economic Management.

Foreign private capital flow studies for Cameroon (2006), Ghana (2003), Tanzania (2004–05), Uganda (2003, 2004), and Zambia (2004) are available at Updated surveys for Ghana and Zambia are being launched in 2008, and surveys for Uganda and Tanzania are being finalized. Other countries in the region that have been covered so far are Burkina Faso, The Gambia, and Malawi. The surveys cover all banks and representative samples of enterprises in all sectors of the economy. They gather information on all types of foreign flows, broken down by origin, destination, and maturity, and on investors’ assessment of the business climate.

The policy challenges associated with private capital inflows have been similar across countries, but the policy responses have varied depending on the monetary and exchange rate regime (Table A3.2). In the countries with hard pegs—Senegal and Cameroon—the inflows did not have a substantial impact on inflation or the real exchange rate. Constrained by structural weaknesses, domestic credit growth has not responded and excess liquidity has increased, particularly in Cameroon. In Senegal, FDI flows appear to be financing a widening current account deficit, in part due to the high import content of FDI. A key policy challenge for the five countries with more flexible exchange rates has been to contain inflation while keeping the exchange rate in check. Because it was unclear at first whether the inflows would be temporary or permanent, the inflows were initially sterilized. As the costs of sterilization rose (and possibly attracted further inflows), some countries resorted to unsterilized intervention. Ultimately, these countries had to allow more flexibility in their monetary or exchange rate targets. The policy response was further complicated by the fact that the surge in private capital inflows coincided with increases in commodity and oil prices (Cameroon, Ghana, Nigeria, Senegal, and Zambia) and with large official inflows (Uganda and Tanzania).

  • In Tanzania, Uganda, and Zambia, the surge in portfolio inflows complicated the conduct of monetary and exchange rate policy. All three countries have a reserve money target and a managed exchange rate float. At the onset of the surge, Tanzania and Uganda fully sterilized the inflows, but this policy rapidly proved costly and may have attracted further inflows by keeping yields high.17 Reserve money growth targets were exceeded in all countries (though only by a small margin in Tanzania). Uganda allowed some nominal (and real) appreciation, but there were concerns about export competitiveness and the high costs of sterilization. A brief resort to unsterilized interventions led to higher-than-programmed reserve money expansion. In Zambia, inflows coincided with a large increase in copper prices, which led to a real appreciation. Subsequently, sterilization operations intensified but the limitations to the monetary policy instruments complicated liquidity management. Tanzania, Uganda, and Zambia also used the inflows to build up foreign reserves.
  • In Nigeria, the inflows occurred in the context of sharply rising oil prices, deepening financial markets, increasing intermediation, and shifting money demand, which made it difficult to focus on the reserve money target and led to nominal and real exchange rate appreciation. This eventually prompted further exchange rate flexibility and the beginning of a transition toward inflation targeting. The inflows also seem to have fostered a number of positive developments: interbank foreign exchange markets deepened and interest rates on government securities were reduced. Unlike in the other case-study countries, foreign inflows were also directed to the banking sector, where foreigners have invested over US$11 billion (also see Box 3.4).
  • In Ghana, the inflows coincided with a significant increase in imports, which dampened their impact on the real effective exchange rate but also, because of widening fiscal and current account deficits and relatively low reserves, increased vulnerability to a sudden reversal of the flows.

For the case-study countries, the short-term evidence on the economic impact of the capital inflows is mixed. In Ghana, there are indications that the foreign purchases of government securities have helped finance the current account deficit (i.e., consumption). In Tanzania, Uganda, and Zambia, much of the inflows were initially sterilized, limiting their economic contribution.18 However, in Tanzania it was not possible to absorb the inflows in any other way because they coincided with large aid flows; and Zambia needed the additional reserves.

The success of Ghana in attracting foreign investors to medium-term instruments through the design of capital controls illustrates that institutional and financial sector policies can help tilt the composition of inflows toward longer-term flows. Tanzania, Uganda, and Zambia have also been able to lengthen the maturities held by foreign investors by issuing longer-term instruments—the result of financial sector reforms and the ability to maintain a credible, stable macroeconomic and political environment. Lengthening maturities helps reduce both rollover risks and maturity mismatches in the financial sector, because longer-term bonds better match the liability structure of domestic institutional investors.

Although the subprime crisis has so far had only a limited impact on the case-study countries (and on sub-Saharan Africa in general), this is as of now an untested risk. The lack of notable outflows partly reflects thin financial markets19 and the generally low degree of financial globalization, combined with solid fundamentals. It also reflects the (perceived) lack of correlation with risks in emerging markets. Nevertheless, portfolio inflows to Ghana, Uganda, and Tanzania all weakened in August 2007, and in Zambia they temporarily reversed. Minimum holding periods for government securities for foreign investors in Ghana may have helped avert an immediate reversal of inflows. In Uganda, there are indications that foreign investors might be in for the longer term in anticipation of the forthcoming oil exploitation. In Nigeria the subprime crisis has so far had no measurable effect, as evidenced by the pickup in government securities trading in the third quarter of 2007. The situation may change, however, as the global financial crisis unfolds.

