The Opportunities and Challenges of Financial Integration in West AfricaNaoyuki Shinohara, Deputy Managing Director
International Monetary Fund
October 28, 2013
As prepared for delivery
Your Excellency, Mr. Vice President; honorable Ministers and Governors; dear guests and participants:
Good morning. I am very pleased to speak to you at the opening of this important conference on Opportunities and Challenges of Financial Integration in West Africa. I am also happy to see that representatives of most ECOWAS countries, as well as policymakers and experts from elsewhere, are participating in what I hope will be fruitful exchanges.
I would like to express my appreciation to Vice President Amissah-Arthur for taking time out of his busy schedule to join us, and of course to Minister Terkper and Governor Wampah for supporting this event. Our joint organization of this event is an example of the close cooperation between the government of Ghana and the IMF.
Let me now set the stage for our discussions today, first by placing Africa’s prospects within the context of the global economic outlook.
The world economy is looking healthier than at the height of the Global Financial Crisis. But growth is still weak, and the drivers of economic activity are changing. New policy challenges are arising, and spillovers may pose greater concern. We currently are forecasting global growth of 2.9 percent this year and 3.6 percent in 2014.
The U.S. has seen several quarters of solid private demand, which has been good news for the global economy. Looking forward, it will be essential to reduce the uncertainty surrounding the conduct of U.S. fiscal policy raising the debt limit in a more durable manner. We also continue to encourage the U.S. to approve a budget for 2014, replace the sequester with gradually phased-in measures that would not harm the recovery, and to adopt a balanced and comprehensive medium-term fiscal plan.
Japan is enjoying a vigorous rebound, but that could lose some steam as fiscal policy undergoes necessary tightening.
Meanwhile, Europe is finally emerging from its downturn and growing again, but the reverberations from the Global Financial Crisis continue. Europe still has to address important policy issues, including strengthening demand, dealing with the overhang of private and sovereign debt, and continuing to adjust its financial and fiscal architecture to build the basis for sustained growth.
European Financial Stability
The issues that Europe now faces—and which other advanced economies have grappled with—are very relevant to this seminar. Financial sector problems lay at the root of the Global Financial Crisis. Restoring soundness to the sector and strengthening its supervision will be a key to Europe’s future stability and the health of the world economy. This lesson of financial sector stability and effective supervision will very much be a part of today’s discussion.
As you know, the emerging markets are a major focus of attention. China and other economies that helped drive global growth during the crisis are coming off their cyclical peaks. They also are facing structural issues. These economies are unlikely to return to the rates of growth that the world has become accustomed to in the last decade.
The outlook for Sub-Saharan Africa is brighter. Despite global volatility, this region is expected to enjoy continued robust growth. There are several important drivers at play, most notably strong investment in infrastructure and productive capacity. Foreign direct investment is rising along with other financing opportunities. Of course, some countries are doing better than others. But external developments pose risks—and certainly present policy challenges. These include the slower demand in emerging markets, less favorable commodities prices, and higher financing costs. But the prospects for continued growth in Africa are good.
For all of Africa’s progress, there clearly are very significant hurdles ahead if the region is to realize its potential. These include strengthening institutions, developing infrastructure, and overcoming serious deficiencies in public health and education.
Another critical factor will be financial sector development, which brings me back to the topic of this conference. There is a lot that this region can achieve if it develops its financial sector. By providing governments and business access to a deeper pool of funding and more diverse products, financial integration fosters private sector growth and can help meet infrastructure needs.
But the risks are significant. When financial institutions increase in size and operate across industries and countries, effective supervision becomes more important and more difficult.
Financial Sector Growth
This is relevant to West Africa. The financial sector in this region already has expanded rapidly in the past decade although from a small base. The increase in the last few years has been largely centered on banks, and has been driven mostly by strong growth in the domestic deposit base. Bank credit has increased in most countries, but it remains largely short term. That alone will not adequately fuel development. The mobilization of more long-term financing sources will be important going forward to support the region’s ambitious goals.
Capital markets can help meet this need, but they still play only a relatively limited role as a source of funding in the region. Debt markets are relatively small and dominated by government securities. Corporate bonds and securities trading on secondary markets are virtually non-existent. Meanwhile, the regional stock market in WAEMU and other markets in the region have relatively low capitalization, with only a small number of listed companies. The potential expansion of capital markets, in particular debt markets, could offer an additional source of finance for development.
Internationally active foreign banks continue to play a large role in individual countries, but the rapid rise of African banks with cross-border operations is an important development that has contributed to stronger competition and financial deepening.
At the same time, preserving financial stability could become more challenging as the sector develops and the spectrum of risks widens. This is particularly the case where banks start operating across borders while significant gaps in cross-border supervision exist, and a consolidated reporting system is absent. So it is important for financial sector supervisors to stay abreast of the sector and develop a good understanding of systemic risks. This includes those arising from the rapid expansion of banks. Moreover, policy makers should forge stronger domestic and regional institutional arrangements that can help mitigate the risks.
We will have three sessions today examining different aspects of financial integration, with a roundtable discussion at the end. The opening session will explore West Africa’s changing financial landscape, focusing on the nature of banks’ cross-border operations and lending. We’ll also touch on the rise of financial hubs.
Lessons from International Experience
The second session will delve into the lessons from the international experience of cross-border banking for regulatory frameworks and supervisory practices. We’ll also examine the challenges to financial stability from cross-border banking that I just touched upon.
Our third session will focus on infrastructure financing—a topic that is of crucial importance throughout Africa. We will address that issue from the perspectives of policy makers and developers, investors and financiers. We will look at what will be required to attract investors to projects and the steps that can be taken to develop customized financing solutions.
Before finishing, I would like to mention the role of IMF technical assistance, which is familiar to many of you. In the financial sector, such assistance can help to bolster supervisory arrangements and strengthen basic capacity, especially in terms of cross-border supervision and forging cooperative arrangements. It can assist the development of regional bodies working on the issue, and can support the development of debt markets.
In closing, let me take a moment to look to a future event that also will address some of today’s important topics. The IMF and the Government of Mozambique will hold a conference called “Africa Rising” in Maputo next May. It will focus public attention on Africa’s recent successes, and the challenges the region faces as it moves to the next stage of development. Invitations have already been sent to the ministers and governors here today, and I hope that we will see you in Maputo to carry on our discussion on a bigger stage.
For now, I very much look forward to our discussions today, and I also look forward to speaking with many of you individually.