Financial Sector Development in Sub-Saharan African Countries

OCCASIONAL PAPER 169

Hassanali Mehran, Piero Ugolini, Jean Philippe Briffaux, George lden,Tonny Lybek, Stephen Swaray, and Peter Hayward

INTERNATIONAL MONETARY FUND Washington DC 1998

Production: IMF Graphics Section Typesetting: Choon Lee and Ashok Kumar Figures: Sanaa Elaroussi

Library of Congress Cataloging-in-Publication Data

Financial sector development in Sub-Saharan African countries / by Hassanali Mehran ... [et al.]. —Washington DC : International Monetary Fund, [1998]. p. cm. — (Occasional paper, ISSN 0251-6365 ; no. 169) Includes bibliographical references (p.). ISBN 1-55775-758-5

1. Financial institutions—Africa, Sub-Saharan. I. Mehran, Hassanali. II. Series : Occasional Paper (International Monetary Fund) ; No. 169. HG187.5.A357F667 1998 332.1'0967—dc21 98-41340 CIP

Price: US$18.00 (US$15.00 to full-time faculty members and students at universities and colleges)

Please send orders to: International Monetary Fund, Publication Services 700 19th Street, N.W., Washington, D.C. 20431, U.S.A. Tel: (202) 623-7430 Telefax: (202) 623-7201 E-mail: [email protected] Internet: http://www.imf.org

recycled paper

©International Monetary Fund. Not for Redistribution Contents

Page Preface vii

I Overview I Background 1 The Financial System Prior to Reforms 1 Implementation of Economic Reforms 2 Progress with Reforms 4 Problem Areas in Financial Sector Development 6 Areas for Further Reform 7

II Review of the Structure of the Financial Sector 9 Background 9 Characteristics of the Financial Sector 10 Size 10 Capital Structure 10 Financial Intermediation 10

III Status of Financial Sector Legislation and Banking System Supervision 12 The Supervisory System 12 Legal Framework 12 Human Resources 13 Political Will 13 Safety Net 14 Infrastructure 14 Assessment 14 Areas for Further Reform 15

IV Development of Monetary Instruments and Financial Markets 16 Group I Countries 16 Group II Countries 17 Group III Countries 19 Obstacles to Transition to Indirect Monetary Instruments and Market Development 19 Lack of Interbank Market 19 Lack of Securities Portfolio 19 Inefficient Payments System 20 Absence of an Automated Book-Entry System 20 Reserve Requirement and Liquid Asset Ratios 20 Absence of a Primary Dealer System 20

iii ©International Monetary Fund. Not for Redistribution CONTENTS

Large Interest Rate Spreads 21 Lack of Communication and Information 22 Areas for Further Reform 22

V Exchange Arrangements and Liberalization of the External Sector 23 Group I Countries 23 External Current Account Convertibility 23 Capital Account Convertibility 24 Group II Countries 24 External Current Account Convertibility 24 Capital Account Convertibility 25 Group III Countries 26 External Current Account Convertibility 26 Capital Account and Full Convertibility 26 Areas for Further Reform 27

VI Legal Infrastructure: Central Bank Autonomy 28 Objective 29 Political Autonomy 30 Coordination and Conflict Resolution 30 Governing Bodies 30 Economic Autonomy 31 Credit to the Government 31 Exchange Rate Policy 32 Financial Conditions 32 Monetary Instruments 33 Accountability 33 Areas for Further Reform 35

VII Payments System 36 Weaknesses in the Payments System 36 Improvements to Noncash Payments System 37 Areas for Further Reform 39

VIII Central Bank Accounting, Internal Auditing, and Information Technology 41 Typical Problems 42 Information Technology 43 Infrastructures 43 Uses 43 Reasons for Slow Development 44 The Year 2000 Problem 45 Areas for Further Reform 45

IX Overall Assessment 46

Appendices I Statistical Tables 49 II MAE Technical Assistance to Sub-Saharan African Countries 102

References 105 iv ©International Monetary Fund. Not for Redistribution Contents

Boxes Section III 1. Main Recommendations on Supervision 15 IV 2. Main Recommendations on Development of Monetary Operations and Financial Markets 21 V 3. Main Recommendations on Development of External Sector Liberalization 26 VI 4. Main Recommendations on Central Bank Autonomy and Accountability 34 VII 5. Lamfalussy Standards: Minimum Standards for the Design and Operation of Cross-Border and Multicurrency Netting and Settlement Schemes 37 6. Main Recommendations on Payments Systems 39 VIM 7. Main Recommendations on Central Bank Accounting and Auditing 44 IX 8. MAE Technical Assistance to Sub-Saharan African Countries 47

Appendix II Al. MAE Technical Assistance in Central Banking and Related Matters 104

Tables Section I 1. Sub-Saharan Africa: Key Economic Indicators 5 III 2. Selected Sub-Saharan African Countries Classified on the Basis of Status of Banking System Supervision 14 IV 3. Selected Sub-Saharan African Countries Classified by Development of Monetary Instruments and Financial Markets, 1997 16 V 4. Status of External Convertibility in Selected Sub-Saharan African Countries, 1997 24 VI 5. Degrees of Central Bank Autonomy for Selected Sub-Saharan African Countries, 1997 29

Appendix

I Al. Indicators of De Jure Central Bank Autonomy and Accountability in Selected Sub-Saharan African Countries, May 1998 50 A2. Structure of the Banking System in Selected Sub-Saharan African Countries, 1997 54 A3. Selected Indicators for Financial Intermediation in Selected Sub-Saharan African Countries 56 A4. Banking Supervision Issues in Selected Sub-Saharan African Countries, 1997 57 A5. Monetary Operations and Financial Market Development in Selected Sub-Saharan African Countries, 1997 64 A6. Monetary Policy Instruments in Use in Selected Sub-Saharan African Countries, 1997 72 A7. Development of Securities Market in Selected Sub-Saharan African Countries, 1997 73 A8. Developments in the Foreign Exchange Area in Selected Sub-Saharan African Countries, 1997 74 A9. Framework for Monetary Policy Formulation and Implementation in Selected Sub-Saharan African Countries, 1997 99

v ©International Monetary Fund. Not for Redistribution CONTENTS

II A10. Schedule of Past Intensive Technical Assistance Provided by MAE to Sub-Saharan African Countries, 1964/97 103