Lessons and Policy Agenda for Sub-Saharan Africa

The trend toward closer integration of sub-Saharan Africa into global financial markets is poised to continue. While FDI still largely flows to resource-rich countries, there are indications that non-resource-intensive countries are attracting FDI to a broad set of economic sectors. Portfolio inflows to a small group of “frontier” markets are also rising rapidly. Together, these flows are already larger than official aid. This investor interest brings tremendous opportunities, but sub-Saharan African policymakers also face particular challenges in managing the inflows.

Sound macroeconomic management, transparent capital account policies, and financial sector reforms will be needed to ensure that the inflows go to productive uses while avoiding macroeconomic instability and the buildup of vulnerabilities. Improving the capacity to monitor the inflows is critical: the authorities need accurate and timely data on the size, composition, and maturity of the inflows to design an appropriate policy response. Better data would also improve understanding of the economic impact of the inflows.

Macroeconomic policy responses to private capital inflows

Monetary and exchange rate policy responses should reflect the nature of capital inflows and the authorities’ policy objectives. Large inflows could lead to macroeconomic instability, higher inflation, and disruptive exchange rate movements, and therefore need to be managed carefully. Sterilized interventions could help preserve exchange rate and monetary stability in the short term while allowing the buildup of official reserves—an insurance against possible sudden reversals.20

Monetary policy alone would have great difficulty in avoiding an appreciation associated with persistent large capital inflows, however. Sterilizing persistent large inflows is likely to raise interest rates. The fiscal cost of sterilization can thus rise rapidly and increase the public debt burden. Moreover, rising interest rates could be self-defeating insofar as they attract more inflows, and may work to suppress appreciation mainly through crowding out the private sector. Unsterilized intervention, on the other hand, may help fend off nominal currency appreciation, but it would likely lead to higher money growth and eventually inflation.

Persistent inflows would thus require the adoption of more flexible monetary and exchange rate policy frameworks. Some of the more mature sub-Saharan African countries are transitioning toward (or have even adopted) inflation-targeting-like regimes (see Chapter 2). Countercyclical fiscal policy can help mitigate the real appreciation pressures associated with the inflows. Keeping fiscal expenditures steady during episodes of large capital inflows—rather than ratcheting them up—has also been shown to foster better growth outcomes in the aftermath of these episodes (IMF, 2007f). However, there may be only limited room for fiscal restraint in low-income countries, particularly post-MDRI/HIPC debt relief, where the additional fiscal space is dedicated to priority poverty-reduction spending. Where inflows are more permanent, enhanced public financial management would help ensure that the resources are allocated to productivity-enhancing investments.

Capital account policies

In the short term, countries should focus on implementing coherent, transparent, and evenhanded capital account policies. At present, capital accounts across sub-Saharan Africa remain fairly closed (de jure) compared with other regions, and exchange controls are complex and difficult to implement. This results in poor information and creates scope for corruption and mismanagement. Existing capital account regulations should be carefully reviewed to enhance transparency, and inconsistencies and inefficiencies between regulations should be eliminated.

In the medium term, a gradual and well-sequenced liberalization strategy would help countries reap the benefits of capital market access while limiting the associated risks. In parallel with the progressive liberalization of capital flows, starting with more stable and long-term flows, countries need to implement supportive institutional and regulatory reforms that will strengthen their capacity to manage capital inflows and the associated vulnerabilities. The timing of the liberalization process should depend on the extent of financial market development and institutions in each country.

Controls on capital inflows may at times play a useful role in giving policymakers additional room for maneuver, but this space is very limited in practice. The international experience is that such measures have at best a short-term effect on the composition of capital flows (see, e.g., Magud and Reinhart, 2007). Reimposing capital controls in the face of a surge in inflows is not an appropriate management tool, for these reasons and because rapid regulatory changes can contribute to the disarray that well-implemented and sequenced reform strategies should avoid. In practice, no country in the case-study group reimposed capital controls as a response to capital inflow surges.

In response to sudden capital inflow surges, the authorities could even consider accelerating the pace of liberalization to better manage capital flows and support other policy responses (e.g., exchange rate and monetary policies). If inflows are occurring in spite of capital controls, removing the controls can improve monitoring. Selective liberalization of capital outflows could also ease inflation and appreciation pressures, provided that foreign reserves are at a comfortable level. However, the impact of outflow liberalization in sub-Saharan Africa deserves further study: African policymakers have been mostly concerned by capital flight, but in emerging economies there is some evidence that outflows liberalization has attracted further inflows (IMF, 2007f).

Financial sector and other structural policies

Better financial sector supervision and regulation are critical to efficient intermediation of the inflows and reduced vulnerabilities to sudden reversals. This is particularly important for sub-Saharan African countries, where institutions tend to be weak and financial sectors shallow. Strengthened financial sector supervision and regulations and improved risk management capabilities of banks could help prevent the buildup of balance sheet vulnerabilities.

Increased government borrowing in foreign and domestic currency associated with private capital flows could affect medium-term debt sustainability. The access to private capital is a welcome sign of success and increases the scope for public investment. But it needs to be carefully monitored, and the risks associated with the costs and structure of such instruments (e.g. bullet payments on international sovereign bonds) should be fully analyzed within the framework of medium-term debt management strategies.

Government debt issuance strategies could support the development of the domestic yield curve and help broaden the local investor base. Governments should aim at a progressive lengthening of maturities on domestic debt instruments, at reasonable cost. This would attract institutional fund managers, provide higher-yielding savings options to the residents (bank deposits in Africa often yield negative interest rates after adjusting for inflation), and allow pension funds and insurance companies to better match the maturity of their assets and liabilities. A broad local investor interest would also lower market volatility and the risk of sudden reversal of capital inflows.

