Occasional Paper: IMF Assistance Helps African Countries To Modernize Their National Financial Sectors

• Pages: 366-368

Page 366

In recent years, there has been a distinct improvement in the economic performance of many of the countries of sub-Saharan Africa. Growth rates have increased, inflation has declined, and financial imbalances have narrowed. This improvement is largely attributable to sound economic, fiscal, and financial policies, as well as fundamental structural reform. One aspect of this progress is the modernization of the financial sector, an area that is discussed in IMF Occasional Paper No. 169, Financial Sector Development in Sub-Saharan African Countries. Two of the authors of the paper, Hassanali Mehran, Senior Advisor, andPiero Ugolini, Advisor, both of the IMF's Monetary and Exchange Affairs Department (MAE), recently discussed with the IMF Survey their study and its lessons for financial modernization in Africa.

IMF Survey: Why did you undertake this study? Mehran: For some time, we in MAE had been thinking about intensifying the department's technical assistance program in Africa. This was done after the seven major industrial countries announced the Initiative on Global Partnership for Growth in Sub-Saharan Africa in Lyon, France, in June 1996. The goal of the initiative is to help these countries participate fully in the expansion of global prosperity and to spread the benefits of globalization throughout their societies. The overall strategy emphasizes trade and investment, the mobilization of global private capital flows, and the buildup of human resources. One aspect is to build healthy and competitive financial supervision standards to ensure stability. MAE undertook this study in the context of the partnership to determine the status of the financial sector in 32 sub-Saharan African countries (see map, page 367) and to recommend steps to sustain and accelerate the modernization of the sector.

IMF Survey: What main changes have occurred in the financial sector in sub-Saharan Africa? Ugolini: In the 1970s and 1980s, a combination of poor policy choices and internal and external economic shocks-and political shocks in some cases-worked against the early development of the financial sector and led to a deterioration of the monetary policy formulation and implementation and the soundness of the financial sector. During those two decades, the newly independent countries began to view financial systems as conduits for financing government expenditures, both fiscal and quasi-fiscal, and as instrumentsPage 367 for directing credit to "priority" sectors of the economy. Their policy choices reflected a desire to speed up their economic development, and they considered the government the best vehicle for achieving rapid growth.

During this time, sub-Saharan African countries emphasized developing and protecting the real sector through government intervention and protectionism. Their primary instrument was direct preferential credit to the real sector, in particular agriculture, and to public enterprises. In other words, the financial sector was given only a secondary role in the development process-to channel credit to the government and preferential sectors without assessing its risk and efficiency.

These developments had a negative effect on the financial systems. Financial institutions were weakened, financial instruments became ineffective, the credibility of financial policy was eroded, and the parallel markets effectively marginalized the formal financial sector. The central banks were seen as part of the government machinery-their job was also to provide credit to the government. Because monetary policy initiative wasn't involved, the issue of central bank autonomy didn't even arise. Whatever financial market there was existed only to sell and buy government treasury bills, often at predetermined interest rates. But the bulk of the loans to...