Figures Section I 1. Evolution of Exchange Rate Regimes of Selected Sub-Saharan African Countries 6

Appendix II Al. MAE Technical Assistance to Sub-Saharan Africa in Selected Years 103

The following symbols have been used throughout this paper: ... to indicate that data are not available; — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist; - between years or months (e.g., 1994-95 or January-June) to indicate the years or months covered, including the beginning and ending years or months; / between years (e.g., 1994/95) to indicate a crop or fiscal (financial) year. "Billion" means a thousand million. Minor discrepancies between constituent figures and totals are due to rounding. The term "country," as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

vi ©International Monetary Fund. Not for Redistribution Preface

At its meeting in Lyon, France, in June 1996, the seven major industrial countries announced the Initiative on Global Partnership for Growth in Sub-Saharan Africa (the Africa Initiative). The initiative establishes a partnership between the international community and sub-Saharan African countries geared toward assisting these countries to participate fully in the expansion of global prosperity and to spread the benefits of globalization throughout their societies. The overall strategy underlying the initiative emphasizes trade and investment, the mobilization of global private capital flows, and the buildup of human resources. One element of the strategy is to build a healthy and competitive financial sector capable of mobilizing substantially higher levels of savings and improving banking and financial supervision standards to ensure stability. Within the context of the partnership, the IMF's Monetary and Exchange Affairs Department (MAE) has undertaken this study to determine the status of the financial sector in 32 sub-Saharan African countries and to make recommendations to assist them to sustain and accelerate the modernization of the sector that is currently under way in many of them. Following the work that has already been undertaken on various elements of financial sector reform in Africa by the IMF and the World Bank, in particular, this report presents a broad picture of trends in financial sector reform in sub-Saharan Africa as a whole and provides comprehensive information that will enable the IMF in collaboration with the World Bank and other international institutions to better support these countries in their reform programs. Since the study involved many cross-country comparisons, for purposes of data consistency, a cut-off date of end-December 1997 has been applied. The bulk of the information in the tables, therefore, covers up to that period, although in a few cases, particularly when more up-to-date information is not available, the data have been provided for periods earlier than end-1997. These are, however, appropriately indi- cated in footnotes. The authors would like to acknowledge the contributions of staff of the African and Policy Development and Review Departments toward the completion of this project, in particular, John Boorman, Evangelos Calamitsis, Anupam Basu, and Ernesto Hernandez-Cata for their useful insights and support of the study, and Sergio Leite and G.G. Johnson for coordinating comments from the African Department. The authors are also grateful to Pascal Bouvier, former Advisor in the MAE Department, who worked closely with the staff team by providing information and comments on the French- and Portuguese-speaking countries of Africa included in the study; and the staff of MAE, in particular, Manuel Guitian, William Alexander, Tomas Baliño, Charles Enoch, R. Barry Johnston, Alfredo Leone, Carl-Johan Lindgren, and Elizabeth Milne for useful comments and a general willingness to exchange views. The authors would also like to thank MAE experts both in the field and at headquarters for providing specific information relating to their areas of expertise, especially Fulvio Carbonaro, John Dalton, Fernando de Peralto, Nicholas Roberts, and John Tait; and the Reserve Bank of South Africa for useful information on the countries of the Southern African Development Community. Finally, the authors would like to thank Elena Budreckaite, Anna Maripuu, and Kiran Sastry for excellent research assistance; and Severina De Biasi-Campanella, Karen Randrup, and Frances Atchison

vii ©International Monetary Fund. Not for Redistribution PREFACE

for excellent word processing services. Elisa Diehl of the IMF's External Relations Department edited the manuscript and coordinated production. The views expressed in this paper, as well as any errors, are the sole responsibility of the authors and do not necessarily reflect those of the Executive Directors of the IMF or other members of the staff.

viii ©International Monetary Fund. Not for Redistribution I Overview

Background The study reviews the progress made by these countries in reforming their financial sectors and identi- The countries of sub-Saharan Africa have wit- fies areas in which further progress is required. nessed a distinct improvement in their economic performance in recent years, with increasing growth rates, declining inflation, and narrowing financial imbalances. The improvement is attributable in large The Financial System Prior to Reforms part to the implementation of sound economic, fis- By the mid-1980s, financial systems in most sub- cal, and financial policies, including policies to lib- Saharan African countries were manifesting signs of eralize trade and improve the investment climate. In weakness and vulnerability primarily because of de- addition, these countries embarked on fundamental teriorating macroeconomic conditions and also be- structural reform. cause of political interference in the operations of To build on this progress, the sub-Saharan African financial institutions, negative real interest rate poli- countries need to sustain their adjustment efforts, cies, and directed credit policies. These were com- further strengthen economic and financial policies, pounded by structural weaknesses, including the ab- and complete the building of a market-oriented eco- sence of an appropriate legal framework to grant nomic framework. At the same time, globalization is independence to central banks in the pursuit of price proceeding rapidly, posing further challenges, as stability; weak operating procedures and the absence well as opportunities, for these countries. Foreign of effective instruments for market-oriented mone- assistance, particularly official development assis- tary management; ineffective and noncompetitive fi- tance flows, on which many of the countries have so nancial market structures; an inefficient bank regula- far relied, is on a long-term declining trend. There- tory and supervisory environment partly caused by a fore, if sub-Saharan African countries are to attain lack of supervisory autonomy and capacity; ineffi- higher per capita incomes in the future, they must cient payments systems; the absence of an effective make further efforts to attract and retain needed pri- legal mechanism for debt collection; and inadequate vate capital—both domestic and foreign—in order accounting standards and reporting and disclosure to accelerate growth. requirements. These weaknesses limited the finan- Many of these countries are working to meet this cial system's efficiency and its ability to perform its challenge. To support their efforts, the international financial intermediation function. community has expressed its willingness to enter Historically, sub-Saharan African countries placed into a partnership with these countries through the great emphasis on developing and protecting the real Africa Initiative, which is directed at promoting sector, with the financial sector having only an ancil- trade and investment, mobilizing global private cap- lary role. Most countries strongly believed that they ital flows, and building up human resources.1 The could support their development objectives through IMF, the World Bank, and other donors could make selective credit allocation mechanisms. As a result, an important contribution to this initative. To deter- governments became directly involved in the opera- mine the nature and extent of such a contribution, MAE has conducted this study of financial sector issues in 32 selected sub-Saharan African countries.2 Union (WAEMU) countries—Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo—and the Central African Economic and Monetary Community (CAEMC) coun- 1See the Communique of the Group of Seven meeting in Lyon, tries—Cameroon, Central African Republic, Chad, Republic of France, June 1996. Congo, Equatorial Guinea, and Gabon. The 14 countries of the 2The countries are Angola, Botswana, Ethiopia, Ghana, Kenya, WAEMU and the CAEMC form the CFA franc zone (see footnote Lesotho, Madagascar, Malawi, Mauritius, Mozambique, 4). Most of these countries have been recipients of technical as- Namibia, Rwanda, South Africa, Swaziland, Tanzania, Uganda, sistance from the IMF and are currently reforming and moderniz- Zambia, Zimbabwe, the West African Economic and Monetary ing their financial sectors.