In the long run, capital inflows can leverage domestic institutional improvements; they are not a substitute. The benefits they bring depend on strengthened governance, better infrastructure, and more human capital (IMF, 2007d). Improvements in the productive structure of the economy, the business environment, and institutional and governance reforms will reinforce the positive effects of capital flows on productivity and growth and help attract more stable inflows. Addressing structural obstacles to credit, including legal and judiciary reforms to strengthen contracts and creditor rights, credit registries, and accounting and auditing standards for corporations, would also facilitate intermediation of the inflows through the banking system.

Appendix 3.1. Country Experiences with Capital Inflows


Cameroon belongs to the Central African Economic and Monetary Community (CEMAC), a customs and monetary union created in March 1994.22 Foreign exchange regulations of members were harmonized in 2000 and all controls were lifted within the CEMAC zone. While capital flows to third countries related to the payment of loan principal or liquidation of FDI are free, other flows are subject to administrative controls. The remaining capital controls give the CEMAC’s central bank, the BEAC, some degree of monetary independence. In practice, monetary policy has been passive. The interest rate structure, which does not reflect market conditions, has resulted in a negative differential with the euro area.

Financial integration within the CEMAC is limited mostly because the financial infrastructure is inappropriate. Efforts to encourage FDI have been hampered by the poor business environment. In March 2002, Cameroon’s parliament approved an investment charter establishing a new framework for investments and integrating laws relating to forestry, mining, and petroleum. An investment promotion agency was created in September 2005.

Capital flows to Cameroon over the past five years have mainly been driven by developments in the oil sector. Construction of the Cameroon-Chad pipeline, which began in 2000, stimulated FDI inflows until it was completed in 2003. The FDI mainly originated in the United States and France and concentrated on transport and communication. Portfolio investments are marginal.

Capital inflows have contributed to the country’s recent buildup in foreign reserves but they have been dwarfed by oil export earnings. Cameroon’s net foreign assets have been steadily rising, reaching nearly CFA 900 billion in 2006. The increase in net foreign assets has had relatively little impact on liquidity because a significant portion of oil inflows has been saved. Large oil revenue inflows, debt relief, and expenditure restraint have improved the fiscal position in the past five years.

Given the obstacles to financial intermediation, credit growth has been subdued. Private sector credit growth was limited by government repayment of arrears to private operators. Credit is also hampered by ceilings on lending rates, a lack of timely and reliable information on borrowers, a poorly functioning court system, and inadequate land registry systems.

Price and exchange rate developments seem not to have been affected by capital movements. Inflation over the past five years has been driven mainly by the pass-through of higher oil and food prices. The REER has appreciated by slightly more than 10 percent, due to the weakness of the dollar against the euro.


Ghana’s partial liberalization of the capital account, while still at an early stage, has so far yielded the expected benefits in terms of increased capital inflows and development of domestic capital markets. Recent liberalization began in late 2006 with the new Foreign Exchange Act, which for the first time allowed nonresidents to purchase domestic government securities. It was part of a coherent strategy for accelerated growth, financial sector development, and regional integration that the Ghanaian authorities started considering in 2003. In particular, the liberalization followed an appropriate sequencing, coming after success in stabilizing the economy (supported by a PRGF arrangement and considerable debt reduction from HIPC and MDRI debt relief). Capital account liberalization has been accompanied by a comprehensive institutional development and reform strategy, which includes reinforcing primary government debt and stock markets, financial sector supervision, and bank soundness.

Portfolio and direct investment inflows began to pick up in 2004 and surged in response to the liberalization in late 2006; nonresident purchases of government debt securities have strengthened the long end of the government debt market. Private FDI and portfolio inflows may have reached as much as 9 percent of GDP in 2007.

Continued success in attracting capital inflows could raise policy problems. In particular, a sudden reversal of capital flows might disrupt the domestic government debt markets, given their depth and liquidity relative to inflows, though limits on the resale and maturities of foreign-owned securities are intended to mitigate the risk. Liberalized access to capital could eventually raise the question of the sustainability of external and public borrowing. After gross debt plummeted in 2006 thanks to MDRI, it rose again to 47 percent of GDP in 2007, and the proportion of nonconcessional debt rose to 40 percent of total debt. Strengthened debt management will be crucial in the future.

Furthermore, the macroeconomic policy framework and its credibility are important for managing risks from rapid capital inflows and possible reversals. While capital flows hold promise for Ghana’s development, they place a premium on a sustainable policy stance. Over the medium term, strengthening fiscal policy would reduce the risks due to capital flow volatility. Since mid-2006, buoyant domestic demand, due in large part to expansionary fiscal policy, has contributed to exchange rate depreciation despite increasing capital inflows. Moreover, international reserves have fallen, often below 3 months of import cover.


Nigeria’s economic fortunes in recent decades have been heavily influenced by developments in, and spillovers from, the oil sector. More recently however, improved economic performance (sustained growth, moderate inflation, falling debt, and rising reserves) has been underpinned by a strengthened economic policy framework. In turn, these stronger economic policies and performance have been crucial to bringing about a period of increased integration with the global economy.

After the period of increasing economic dislocation, in 1995 the authorities made a significant effort to liberalize capital account transactions.25 While certain residual restrictions (largely administrative) remain, the system is for economic purposes essentially free of restrictions on international current and capital transactions.

