South and east African countries need to co-operate on developing local capital markets and pool central bank resources if the region is going to find a way out of the many cycles of crisis it has endured.
Local capital markets will need to be developed if these countries are to free themselves from a dangerous over-reliance in aid and grants and funnel investor cash looking for high yields into the many infrastructure projects in the region in need of finance.
Speaking on the fringes of the IMF annual meetings this week, Caleb Fundanga, executive director of MEFMI, a grouping of southern and eastern African countries, is encouraging members to move on policy reforms that would allow for the advancement of a regional capital market.
“We have to develop an African capital market. It is an idea whose time has come because there is no reason why we should be investing in low yield paper from OECD countries,” he said. “It is going to be a hard sell, but we have to start now if we want to find a way out of these cycles of crisis.”
Fundanga said a lack of capital markets blocked access of African countries to available cash. “There is a lot of money today and we have many projects that offer very high yields. We need to get policies in place so investors can look to us to place capital,” he said.
Fundanga is not alone is pushing the need for capital market development. The African Development Bank (AfDB) has launched its own financial capital market initiative to create a more vibrant capital market that will support development in the region.
Charles Boamah, AfDB vice president of finance, said countries had traditionally relied on official flows, grants and other types of support that were declining or, at best, stagnant.
“You now have to look at other sources to finance your development. Aid and grants still have a role to play. So we put on sharp focus the need to rely more on capital markets, to channel savings into profitable development projects. It is going to grow in importance,” he said.
POOLING RESOURCES
Powell Mohapi, chief economist at the Lesotho Central Bank, said capital market development was on the agenda, but there were a series of other steps countries were working on to link up.
The 14 members of the Southern African Development Community have implemented a regional payment system and Mohapi said the next initiative was central banks potentially pooling resources to address crises.
He said a potentially game-changing idea would be an agreement among the 14 countries to jointly finance infrastructure.
Investors, however, remain sceptical about capital market development if reforms are not put in place first.
Thomas Konditi, president and CEO of GE South Africa, said capital markets would be a catalyst, but it was necessary to work on a reform that could help navigate the existing strong headwinds.
“It is important to first look at how much capital is tied up in inefficiency or is misdirected. If you tally how much revenue is coming in and where capital is, you could redeploy resources to focused areas and keep the needle moving today,” he said.