1 ©International Monetary Fund. Not for Redistribution I OVERVIEW

tions of the financial sector and even set up financial sess borrowers' creditworthiness, leading to the institutions (mainly commercial and development granting of more bad loans. In particular, volatil- banks) to ensure that the monetary and financial sys- ity in inflation rates led to asset price bubbles tems contributed to the achievement of the develop- that have proved to be extremely detrimental to mental goals; these institutions were used mainly as the asset portfolios of financial institutions. vehicles to direct credit to specific sectors of the • Fourth, the negative real interest rates that re- economies. Banking resources were used to finance sulted from interest rate ceilings undermined the the government budget deficit and to provide financ- allocative efficiency of the financial system and ing for state-owned companies. Banking sector led to capital flight. In addition, the artificially claims on government increased from 1.8 percent to low lending rates caused excess demand for 3.9 percent of GDP during this period. Credit to the credit, thereby forcing financial institutions to private sector was crowded out and rationed, and in- ration loans—sometimes favoring borrowers terest rates were controlled at below the market- with projects that had lower rates of return. clearing rate—often at negative rates in real terms. • Fifth, the misalignment of the real exchange Most countries also introduced price controls and rate in many sub-Saharan African countries aris- foreign exchange restrictions and rationed many ing from maintaining overvalued currencies in goods and services, including foreign exchange. Ex- real terms for a long time proved detrimental to cessive controls encouraged the development of par- some sectors and biased the economy toward allel markets, which led to the hoarding of foreign import dependency. currencies. • Sixth, the use of direct credit and interest rate The debilitating effects of these trends on the de- ceilings constrained liquidity management by velopment of the financial systems of sub-Saharan banks, resulting in disintermediation and reduc- African countries during the 1970s and 1980s may ing the client base and profitability of the bank- be characterized as follows: ing system. In addition, it did not encourage • First, the growth of these economies was not central banks to develop market instruments and commensurate with the level of investment, build capacity for their use. largely because of low efficiency in the use of With these circumstances at play, the banking sys- capital, which was mostly provided to poorly tems in these countries effectively failed to serve as managed state-owned companies. a pivot for the implementation of monetary policy. • Second, the bias of directed credit in favor of With banking systems virtually in crisis, the finan- selected sectors, particularly the agricultural cial intermediation process suffered; the efficiency and mineral, resulted in an overconcentration of of the payments system deteriorated; financial and credit in these sectors, thereby increasing the borrower discipline eroded; and banks ceased to be a banking system's vulnerability to risks. Owing safe haven for savings, distorting resource mobiliza- to deteriorating terms of trade, bad weather, and tion and allocation. Consequently, economic policy mismanagement, many of these directed credits management and performance were undermined, became nonperforming loans. In addition, the thereby adversely affecting real incomes and prices. ability to borrow at cheap rates encouraged less productive investments. Those who borrowed for projects with low financial returns could not Implementation of Economic Reforms repay their loans. In other cases, borrowers will- fully defaulted because many believed creditors Against the background of the deteriorating eco- could not force court action against those con- nomic and financial situation, by the late 1980s and sidered to be in priority sectors. The distorted early 1990s, sub-Saharan African countries had em- allocation of resources and erosion of financial barked upon a policy of adjusting their economies discipline left intermediaries unprofitable and, and dismantling the controls and restrictions that had in many cases, insolvent. become institutionalized. This policy was largely in- • Third, macroeconomic instability, primarily stituted within the framework of IMF-supported originating from fiscal deficits, compounded the SAF/ESAF programs and World Bank-supported difficulties that the financial systems faced. SAC and SAL programs.3 The overall objective was Against the background of rising fiscal deficits, to achieve noninflationary, private sector-led growth most governments resorted to borrowing from within a market-based economic system. In the con- central banks because the domestic financial text of the overall adjustment program, a large num- markets were too shallow to meet the financing requirements. This resulted in high inflation. 3SAF/ESAF: Structural Adjustment Facility/Enhanced Struc- Volatility in economic growth and rising infla- tural Adjustment Facility. SAC/SAL: Structural Adjustment tion made it even more difficult for banks to as- Credit/Loan.