Capital account liberalization was part of a broader reform process. Efforts to liberalize the foreign exchange market were already under way with the creation of an interbank market; these culminated in 2006 with a wholesale Dutch auction and effective unification of the parallel and official exchange rates. The resulting exchange rate flexibility supported monetary policy and helped to dampen inflation pressures. Since 2004 the banking sector has also undergone considerable consolidation, which among other things has strengthened the capital adequacy of the sector. Risk-based banking sector supervision was initiated, and efforts are now under way to implement consolidated supervision. The creation of a debt management office in 2000 has helped with debt restructuring and expansion of the government’s securities market.

Since 2005, private sector (including foreign) interest in naira assets has risen considerably, as evidenced by the expansion of the domestic government securities market, increased interest in Nigerian initial public offerings (on both Nigerian and international exchanges), and issuance of corporate bonds and global depository receipts. These flows could be as high as several billion U.S. dollars annually; most of the increase occurred in 2006 and 2007.

But policymaking is complicated by increased intermediation, new lending activities (both retail and cross border); and increased inflows (from both emigrants and international investors seeking yields). These developments were accompanied by appreciation pressures, culminating in notable naira appreciation in late in 2007. Money demand volatility has prompted the authorities to progressively abandon reserve money targeting in favor of a transition toward inflation targeting, while allowing more exchange rate flexibility. There is also potential for a sudden reversal of flows. However, in spite of the turbulence in global financial markets, trading in government securities trading accelerated in the third quarter of 2007, and foreign interest in the banking sector is ongoing. The Nigerian stock market has been appreciating significantly, and price/earnings ratios are very high.


Over the past decade Senegal has achieved considerable economic stability and robust growth, and debt relief has brought its debt indicators down. Although growth slowed in 2006, due in part to policy slippages, it rebounded in 2007, driven by the services and construction sectors, and the fiscal deficit lessened. Senegal is a member of the West African Economic and Monetary Union (WAEMU), which pegs its exchange rate to the euro. Senegal’s macroeconomic and structural policies are supported by a three-year IMF Policy Support Instrument (PSI), approved in November 2007.27

Like the other WAEMU members, Senegal maintains controls on capital outflows to non-WAEMU countries. These controls have not changed in recent years, except that in 1999 the WAEMU eliminated controls on inward FDI and foreign borrowing by residents.

Senegal’s financial market is underdeveloped. There is no secondary bond market, only two Senegalese companies are listed on the regional stock exchange, and bank credit to the economy is less than 25 percent of GDP. The financial market has been held back by a lack of structural reforms and the persistence of excess liquidity in the banking system.

International capital flows into Senegal have generally been small, but FDI is on the rise. Portfolio flows, amounting to perhaps ½ percent of GDP in either direction, consist largely of bank purchases of government bonds issued by WAEMU countries. Foreign financing of the private sector has amounted to 2–3 percent of GDP a year but rose markedly in 2006, in part owing to the rise of domestic investment.

FDI in Senegal is on track to rise from about 2 percent of GDP annually in the first half of the decade to 5–6 percent of GDP by the end due to investor interest in mining, telecommunications, the port of Dakar, and a special economic zone; a significant share of the investment is coming from Arab sources. Senegal’s economic performance over the last decade has laid the basis for the increase in FDI. The Senegalese authorities are also actively pursuing investment opportunities, marketing Senegal as a stable, business-friendly location, and upgrading their ability to manage public investment.

The economy is absorbing the FDI flows smoothly within the WAEMU exchange rate and monetary framework. The potential fiscal benefits and costs of direct investment are being managed as part of a fiscal policy to keep debt sustainable.


The Tanzanian economy has sustained robust growth and low inflation for several years. For 2000–07 real GDP growth averaged 7 percent a year, and inflation averaged just over 5 percent. Sound financing of government operations through revenue growth and donor assistance has been the anchor for economic stability. Tanzania benefited from extensive debt relief from the HIPC Initiative (2001) and more recently MDRI (2006).

Increasing private investment, FDI in particular, has been a central focus of Tanzanian economic policy. However, Tanzania does not compare favorably worldwide as a location for doing business. In the 1990s, Tanzania partially liberalized capital account transactions, which coincided with privatization efforts, but retained restrictions on portfolio investment to limit short-term flows. FDI responded, increasing from about 1 percent of GDP in 1994 to 2 percent of GDP a year for 1995–97. Since further liberalization in 1999, FDI has amounted to about 4 percent of GDP a year.

Relatively high yields on Tanzanian government securities, low inflation, and a strong currency have attracted investment by hedge and other funds in search of higher returns. Investors saw little exchange rate risk because the country’s external position remained strong. Between April and July 2007, purchases of government securities by local branches of major multinational banks were extraordinarily high. There is no evidence of capital outflows, in part because these investments are illiquid and Tanzania’s secondary market for government securities is minimal.

There are lessons to be learned from Tanzania’s experience in 2007. Sterilization of foreign capital inflows proved costly because yields on government securities remained high. If the exchange rate and monetary policy had been more flexible, these portfolio inflows could have generated more positive effects. Finding the right policy balance is difficult however, especially when data on foreign investment inflows are limited. More liberalization of the capital account for portfolio flows would also improve transparency.

