General Discussion

Laura Wallace
Published Date:
January 1999
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Financial Sector Reform

Gray Mgonja of Tanzania opened the discussion by noting that his country’s 1995 banking legislation reflected many of the proposals that Piero Ugolini had made for reforming the financial sector, including explicitly making the attainment of low and stable inflation an objective of the Bank of Tanzania, and giving the central bank independence. The governor of the central bank is appointed under a five-year contract—which is renewable—and cannot be removed from office before the contract expires. Moreover, if the governor differs with the minister of finance on monetary policy, the minister is required to publish that difference of opinion in the government newspaper and to report to parliament. So far, the need for such action has not arisen.

Mgonja concurred with Ugolini’s suggestion that banking supervision be given to a single authority, preferably the central bank at the initial stage, remarking that when the supervisory role was split between institutions, as had occurred in other countries, problems arose. He also pointed out that Tanzania was harmonizing its banking supervision rules with its East African neighbors, Kenya and Uganda.

Yukio Yoshimura of Japan instead favored separating the banking supervision function from the central bank, because of the risk of conflict of interest between monetary policy management on the one hand and banking supervision and restructuring on the other. He also stressed the importance of ensuring that central banks be independent and that monetary policy not be politicized.

Mansour Cama of Senegal commented that it was difficult to have one overall approach to financial sector reform in Africa because the differences between regions were so great. In West Africa, for example, a banking commission headquartered in Abidjan, as part of the Economic Community of West African States, handles banking supervision for the eight member countries. Cama sees the main challenge now for West Africa as one of devising ways to mobilize savings and investment, and to channel savings into investments.

Kwesi Botchwey of Ghana remarked that the formidable challenge of financial intermediation for Africa was not one with which the East Asian economies had to struggle. In Africa, financial sector reform is, disturbingly, too often followed by a shrinking of banks’ net worth and, still, very low real savings. He strongly supported the idea of an independent central bank, but even more important for him was that the governor be apolitical and that the central bank be properly capitalized.

Jean-Claude Brou of Côte d’Ivoire agreed with Cama that the main problem now was one of financial intermediation, pointing to an apparent paradox in his country. The private sector frequently complains that it cannot obtain access to needed medium- and long-term credit, yet there is an excessive amount of liquidity with the banks. How could resources be better mobilized? He felt part of the answer might lie in developing capital markets, such as regional stock exchanges where bonds, for example, could also be issued.

Jan Willem Gunning of the University of Oxford tried to turn the discussion on its head by asking: “Even if banking systems in Africa were perfect, would that solve the problem of financial intermediation and bring about high investment rates in Africa?” He submitted that the answer was no, an uncomfortable message, especially for donor circles, where the opposite assumption is held. Gunning based his skepticism on micro-level data for Africa that showed that the effect of increased profitability on investment was very weak in African firms. This means that the binding constraint is not a lack of credit but rather the wariness of private entrepreneurs to invest, in part because of policy credibility problems. The bottom line is that financial sector reform is important, but not a magic solution.

On another aspect of borrowing, Moses Asaga of Ghana noted his country’s progress during the 1990s in reducing inflation and interest rates, but asked why it had become so difficult over the past year to further reduce nominal interest rates when inflation was decreasing so rapidly? This theme was picked up by Koichi Hamada of Japan, who noted that something was amiss with economic policy when African countries had inflation rates in the single digits but nominal interest rates still in the double digits.

Hiroyuki Hino of Japan suggested that the problem was really one of economic structure and risk rather than faulty monetary policy. For example, a country with 8 percent inflation could end up with 22 percent nominal interest rates, if the real interest rate was 4 percent, the risk premium was 6 percent, and intermediation costs and reserve requirements were 4 percent. What should countries in this predicament do to lower nominal interest rates? He counseled policymakers to let the market determine interest rate levels—as this was necessary to keep the banking system healthy—and instead focus their efforts on reducing risk as quickly as possible.

Piero Ugolini responded to several speakers’ comments on banking supervision by reiterating that, ultimately, it did not matter where supervision was located, so long as it was independent. And that included the possibility of an independent unit that was part of the central bank but located in a completely different building. He explained that he favored initially making the unit a part of the central bank, strictly for reasons of efficiency given the size of the financial sector and the lack of qualified staff in Africa to create a new institution. Even in those countries where supervision was outside the central bank, the bank provided support to the supervisory agencies.

James Cross of South Africa closed the discussion by asking the IMF to make it very clear to policymakers during consultations and exchanges what the early warning systems of banking problems are and drawing especially on the IMF’s cross-country experiences.

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