2 ©International Monetary Fund. Not for Redistribution Implementation of Economic Reforms ber of sub-Saharan African countries also undertook led to a significant recovery. Uganda embarked on structural reforms of the financial sector. In general, an early removal of domestic price distortions and a these reforms included granting central banks more progressive liberalization of the trade, payments, autonomy in conducting monetary policy; liberaliz- and exchange systems. Responsibility for monetary ing interest rates and eliminating administrative allo- policy formulation and implementation was com- cation of credits; instituting the transition from di- pletely transferred from the ministry of finance to rect to indirect monetary policy implementation; the Bank of Uganda. With the liberalization of inter- restructuring banks to restore their solvency; devel- est rates, all rates are now market determined, except oping financial markets; and improving infrastruc- for the Bank of Uganda's lending rates, which are in tures, including bank supervision and accounting any case tied to market interest rates. Action was and auditing practices. also taken to widen the scope of the treasury bill The reforms in the financial sector were imple- market and introduce new instruments to the public. mented using different strategies and approaches. In A strategy for improved monetary control through Ghana, for example, reforms proceeded gradually in reserve money programming was developed. Open- essentially three phases. In the first phase, reforms ended lending by the Bank of Uganda to commercial were directed at regaining control of credit expan- banks, which was a significant source of inflationary sion by the banking system, particularly to the gov- pressure, was eliminated. Initial steps have been ernment. At the same time, reforms were designed to taken to facilitate the development of an interbank support the exchange rate policy and achieve the tar- market. gets for inflation and the overall balance of pay- To raise the efficiency of the financial system as a ments position. To this end, ceilings were placed on whole, actions were also taken to foster competition the net domestic assets of the banking system and on among banks. In that regard, the government has net bank credit to the government to avoid crowding been reducing its own participation in the financial out the private sector. Although administrative con- system, and its new Financial Services Act has liber- trols on interest rates remained during this period, alized entry and exit barriers in the banking sector. these controls were raised in discrete steps while in- Institutional reforms in the Bank of Uganda and the flation was coming down. In the second phase, the commercial banks were also implemented at the focus of reform was broadened to include greater same time. Regarding the former, the Bank of emphasis on the liberalization of controls on interest Uganda significantly enhanced its position in policy rates and bank credit. In the third phase, there was formulation, implementation, and prudential super- the gradual introduction of an indirect system of vision. With regard to the supervisory function, it monetary control, entailing a shift from direct con- also developed new banking laws, designed support- trols toward increased reliance on market-based in- ing regulations, modernized supervision methodol- struments of policy. ogy, and instituted ongoing on-site examinations and As part of this process, the Bank of Ghana ratio- off-site monitoring. As a member of the Cross- nalized the minimum reserve requirements for Border Initiative, Uganda also significantly liberal- banks, introduced new financial instruments, inten- ized its trade and payment arrangements within the sified the absorption of excess liquidity from the zone. economy through open market operations at market- The examples provided by Ghana and Uganda determined yields, and strengthened its monetary generally reflect the reform efforts of countries in management capacity. In addition, the financial po- west, east, and southern Africa that are not part of sition of the Bank of Ghana was strengthened. These the CFA franc zone,4 particularly those countries that policies were complemented by a major program of are undertaking reforms under the IMF's ESAF reform with a view to enhancing the soundness of arrangements. the banking system by improving the regulatory Reforms in the CFA franc zone have proceeded framework and strengthening bank supervision, and somewhat differently. Because of the CFA franc to improving the efficiency and profitability of arrangements and the discipline that they imposed, banks, including replacing their nonperforming as- the CFA countries benefited from low inflation and sets. To complete the reform process, Ghana has re- sustained economic growth until 1985. After 1985, cently embarked on a strategy to increase the com- however, the economic and financial situation of the petitiveness of the banking system by privatizing the zone deteriorated as a result of external shocks, the major publicly owned banks as part of a comprehen- appreciation of the real exchange rate, rigidity in the sive privatization strategy. labor market, bloated government expenditures, and Uganda's progress with reforms was somewhat more rapid. After initial difficulties with the imple- 4CFA stands for Communaute financiere africaine in the mentation of reforms, the government's strong com- WAEMU and Cooperation financiere en Afrique centrale in the mitment to adjustment and consistency in its actions CAEMC.

3 ©International Monetary Fund. Not for Redistribution I OVERVIEW

sizable domestic and external payments arrears. Be- (Table 1). Per capita output has risen at an aver- tween 1985 and 1993, attempts were made to over- age annual rate of almost 1 1/2percen t in the past come these difficulties through internal adjustments, three years, compared with an annual decline of especially through fiscal measures and restructuring 2 percent a year in the first half of the 1990s. the banking system and public enterprises. A number • After reaching a high of 44 percent in 1986, an- of key banks, which had been performing badly, nual inflation dropped to 13 percent in the first were restructured. In addition, two banking commis- half of the 1990s. sions were established with supervisory powers and • The overall fiscal deficit (excluding grants) fell functions within the two CFA subzones. The com- from a peak of 9 percent of GDP in 1992 to 4 1/2 missions established prudential regulations govern- percent of GDP in 1997. ing the activities of commercial banks. In January • The region's current account deficit (excluding 1994, the CFA franc was devalued by 50 percent. grants) widened to about 6 percent of GDP in Within this framework, the CFA countries acted to the mid-1990s, but then fell to 4 percent of GDP preserve the existing regional monetary and ex- in 1997. change arrangements, strengthen monetary coopera- As noted in Fischer and others (1998), these re- tion, and deepen regional economic integration. gional averages conceal significant differences in Since 1994, reforms have proceeded rapidly. These performance among countries; the strong performers reforms were designed to replace direct instruments experienced average annual growth in per capita with indirect instruments of monetary policy to the GDP of more than 7 percent during 1995-97, and extent allowed by the link with the French franc. some others experienced declining per capita GDP Within this context, credit controls were progres- over the same period. Overall, however, regional sively abolished, and crop credit was brought under performance improved, mainly the result of im- an overall credit ceiling. Approval requirements for proved policies in a number of countries. individual loans were also replaced by a new credit- Equally encouraging results are emerging from worthiness rating system to govern the overall cen- the financial sector. For one, monetary authorities tral bank refinancing policy. Later, the banks moved are becoming more effective in controlling monetary to a system of monetary management based on indi- aggregates. Intermediation has increased, with rect monetary policy, operating in the context of a claims on the private sector as a percentage of GDP regional interbank and money market. These instru- rising from the prereform level of 15.1 percent to ments consist primarily of money market auctions 18.9 percent at the end of 1996, while net claims on and a discount window at the central bank. A form of government as a percentage of GDP have decreased repurchase agreement was also introduced to pro- from 5.2 percent to 4.1 percent. The structure of the vide temporary liquidity for banks. In addition to financial system itself is changing rapidly: less than these measures, interest rates were liberalized. The 40 percent of banks are publicly owned compared supervision capabilities of the two banking commis- with more than 50 percent during the prereform era sions continue to be strengthened, and the new regu- (Appendix I, Table A2). latory and prudential standards are gradually being Notwithstanding these trends, progress with finan- enforced. cial sector reform has been varied and uneven. While some countries have progressed faster and further than others and are gradually transforming Progress with Reforms the financial sector and their economies, others have yet to make significant headway with overall re- With the introduction of overall reforms, includ- forms. In like manner, considerably more success ing in the financial sector, sub-Saharan African has been achieved in some areas of reform than in countries as a whole have made significant strides in others, even within the same country. adjusting their economies. As a result, growth is be- In terms of performance in the key areas of the fi- ginning to gain momentum and per capita incomes nancial sector, sub-Saharan African countries have are once more on the rise. Even though the period of made considerably more progress in the area of do- adjustment has been relatively short, these countries, mestic monetary operations—that is, in establishing as a group, have made significant progress on most market-based monetary policy instruments and pro- macroeconomic indicators5 (see Fischer and others, cedures—than in any other area of financial sector 1998). reform. In all countries except Angola, Ethiopia, and • Real GDP growth averaged 4 1/4percen t a year Lesotho, where some restrictions remain, interest in 1995-97, up from 1 1/2 percent in 1990-94 rate and credit policies have been fully liberalized, and the central bank is increasingly relying on some 5Statistics are taken from the IMF's World Economic Outlook form of open market operations. While open market database. operations prevail, however, trading in government