The other major challenge for Tanzania is to ensure that sudden capital inflows do not reverse to similarly sudden capital outflows. Sound economic policies and healthy private sector demand for bank credit should help encourage longer-term portfolio investments. With respect to FDI, and long-term private investment more generally, eliminating major impediments to doing business and improving infrastructure could be effective—not only for attracting investment but also for accelerating economic growth and job creation.


With its promarket emphasis yielding positive results, the Ugandan government moved as early as July 1997 to liberalize the capital account, even though the prevailing conditions—a shallow financial sector, limited regulatory capacity, and public debt restructuring—were considered less than ideal. Minimal capacity to enforce capital controls and the need to attract foreign capital to reduce reliance on foreign aid persuaded Uganda to open up its capital account. Comprehensive financial sector reforms, including more forceful supervision and recapitalization of a major insolvent bank, took place only later.

However, until very recently liberalization had had little impact on capital flows. In its wake, Uganda sustained strong growth and economic imbalances were reduced, but the volume of capital flows started to pick up substantially only in 2004; since late 2006 purchases of government securities by nonresidents has surged to about US$100–150 million (1 percent of GDP).

The preponderance of evidence suggests that the inflows are driven by push rather than pull factors. It is difficult to discern recent step improvements in the quality of institutions, condition of the financial sector, or political developments that might have boosted investor confidence and led to higher capital inflows. If anything, developments at the point that capital flows picked up were more likely to sap confidence: the economy was going through a rough patch due to a drought-induced shortfall in energy production. MDRI-related debt relief and the consequently improved fiscal solvency have had limited effect on the liquidity position of the government and thus its near-term capacity to service debt.

The recent increase in private inflows has heightened the monetary and exchange rate policy challenges facing the government. Foreign aid to Uganda already totals about 10 percent of GDP annually. Part of the aid is sterilized, which entails a large fiscal cost, but sterilization is not effective in the long run and keeps interest rates higher than they would otherwise be. The surge in private inflows has exacerbated aid-related pressures.

The authorities have addressed the tensions by making monetary policy more flexible and allowing some nominal exchange rate appreciation. However, policymakers attach great importance to an independent monetary policy, given the shocks the country is susceptible to, and have limited tolerance for nominal appreciation. The usefulness of fiscal policy in the face of surges in capital inflows, is also limited because of huge public spending needs. In this environment, finding an appropriate policy response will require hard choices and, perhaps, changes in policy priorities.


In the early 1990s Zambia began to dismantle controls on prices and economic activity generally to address prolonged economic contraction and mounting instability after copper prices collapsed.31 The severe terms of trade shock and the inefficiency of parastatals made a shift in economic policies necessary to diversify the economy away from copper, create a stable financial environment, and establish a basis for normalizing relations with creditors. Progress on economic reform since has been accompanied by substantial capital inflows, mainly into government securities since 2005, after Zambia was granted HIPC and MDRI debt relief. Although the policy reforms created an environment more conducive to foreign capital flows and eased restrictions on such flows, the reforms were largely directed to stabilizing the economy, increasing international competitiveness, and addressing Zambia’s considerable foreign debt.

The shift toward reliance on market forces to guide economic activity was accompanied by measures to build financial market infrastructure. With interest rates liberalized, in 1993 an auction system for treasury bills was introduced and later extended to government bonds. Open market operations, mainly deposit auctions, were introduced about two years later. Recently repurchase agreements have increasingly been used in the conduct of monetary policy. However, the interbank market still lacks depth, and interest rates have been highly volatile.

A lack of liquidity characterizes government securities markets. Trading on the stock exchange, which opened in 1994, has increased and market capitalization has risen markedly. Private bond issues varying in maturity from 3 to 12 years were sold in 2004 and a few more recently. However, listings are still limited, and only a small proportion of listed stocks are available for trading. The foreign exchange market in 2003 was transformed into an interbank market.

Portfolio flows into government securities have recently gained momentum. In December 2007 foreign investment inflows reached K 830 billion (US$216 million). Foreign investors have mainly opted for short-term securities, but their interest in medium- and longer-term maturities has been significant. Foreign demand for government securities, reduced domestic borrowing by the government, and a decline in inflation to its lowest level in three decades have brought market interest rates down considerably, especially in 2006. However, an abrupt reversal in portfolio inflows is a risk, as was demonstrated in 2006 before the general elections.

The authorities are committed to limiting intervention in the exchange rate market and have built up international reserves to prepare for a sudden reversal of capital flows. They have also increased the instruments available for conducting monetary policy. Liquidity management remains a problem; however, the authorities need to build the interbank market to allow banks manage their liquidity more actively and efficiently.

