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Africa in a changing global financing architecture

Africa in a changing global financing architecture
Photo credit: AU-UN IST | Stuart Price

10 Aug 2018

ECA Executive Secretary Vera Songwe was a special guest at the 41st Symposium of the Association of African Central Banks (AACB), held in Sharm El Sheikh, Egypt from 5-9 August 2018, where she delivered the keynote address.

Speaking about Africa in a changing global financial architecture, Ms. Songwe highlighted the economic and social impact of de-risking correspondence banking relationships on the continent.

To mitigate this, she urged governments to among others, adopt measures to halt the flow of illicit financial flows, enhance legal and regulatory frameworks, and to leverage on technology to advance financial inclusion.

She also spoke about how the African Continental Free Trade Area (AfCFTA) provides an opportunity to improve regional markets and banking systems in Africa. Extracts from her presentation are given below.

Africa during the Recent Global Economic Crisis

Before the crisis

  • High growth averaging 5.7% per annum during 2001-2008
  • Low inflation rates between 5% and 10%
  • Declining poverty rate since 1990s

Impact of the crisis on African Economies

  • Declining trade flows and capital inflows
  • Deteriorating foreign exchange reserves
  • Increasing deficits in Governments revenues and overall balances
  • Large financing gaps for growth drivers

Africa’s Sustained Economic Expansion

GDP Growth: Africa’s growth record has been significant for the past decade

Trade: High demand led to favorable terms of trade in Africa

Financial Flows to Africa: Robust foreign investments and upward trend in remittances

Illicit Financial Flows out of Africa

In the last three decades to 2009, Africa has lost close to US$1.4 trillion. Losses through non-trade channels average $27 billion annually between 2005 and 2014. Losses through mis-invoicing averaged $73 billion between 2005 and 2015. Uneven geographical distribution of illicit capital flight – West and Central Africa surpassing the rest of the regions.

Read more in the ECA pdf Study on the global governance architecture for combating illicit financial flows (809 KB) .

African Banking and Financial Systems

The development of African financial markets has been driven by improved macroeconomic fundamentals, increased political stability, high commodity prices and robust domestic demand; increasing trading volumes and capitalization in stock markets – highest returns in the world; and growing investment rates supported by strong emerging middle class.

AfCFTA – An opportunity to improve Regional Markets and Banking Systems

Regional integration is vital for Africa – providing benefits and opportunities for growth, structural transformation and strong and integrated markets. 44 African countries signed the Agreement establishing the African Continental Free Trade Area (AfCFTA).

The AfCFTA is an important step towards boosting intra-African trade and achieving the SDGs and leaving no one behind (Agenda 2030 and African Union Agenda 2063). Long-term gains are estimated at about US$16 billion annually when all tariffs are eliminated.

Expected increase in intra-African trade of about 30% will contribute to:

  • Structural transformation (incl. increased production/trade of more sophisticated products with a higher technological content),

  • Higher returns on investments (with economies of scale),

  • Increased efficiency of domestic firms,

  • Employment expansion (incl. for women and youth), especially along road corridors.

Impact of De-risking on African Economies

Consequences for Local/Regional Banks

  • Concentration of relationships in smaller financial institutions
  • Increased costs of funds/ transactions
  • Compliance and regulatory challenges
  • Capacity constraints

Economic and Social Impact

  • Reduced effectiveness of domestic banking system
  • Affects Financial inclusion
  • Trade – lower exports and imports
  • Loss of FDI and remittances and threats to poverty reduction
  • Rise of informal financial systems and increasing illicit transactions

Mitigating the Risks and Effects of De-risking

The following strategies and initiatives were presented:

  • Halt the Flow of IFFs: Various initiatives

  • Develop compliance and legal entity identifier database platforms

  • Create national and regional credit rating agencies

  • Develop and strengthen effective information-sharing platforms

  • Promote innovation and technology developments – e.g. Fintech and DIGITALID

  • Enhance regulatory and legal frameworks – e.g. enforcement of domestic and international regulations (including AML/CFT)

  • Advocate for more harmonization of regulations across jurisdictions and cross-border banking – e.g. advocacy and support for the AfCFTA.

Author Dr. Vera Songwe
Source UNECA
Website Visit website
Date 10 Aug 2018
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