4 ©International Monetary Fund. Not for Redistribution Progress with Reforms

Table I. Sub-Saharan Africa: Key Economic Indicators

Averages 1990 1991 1992 1993 1994 1995 1996 I9971 1990-94 1995-97

(Percent change) Real GDP 2.3 1.8 0.1 1.5 2.2 4.1 4.9 4.0 1.6 4.3 Real GDP per capita -1.4 -1.5 -3.9 -2.4 -0.6 1.7 1.6 0.8 -2.0 1.4

(Percent of GDP) Investment 16.0 16.8 16.3 15.8 17.0 17.3 17.0 16.4 16.4 16.9 Government 4.7 4.7 4.4 4.8 5.3 5.1 4.6 4.0 4.8 4.6 Private sector 11.3 12.1 11.9 11.0 11.7 12.2 12.4 12.4 11.6 12.3 Domestic saving 17.9 16.7 14.7 13.7 15.5 16.8 15.9 15.5 15.7 16.1 2 Current account balance -4.8 -4.7 -5.5 -6.0 -5.7 -6.1 -3.3 -4.0 -5.3 -4.5 Grants 1.7 1.8 2.1 2.0 1.9 1.7 1.5 1.4 1.9 1.5 Overall fiscal balance2 -6.0 -7.2 -9.1 -8.6 -7.8 -6.1 -5.8 -4.6 -7.7 -5.5 Primary fiscal balance3 -1.4 -2.3 -3.7 -3.2 -1.9 -0.8 -0.4 0.7 -2.5 -0.2

(Percent change) Broad money growth 21.1 30.1 32.6 27.3 44.1 28.2 30.3 17.8 31.0 25.4 Consumer price inflation 19.7 27.2 37.7 39.1 44.4 40.5 32.8 13.2 33.6 28.8

Source: IMF, World Economic Outlook database. 1Data for 1997 are preliminary. 2Excluding grants. 3Overall balance, excluding interest payments.

securities in primary markets constitutes the major adopted or are adopting prudential regulations that element of these operations. Interbank markets, are basically in line with the Basle Committee's though being promoted, are still limited, and sec- Core Principles. In addition, all countries conduct ondary markets are still only embryonic or virtually both off-site monitoring and on-site inspection of nonexistent. banks and, in some cases, other financial institu- Together with domestic monetary operations, tions. Moreover, to reinforce sound banking systems most sub-Saharan African countries have also made within regions, they are pursuing regional coordina- tangible progress in liberalizing the external sector tion and harmonization of supervision policies.Two current account as well as in developing foreign cur- significant examples of these are (1) the arrange- rency interbank market activities, including the ments under the East and Southern Africa Banking opening of foreign exchange bureaus. In terms of Supervisors Group, where the governors of the foreign exchange arrangements, a larger number of central banks of 16 countries have committed them- countries today maintain unpegged arrangements selves to cooperating and coordinating development than in 1975, when the overwhelming majority of on matters regarding banking supervision, and countries maintained pegged arrangements (see Fig- (2) the establishment of the two banking commis- ure 1). Although some progress has also been made sions by the CFA countries as supranational supervi- with the liberalization of capital account transac- sory bodies whose authority transcends loyalty to tions, most countries are still considered restrictive any single national interest. These examples of re- because they maintain controls over capital receipts gional cooperation are likely to augur well for the and outflows, including investment liquidation. development of the financial sector. At present, how- Controls over portfolio investments, within the lim- ever, notwithstanding the improved regulatory and its of the existing capital markets, appear to be dis- institutional setup, effective banking supervision in couraging private capital flows. sub-Saharan African countries continues to be ham- In recent years, all countries have also made con- pered, including by the mismatch between the grow- siderable progress in strengthening banking supervi- ing number of institutions being licensed and the sion activities. Although not all the countries have skilled personnel available to central banks to super- promulgated basic legislation granting full auton- vise these institutions; the paucity and low quality of omy for supervision to the central bank, many have accounting records; and, in many cases, lingering