Table A3.1.Controls on Portfolio Investments and FDI in Selected African Countries
CountryDebtEquity and FDI
BotswanaBonds: nonresidents max 20% of government bondsBonds: no controls, listing requirementsShares: controlsShares: no controls
Money market securities: nonresidents not allowed to purchase central bank securitiesMoney market securities: no controlsFDI: no controlsFDI: no controls
Derivatives: no controlsDerivatives: no controls
Cameroon1Bonds: controlsBonds: controlsShares: controls on issuing, advertising, and sale of foreign securities of more than CFAF 10 millionShares: controls
Money market securities: controlsMoney market securities: controlsFDI: no controls if below CFAF 100 millionFDI: no controls if below CFAF 100 million
Derivatives: not applicableDerivatives: not applicable
Chad1Bonds: not regulatedBonds: controlsShares: not regulatedShares: controls
Money market securities: controls on sale or issue by residents abroadMoney market securities: controlsFDI: no controls if below CFAF 100 millionFDI: no controls if below CFAF 100 million
Derivatives: controls on sale or issue by residents abroadDerivatives: controls
GhanaBonds: nonresidents allowed to invest in securities with more than three years maturityBonds: controls, except for residents purchasing bonds abroadShares: no controlsShares: controls for nonresidents’ sale or issue locally
Money market securities: controls on nonresidents purchasing domesticallyMoney market securities: controls on nonresident sale or issue domesticallyFDI: controlsFDI: no controls
Derivatives: no controlsDerivatives: controls on nonresident sale or issue domestically
MauritiusBonds: no controlsBonds: no controlsShares: controls on shares not listed on the stock exchangeShares: no controls
Money market securities: no controlsMoney market securities: no controlsFDI: sectoral control in the sugar industryFDI: no controls
Derivatives: no controlsDerivatives: no controls
MozambiqueBonds: controlsBonds: controlsShares: controlsShares: controls
Money market securities: controlsMoney market securities: controlsFDI: controlsFDI: controls
Derivatives: controlsDerivatives: controls
NamibiaBonds: controls on resident sale or issue abroadBonds: controls on resident purchase abroad of more than N$2 millionShares: controls on resident sale or issue abroadShares: control on resident purchase abroad of more than N$2 million
Money market securities: controls on resident sale or issue abroadMoney market securities: controls on resident purchase abroad of more than N$2 millionFDI: no controlsFDI: controls
Derivatives: controls on resident sale or issue abroadDerivatives: controls on resident purchase abroad of more than N$2 million
Nigeria2Bonds: no controls2Bonds: no controlsShares: no controlsShares: no controls
Money market securities: controls2Money market securities: controls on resident purchases abroadFDI: no controls, only registrationFDI: no controls
Derivatives: no controlsDerivatives: no controls
Seychelles3Bonds: no controlsBonds: controlsShares: no controlsShares: no controls
Money market securities: no controlsMoney market securities: no controlsFDI: no controlsFDI: controls
Derivatives: no controlsDerivatives: no controls
South AfricaBonds: controls on resident sale or issue abroadBonds: controlsShares: controls on resident sale or issue abroadShares: limits on resident purchases abroad
Money market securities: controls on resident sale or issue abroadMoney market securities: controlsFDI: no controlsFDI: controls
Derivatives: controls on resident sale or issue abroadDerivatives: controls
TanzaniaBonds: nonresidents must purchase domestically for local currency; controls on resident sale or issue abroadBonds: controls on nonresidents; residents may purchase abroad from external sourcesShares: nonresidents may purchase 60% of total securities by an issuer; controls on resident sale or issue abroadShares: only nonresidents from certain countries may sell or issue locally; residents may purchase abroad from external sources
Money market securities: controlsMoney market securities: controls on nonresidents; residents may purchase abroad from external sourcesFDI: no controlsFDI: controls
Derivatives: controlsDerivatives: controls
Togo4Bonds: controls on resident sale or issue abroadBonds: controlsShares: no controlsShares: controls on resident purchases abroad
Money market securities: no controlsMoney market securities: controlsFDI: no controlsFDI: controls
Derivatives: no controlsDerivatives: controls on certain derivatives for resident purchase abroad
UgandaBonds: no controlsBonds: no controlsShares: no controlsShares: no controls
Money market securities: no controlsMoney market securities: no controlsFDI: no controlsFDI: no controls
Derivatives: no controlsDerivatives: no controls
ZambiaBonds: no controlsBonds: no controlsShares: no controlsShares: no controls
Money market securities: no controlsMoney market securities: no controlsFDI: no controlsFDI: no controls
Derivatives: no controlsDerivatives: no controls
Source: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions(AREAER) (2007).

Movements of capital within the CEMAC are not subject to exchange controls.

This information is not based on the AREAER, but on reporting from other sources.

Even though there are no legal controls, the country does not have free availability of foreign exchange for capital account items.

Capital transactions between WAEMU countries are unrestricted.

Source: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions(AREAER) (2007).

Movements of capital within the CEMAC are not subject to exchange controls.

This information is not based on the AREAER, but on reporting from other sources.

Even though there are no legal controls, the country does not have free availability of foreign exchange for capital account items.

Capital transactions between WAEMU countries are unrestricted.

