The New International Financial Architecture and Africa

• Author: Saleh M. Nsouli and Françoise Le Gall
• Position: Deputy Director of the IMF Institute/Deputy Chief of the IMF Institute's African Division

At first glance, the new international financial architecture would seem to have little relevance for Africa-it was built up in response to developments that took place far from Africa and whose direct impact on Africa was limited. Nonetheless, key components of the international financial architecture are very relevant for Africa.

The crises that shook Mexico in 1994-95 and East Asia in 1997-98 came as a stark reminder that economic fundamentals-sound national macroeconomic and structural policies and a sound and properly regulated financial system-were as critical as ever. The crises also highlighted the new tensions that had arisen in the international financial system amid the rapid growth and integration of capital markets and alerted policymakers to the need for new practices to strengthen the system. The crises that erupted in Russia in 1998, Brazil in 1998-99, and Turkey and Argentina in 2001 have only emphasized the importance of rethinking the international financial architecture to ensure a smoothly functioning and orderly international financial system, maximize the benefits of globalization for all countries, and prevent financial crises or manage them effectively if they do occur.

Reform of the international financial architecture is being undertaken on several fronts. The main elements are

* promotion of transparency, accountability, and good governance, which, by fostering broad discussion of economic policies and improving the provision of information to markets, can help countries bolster their economic performance;

* adoption of international standards and codes, which provide benchmarks against which to assess the performance of individual countries;

* strengthening of financial systems, which contributes significantly to domestic and international financial intermediation, helping to mobilize savings and channel them efficiently to productive investments;

* orderly capital account liberalization through careful management and sequencing so that countries are able to benefit from open capital transactions while minimizing the risks of sudden capital movements;

* implementation of sustainable exchange regimes, which are critical to macroeconomic stability and competitiveness;

* development of modalities for the involvement of the private sector in forestalling and resolving crises; and

* reform of the IMF's nonconcessional lending facilities to focus more on crisis prevention and to ensure more effective use of IMF resources.

These initiatives for a new international financial architecture are complemented by initiatives focusing on debt relief and poverty reduction for low-income countries. To the extent that the international financial architecture is a force for macroeconomic stability, it also contributes to growth, which is crucial to efforts to fight poverty. To address the problems of poverty and high debt levels more effectively, in 1996 the IMF launched the Heavily Indebted Poor Countries (HIPC) Initiative jointly with the World Bank, and, in 1999, replaced the Enhanced Structural Adjustment Facility with the new Poverty Reduction and Growth Facility (PRGF), which, like its predecessor, provides concessional loans.

Relevance to Africa

The relevance of the...