5 ©International Monetary Fund. Not for Redistribution I OVERVIEW

obsolete information technology and data manage- Figure I. Evolution of Exchange Rate ment systems. Regimes of Selected Sub-Saharan African Countries Problem Areas in Financial Sector Development Sub-Saharan Africa continues to face challenges Number of Countries that will need to be overcome rapidly if the financial sector is to play its part in fostering growth and raising per capita incomes in these countries. The most relevant ones are highlighted below: • Most of the countries continue to provide only limited autonomy to central banks to perform appropriate monetary and supervisory functions. Government interference in credit extension, bank licensing, and supervision encroaches on the fulfillment of the main man- dates of the central bank—that is, maintaining price stability and ensuring the soundness of the financial system. • The financial sector still suffers from a lack of Note: Angola, Mozambique, and Zimbabwe did not become competition created by the still-dominant posi- members of the IMF until 1989, 1984, and 1980, respectively. tion of large government-owned banks, and the lack of a level playing field continues to discourage the entry of private and foreign banks. • The large share of nonperforming loans on the political interference, which delays critical actions balance sheets of the largely government-owned that central banks would otherwise take promptly. commercial banks impedes the development of Despite the progress that sub-Saharan African interbank markets because sound banks do not countries have made in the aforementioned areas, a want to deal with weaker banks. number of other key functional areas require further • The absence of a complete array of monetary in- and urgent attention. In the area of central bank au- struments and a dearth of expertise constrain the tonomy, over 75 percent of the sampled countries ability of central banks to deal with the excess still confer only limited and selective autonomy on liquidity created by government expansionary their central banks in the conduct of monetary pol- policies. icy; only three countries—Botswana, Kenya, and • The large share of nonperforming loans, the South Africa—have central banks with significant crowding out of the private sector, the lack of autonomy. A conducive legal and regulatory frame- competition in the financial sector, and high ad- work is critical to the development of the financial ministrative costs, as well as high reserve re- sector. quirements and inefficient payments systems Other areas in need of improvement are payments are at the root of the large spreads between de- system development and central bank accounting posit and lending rates. and auditing. With respect to the former, except for • The crowding-out effect of government borrow- South Africa—and to a lesser extent Mauritius and, ing pushes the interest rate structure upward and quite recently, Zambia—where payment arrange- discourages borrowing for long-term investment. ments are fully developed and automated, most • The regulatory framework for supervision is not other countries have inefficient manual systems, entirely satisfactory, and its implementation not which are prone to individual bank and systemic always effective. The authorities are tardy in risks. The inefficient payments system and the high dealing with insolvent financial institutions. level of reserve requirements as the main tool of do- Loan recovery is also hampered by bottlenecks mestic liquidity management are some of the major in the judicial system. causes of the large spread in interest rates observed • The uncertainties surrounding the political and throughout sub-Saharan Africa and are also the economic situation of some countries have an main reasons for the limited credit expansion to the impact on investor preference for short-term private sector. The accounting and auditing of fi- speculative investments and discourage savings nancial institutions—which are crucial for effective and long-term credit expansion. banking supervision—also need work. Finally, al- • The inefficiency of payments systems hinders most all the countries need to modernize or replace financial sector development, keeps payments

©International Monetary Fund. Not for Redistribution Progress with Reforms

system risks high, and hampers the transmission A well-conceived legislation, however, represents mechanism of monetary policy. only a minimum condition for central bank auton- • The constraint imposed by the dearth of well- omy. A further condition would be commitment by trained and qualified nationals limits the formu- governments to ensure compliance with the provi- lation and implementation of sound monetary sions of the legislation. In this regard, it could be policy. useful to set up independent, specialized courts that deal only with matters relating to the financial sector. These are likely to not only speed up the settle- Areas for Further Reform ment of financial contractual cases, but will also, To meet these challenges, sub-Saharan African above all, send a clear signal as to the direction and countries will have to intensify their efforts to main- intention of monetary policy. tain macroeconomic stability and accelerate structural reforms. In other words, they must first build a macroeconomic, regulatory, and institutional envi- Development of Market-Based Financial ronment that fosters domestic savings and attracts System Infrastructure private capital and must then channel these re- For sub-Saharan African countries to make further sources into long-term, broad-based, and sustainable progress in this area, they must address a number of growth. The lessons that have emerged from the ex- issues simultaneously. One is to get fiscal policy periences of countries in Europe, Latin America, and under control; a second is to restructure banks and Asia indicate that the first steps should be to get the strengthen the soundness of the financial sector; a fiscal deficit under control and establish macroeco- third involves acquiring the means and developing nomic stability. Clearly, reforms cannot proceed ef- instruments to absorb excess liquidity; a final issue fectively against the background of an unstable is to modernize the payments system. macroeconomic environment. In addition, given the dual relationship between macroeconomic stability and financial sector development, macroeconomic Foreign Exchange Operations stability must be accorded high enough priority in Despite the progress made in external liberaliza- the reform of the financial sector if the two are to tion, further efforts are needed to improve the policy catalyze and reinforce each other. mix with respect to macroeconomic balance, bank With regard to structural reforms, further mea- soundness, and political stability. Progress in struc- sures are generally required in a number of areas. tural reforms, such as privatization of public and state enterprises, recapitalization of financial institutions, and removal of obstacles to interbank trading Legal and Regulatory Framework and efficient payments systems, is needed to estab- To attain a suitable level of autonomy for central lish the systemic resilience required to withstand fi- banks, governments would have to promulgate cen- nancial shocks associated with capital volatility. tral bank legislation containing, at a minimum, pro- In general, with the progress in the worldwide in- visions that (1) give explicit priority to price stability tegration of financial markets, attention must be fo- as the objective of monetary policy; (2) grant the cused not only on the benefits but also on the risks of central bank, when it is responsible for supervising external liberalization. While there should be general the banking system, enough authority to perform this interest in reaping the benefits of financial technolo- function efficiently as well as to oversee the finan- gies and integration into external trading systems, cial system; (3) consolidate the licensing and revo- the risks associated with capital volatility can be se- cation of bank licenses in one body, preferably the rious. To liberalize capital markets without being central bank, at the early stages of development; sufficiently prepared in terms of structural reforms (4) require an institutionalized, transparent mecha- and financial soundness could be counterproductive. nism for resolving divergences between fiscal policy and monetary policy; (5) ensure that governors of central banks and members of boards of directors do Banking Supervision not come under undue political influence; (6) place As economic stabilization has progressed in sub- explicit and reasonable limits on the amount of Saharan African countries and inflation rates have credit that the central bank can grant to the govern- come down, there is a corresponding need for com- ment and ensure that the central bank has the means mercial banks to strengthen their balance sheets, in- to manage the level of liquidity in the banking sys- crease provisioning for nonperforming loans, and tem; (7) protect the central bank from the obligation strengthen their credit and market risk analysis. In to undertake quasi-fiscal activities; and (8) ensure this connection, firm, timely, and effective supervi- the financial viability of the central bank. sion is required to ensure that these imperatives are