Table A3.2.Capital Account Liberalization Process in Case-Study Countries
Status/SequencingFully OpenPartially OpenFairly Closed
One-step openingUganda (1997) Liberalization part of a broad package of market-oriented reforms, privatization and trade liberalization
Zambia (1990-95) 1993-94:liberalization of capital transactionsGhana (1995-2006) Mid-1990s: partial liberalization of portfolio and direct investmentCameroon (2000 to present) 2000: Harmonization of national foreign exchange regulations and liberalization of capital flows within CEMAC
1995: banks allowed to accept foreign currency deposits2006: Foreign Exchange Act, allowing nonresidents to buy government securities with maturities of three years or longer; minimum holding period of one yearPrudential limits on banks’ net open foreign positions
Liberalization part of broad reforms focused on economic stabilization, competitiveness, and debt restructuring, accompanied by financial market reformsLiberalization following economic stabilization and debt restructuring: parallel reforms in the primary government debt and stock markets; efforts to develop interbank money and foreign exchange markets and to strengthen financial sector supervision and soundnessResidents’ foreign exchange deposits prohibited
Continued administrative restrictions remain on most capital outflows
No immediate plans for further opening
Sequenced openingNigeria (1985-2006) Economic reforms initiated in the mid-1980s and subsequently reinvigorated in the mid-1990s, starting with treatment of dividends and profit repatriation, then later removal of controls in other areas such as derivatives and real estate; some remaining administrative restrictions
Foreign exchange market reformed at various points from the mid-1980s onward: establishment of an interbank forex market initially supplied by the central bank, and later through a Dutch auction (1986); subsequent autonomous forex market (1996); wholesale Dutch auction system initiated in 2006, along with growing importance of interbank market, and the effective unification of the parallel and official exchange rates
Tanzania (1990)Senegal (1999 to present) 1999: elimination of controls on inward FDI and foreign borrowing by residents
1990: start of FDI liberalization
1997: full liberalization of FDI flowsContinuing administrative restrictions remain on capital outflows to non-WAEMU countries
1998: supporting foreign exchange regulations
Continuing restrictions on portfolio investments (government securities)
FDI liberalization coinciding with privatization program, creation of one-stop shop, and investment promotion policy
Sources: IMF, African Department country teams, and AREAER database.
Sources: IMF, African Department country teams, and AREAER database.
Table A3.3.Case Study Countries: Challenges and Policy Responses
Country and Exchange Rate SystemImpact of Inflows/Policy ChallengesPolicy Responses/Recommendations
Cameroon Hard pegOil export receipts dominate private debt inflowsResponsibility for monetary policy rests with regional central bank
Inflows have helped build international reserves, but have had little impact on money growth and inflationIMF staff recommendations:
The REER appreciated in line with the euro– maintain fiscal sustainability
With low and stagnant private sector credit and high excess liquidity, challenge is to improve financial intermediation– strengthen the financial sector
– improve the business environment, including the legal framework and the judicial system
Senegal Hard pegFDI inflows help finance the current account deficitResponsibility for monetary policy rests with regional central bank
In the context of excess liquidity, FDI inflows have so far had little or no impact on inflation, and a significant portion is likely to lead to higher imports, limiting domestic impactThe authorities are actively seeking FDI and they are working to reduce fiscal and governance risks
GhanaThe surge in inflows is too recent to have had much macroeconomic impact, but fiscal policy became expansionary, and the current account deficit is wideningThere has been no specific response to the inflows, which are welcome by the authorities, but the policy mix has become less consistent and vulnerabilities are increasing
Managed floatThe REER depreciated somewhat in 2006 because of excess demandIMF staff recommends fiscal consolidation and further strengthening financial markets, improving capacity to monitor the inflows and enhancing debt management capacity
Inflation targetRapid credit growth driven by a rise in deposits, with no contribution from foreign capital flows so far
Capacity to monitor private capital inflows is weak
NigeriaOil export receipts dominate inflows, though FDI and particularly portfolio flows are becoming more importantThe authorities should maintain a prudent fiscal stance to avoid additional domestic demand pressures
Managed floatThe interbank foreign exchange market is deeper and has become the primary measure of exchange rate developments. Forward foreign exchange contracts are now offeredThe exchange rate has become more flexible, and short-term movements in the naira rate should ensure that investors perceive twosided exchange rate risk
Reserve money targetInterest rates on government paper have been reducedThe country is in transition to an inflation targeting regime
Bank capital increases prompted inflowsStrengthening banking supervision and monitoring of flows is recommended
The REER has appreciated
Capacity to monitor private capital inflows is limited
TanzaniaPortfolio inflows complicate monetary and exchange rate policyInflows were nearly fully sterilized when the surge began (reserve money target narrowly missed). BoT’s sales of foreign exchange for mopping up domestic liquidity were abandoned owing to appreciation pressures. Treasury-bill/bond sales increased sharply and the interest cost of government debt surged. When inflows abated, authorities returned to selling foreign exchange
Managed floatInflows create appreciation pressuresLess sterilization and more flexibility with reserve money program, allowing some appreciation and downward pressures on treasury-bill yields recommended
Reserve money targetDifficulty in monitoring them adds to the challenge for the Bank of Tanzania (BoT)
There is a risk of sudden outflows, but it has not materialized yet
To improve capacity to monitor flows, further liberalization might help by increasing transparency
Sound macro policies to avoid risks of outflows
Eliminate impediments to doing business to attract more FDI and private investment
UgandaSurge in inflows since 2004 has been causing appreciation pressuresResponse was a mix of sterilized intervention, increase in base money and nominal appreciation