7 ©International Monetary Fund. Not for Redistribution I OVERVIEW

adhered to. In this regard, these countries must sign and implement monetary and exchange policies make greater efforts to comply with the basic super- as well as supervisory functions on a regular basis. It visory standards relating to prudential regulations is in this area that these countries will require the guided by the Basle Committee's Core Principles greatest assistance of the international community. for banking supervision and further strengthen ex- Taking into account the requirements of global- amination procedures, including on-site inspections ization, sub-Saharan African countries as a whole and off-site surveillance, that are capable of identi- still do not have enough financial regulators, super- fying weaknesses. visors, and managers who can maintain the high pro- The guidelines contained in the Basle Core Princi- fessional standards required for the smooth and ples are minimum requirements. Sub-Saharan African rapid development of the financial sector. The IMF countries, because of their current higher bank and and the World Bank should continue to play their systemic risks, may need to set higher standards than complementary roles in supporting the reform ef- those suggested in the Basle Principles. forts of those countries that show the requisite com- Meeting the challenges outlined above requires, mitment to reform through a program of focused and first and foremost, a strong commitment to reform intensive technical assistance. The existing coopera- and strong leadership on the part of sub-Saharan tion between the two institutions should be enhanced African governments to create an atmosphere of and intensified, where necessary, to ensure efficient economic security and good governance within and coherent delivery of assistance consistent with which reforms can take place. Second, sub-Saharan their respective areas of expertise and comparative African countries must develop the capacity to de- advantage.

8 ©International Monetary Fund. Not for Redistribution II Review of the Structure of the Financial Sector

Background More recently, privately owned banks have emerged in a few countries. Immigrant communities—for ex- In virtually all African countries, formal banking ample, the Lebanese in West Africa, and Asians began with the establishment or arrival of "colonial" building on older Arab traditions in east Africa— banks, owned by investors from the metropolitan have developed banking businesses alongside other country or from South Africa. These banks offered business activities. Kenya is the most significant, but banking services to colonial enterprises, both those financial institutions have also developed recently in that developed the agricultural cash crop and extrac- Ghana and Zimbabwe and in francophone west tive businesses and those that provided local ser- Africa. However, these institutions were the most vices, such as oil, retailing, and equipment. They fragile and many did not survive. also provided banking services to the manufacturing Until the 1990s, the development of banking in sector in those countries where one emerged, that is, most sub-Saharan African countries was still very principally in Kenya, Nigeria, South Africa, and weak. The colonial banks were often acquired by Zimbabwe. These banks also offered branch net- other foreign banks because the African businesses works that provided savings, money transfers, and were regarded as insignificant operations in "diffi- some credit facilities to small businesses, salaried cult" territories. The few that were left, with little ac- employees, and similar borrowers. They did not pen- tivity in their home country, found themselves se- etrate the subsistence agricultural sector. verely weakened. As a result, there was a general Partly because the colonial banks were seen as withdrawal from Africa. This withdrawal did not al- serving expatriate interests and lacking in national ways lead to closure of specific subsidiaries, but it developmental objectives, several countries estab- did lead to reduced investment, concentration on the lished government-owned commercial banks upon more profitable aspects of the business or those with gaining independence. They were used to penetrate synergies elsewhere—such as foreign trade financ- the rural economy through aggressive branching, ing—and a cutback in purely domestic retail busi- moving down market from the clientele of the colo- ness. Meanwhile, the national banks began to show nial banks. They were also used as captive banks to clear signs of weakness, such as a lack of manage- finance the growing public sector involvement in ment, default by "political" borrowers, and govern- utilities and other areas of the economy. In a few ment guarantees that could not be enforced. The in- cases, including Tanzania, the government took over digenous private sector was too small and too foreign-owned banks and converted them into na- concentrated to fill the gap. Some experiments took tional banks. In equally rare cases, as in Angola, place, as in Asia, with community banks of one kind Ethiopia, and Mozambique, monobanking or spe- or another. Like most such experiments, they failed cialized banks were used.6 Nationalization was in because of a lack of management capacity, a lack of fact much rarer in banking than in other sectors of capital and systems expertise, and connected lending the economy. and political influence problems. In very few African countries did indigenous pri- Recent developments are more encouraging. As vately owned banking institutions develop. As in economic policies have improved and growth has re- other sectors of the formal economy, and unlike in sumed, the number of creditworthy borrowers has some Asian countries, at the time of independence, increased. The opening up of markets and the ability little wealth was available for investment in an in- to remit profits have encouraged the foreign banks to dustry as intensive in financial capital as banking. invest, although there have been few significant new entrants to the market, even as purchasers of the

6 franchises of government-owned banks whose own- In Mozambique, a small foreign-owned bank, the Standard Tota, continued to operate, but otherwise the banking system was ers were anxious to privatize. Privatization of finan- typical of centrally planned economies. cial institutions has been more difficult than in other