Managed floatPolicy trilemma with constraints on how much fiscal contraction can be implemented: if inflows persist, tensions between open capital account, monetary policy independence, and a competitive exchange rate will be heightenedSterilized intervention was the first line of defense, but was incomplete, leading to a large increase in base money Some appreciation was allowed, but concerns about high sterilization costs and export competitiveness prompted, for a short period, unsterilized intervention. This caused a temporary but large increase in reserve moneyReserve money target
ZambiaInflows have complicated the conduct of monetary and exchange rate policy. Their onset coincided with a surge in copper prices that led to a large initial appreciation, in the absence of sterilizationPolicy response after large appreciation has been to intensify sterilization operations (to meet reserve money target), but is costly
Managed floatMonetary policy helped by
Reserve money targetTemporary reversals in inflows, associated first with the uncertainty before the 2006 elections and then with the subprime crisis in August 2007 caused a sharp depreciation– underexecution of the budget in 2007
Challenges arise from the cost of sterilization, the limited availability of monetary policy instruments, and the difficulty of selling foreign exchange when the currency is appreciating– transfer of government funds in commercial banks to the Bank of Zambia
In spite of good capital flows data, the authorities have difficulty forecasting the government’s cash flow– steps to increase monetary policy instruments, though liquidity management remains a problem
– an active interbank market to manage liquidity should be developed
Source: IMF, African Department country teams.
Source: IMF, African Department country teams.
Note: This chapter was prepared by a team led by John Wakeman-Linn and composed of Corinne Deléchat, Arto Kovanen, Inutu Lukonga, Gustavo Ramirez, Judit Vadasz, and Smita Wagh.
1These refer to net changes in external liabilities of the private sector, that is, foreign direct investment, and portfolio and loan flows. Official flows and private transfers from abroad are excluded.
2According to the OECD’s Development Assistance Committee, total official flows to sub-Saharan Africa amounted to about US$40 billion in 2006, compared with US$48 billion for private capital flows.
3The analysis in this chapter relies on data gathered for all sub-Saharan African countries and on case studies for seven countries (Cameroon, Ghana, Nigeria, Uganda, Senegal, Tanzania, and Zambia). The quality of data on capital flows is often poor. Financial account data on the balance of payments are of uneven quality: FDI data tend to be more reliable, but are often reported on a net basis, with little information on gross in- and outflows. Portfolio flow data usually do not allow for distinguishing between equity and debt investments, and private sector external debt is not well monitored in most countries. This may limit the robustness of this chapter’s conclusions.
4Based on preliminary estimates, portfolio inflows fell in 2007 to about US$20 billion, largely due to a projected decline of about US$4 billion in these flows to South Africa compared with 2006.
5A number of the new Africa Funds aim to increase international investors’ information about the region, while helping African firms access global markets. Examples include Renaissance Capital (Rencap); the Investec Africa Fund; the Duet Victore Africa Index Funds; the S&P/IFCG extended frontier 150 Index; the Nigerian Africa Finance Corporation (AFC); Pamodzi Investment Holding; and the AfriCap Microfinance Fund.
6See for example IMF (2007d); and Kose and others (2006).
7This section relies on information from the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) database.
8In this study, capital account or financial openness refers to the de jure status of regulations affecting capital account transactions. Financial integration refers to the de facto degree of openness as measured by the actual size of capital inflows a country is experiencing.
9This does not mean that one-step liberalizations have not or cannot be successful (e.g., Uganda). However, in Uganda’s case, the capital account liberalization was also part of a broader macroeconomic and structural reform strategy.
10It is not yet clear how the recent political turmoil will affect Kenya (and the whole region) as a favorite destination for investment.
11The nine countries are Botswana, Côte d’Ivoire (WAEMU), Ghana, Kenya, Mauritius, Namibia, Nigeria, South Africa, and Zimbabwe.
12Country case studies can be found in Appendix 3.1.
13In Zambia portfolio flows picked up in late 2005 but leveled off in 2006 owing to uncertainty related to the September presidential elections. They took off again in the second quarter of 2007. In Cameroon, FDI inflows associated with the construction of the Chad-Cameroon pipeline peaked in 2002. In Nigeria, portfolio flows became significant in 2007.
14Recent survey data show that in 2005 the share of total FDI in manufacturing was about 30 percent of the total in Uganda and 13 percent in Tanzania. Martin and Rose Innes (2004) also find that FDI in other non-resource-intensive countries in sub-Saharan Africa (Ghana, Malawi, The Gambia) is benefiting a range of economic sectors.
15In all case study countries except Cameroon, private capital inflows closely followed HIPC/MDRI and other debt relief, which itself was mostly conditional on strong economic policies. On the other hand, the timing of debt relief also coincided with a surge in commodity prices and global liquidity.
16At this time, estimates of such flows can only be made based on commercial bank purchases of government securities. A study of commercial bank liabilities to nonresidents and foreign investment funds or possible intermediaries would be needed to more accurately identify portfolio flows.
17In Tanzania, the central bank aborted its planned sales of foreign exchange for mopping up domestic liquidity, which were aimed at relieving pressure on treasury bill yields.
18If the purchase of government securities was financing a fiscal expansion, then the composition of government spending would matter, but the expansion would be fueling inflation and a real appreciation.
19The lack of secondary markets can prevent foreign investors from withdrawing investments on short notice.
20If inflows are geared toward purchases of government securities, sterilization could also help meet the increased demand for such instruments.
21This case study was prepared by Raju Singh.
22The other members are Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon.
23This case study was prepared by Marshall Mills.
24This case study was prepared by Ben Kelmanson.
26This case study was prepared by Frank Lakwijk.
27The PSI is designed for “mature stabilizers”; Senegal is the first francophone country with a PSI.
28This case study was prepared by David Dunn.
29This case study was prepared by Abebe Selassie and Dmitry Gershenson.
30This case study was prepared by Patrick Akatu.
31In the 1970s and 1980s per capita income had declined by about 30 percent.

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