9 ©International Monetary Fund. Not for Redistribution II REVIEW OF THE STRUCTURE OF THE FINANCIAL SECTOR

industries partly because of political opposition and Capital Structure partly because of high capitalization requirements, By the 1960s, banks in sub-Saharan Africa were but there are some successes, such as Kenya and mostly privately owned, but following indepen- Mozambique. New indigenous entrants are finding dence, there was a marked growth of government more of a niche in new business sectors, particularly banks. During this period, governments directly or small businesses. Meanwhile, the opening up of indirectly held majority interest in more than half South Africa has led South African banks to expand and minority interest in a large percentage of the re- into what they now see as their regional market, mainder. By the 1990s, however, the dominance of backed up by significant investment in their Johan- government in the banking system had started to nesburg operational systems. wane. The number of banks in which government held a controlling interest had been reduced from 140 to 118. In some countries, governments relin- Characteristics of the Financial Sector quished their control over banks to the private sector, either through outright privatization or, where The financial sector in sub-Saharan Africa today they retained a majority interest, through a man- possesses the following characteristics. agement contract that they entered into with a minority shareholder (generally foreign). By Decem- Size ber 1996, government ownership as a proportion of total assets of banks ranged from 15 percent in The financial systems of sub-Saharan African Swaziland to 96 percent in Ethiopia. Within this countries have not reached a size similar to those in range, fewer than one-third of the countries in the developing countries in Asia or Latin America: sample now have government ownership in excess Kenya with 52 banks, South Africa with 51, of 50 percent of total bank assets. The decrease in WAEMU countries with 51, Ghana with 38, and government shareholding in banks is expected to CAEMC countries with 32 have the largest number continue as liquidation, restructuring, and privatiza- of banks. Countries with a smaller population tion of banking institutions progress. Among in- (Botswana, Lesotho, Madagascar, Namibia, Rwanda, vestors in private banks, foreign banks are still pre- and Swaziland) and countries just emerging from a ponderant, but the role of private domestic or other monobank structure (Angola, Ethiopia, and Mozam- African interests in the privatization of the banking bique) typically have only a handful of banks, al- system is increasing. though the number in some of these countries has been increasing. In terms of inhabitants per bank branch, South Africa with 16,000 and Botswana Financial Intermediation with approximately 21,000 have the lowest number; Currency in circulation amounts to almost 6.5 per- others, such as Malawi and Madagascar with cent of GDP on average for the 32 countries in sub- 182,000 and 113,000 persons per bank branch, re- Saharan Africa, while the comparative figure for the spectively, have the highest. Bank expansion has countries of the Organization for Economic Cooper- been hampered in sub-Saharan Africa not only be- ation and Development (OECD) is 5 percent (Ap- cause of low per capita incomes, but also because of pendix I, Table A3). Currency in circulation as a per- competition from traditional and informal methods centage of broad money (M2) is, however, much of collective savings that have often proved to be higher in the African countries (22 percent) than in more successful and viable than commercial banks OECD countries (7.5 percent), partly because many because of their minimal operating costs, personal transactions in OECD countries are settled through relationships within the group, and excellent repay- noncash means of payment, but also partly because ment records. More recently, new institutions espe- more deposits are made in OECD countries. Growth cially tailored to the needs of small savers and bor- in demand and time deposits has on average in- rowers have emerged. creased only marginally over the past decade. De- A large number of nonbank financial institutions posit-taking institutions' demand and time deposits have also spread throughout the region. Some, like are 26 percent of GDP in the African countries com- building societies, insurance companies, pension pared with 62 percent in OECD countries. The bank- funds, housing, and hire-purchase companies, have ing sector in Mauritius is an exception in that it has been established to provide services that the banks more deposits (69 percent of GDP in 1996) than the either cannot or are not allowed to offer.7 OECD average, which reflects the country's substantial offshore banking activities. Bank claims on the private sector in sub-Saharan 7For a more detailed account of changes in the structure of the Africa amount to about 20 percent of GDP, while the financial sector in this region, see Tenconi (1992). same figure for OECD countries is almost 70 per-

10 ©International Monetary Fund. Not for Redistribution Characteristics of the Financial Sector cent of GDP. This disparity reflects both a lower spite the existence of excess liquidity in the financial level of financial intermediation and a smaller pri- sectors of most of these countries, only a relatively vate sector in many of the African countries. South modest share of loanable funds is made available for Africa is closest to the OECD average, but Kenya, private sector credit. Lesotho, and Namibia also have relatively large The average spread between commercial bank claims on the private sector. In several countries, in- lending and deposit rates during the early 1980s was cluding Burkina Faso, Ghana, Malawi, Rwanda, almost the same in sub-Saharan African countries as Tanzania, Uganda, and Zambia, deposit-taking insti- in OECD countries, but since 1992, it has almost tutions all have very low claims on the private sector doubled in the former. The generally large problems (less than 10 percent of GDP). Moreover, sub- with debt recovery in sub-Saharan Africa, associated Saharan African banks' current and time deposits are with the costs of bank restructurings pursuant to the typically much higher than their claims on the pri- implementation of stabilization policies, have tended vate sector; a large part of deposits is still used in fi- to widen the spread between rates. An improved pru- nancing budget deficits. The exceptions are the Cen- dential and legal framework, including regulations tral Bank of West African States (BCEAO)—Benin, for bad loans, and prudent enforcement result in a Burkina Faso, Cote d'Ivoire, Guinea Bissau, Mali, higher spread because those factors give a more pre- Niger, Senegal, Togo; the Bank of Central African cise measure of the costs of loan losses and the prob- States (BEAC)—Cameroon, Central African Repub- lems with enforcing contracts. Increased competi- lic, Chad, Republic of Congo, Gabon, Equatorial tion should drive down the spread, but only if sound Guinea; Namibia; Zimbabwe, where deposits are al- collateral and bankruptcy laws are put in place and most in balance with claims on the private sector; firmly enforced. and South Africa, where savings and time deposits In general, the authorities have become increas- fund only about 80 percent of banks' claims on the ingly aware of the importance and relevance of private sector. developing a sound banking system. Nevertheless, Total loans and advances of the domestic banking banks in most countries still have serious problems, sector as a percentage of GDP represent, in most and the banking sector remains fragile. Commercial countries, only a small proportion of total banking banks—in particular, government-owned ones—con- sector assets (Table A2). In Kenya and Mauritius, for tinue to experience huge losses from nonperforming example, total loans and advances account for about loans. Loans to parastatals, arising primarily from fi- one-half of total assets of the banking sector. In other nancial repression and poor governance, are the countries, such as Botswana, Ghana, Kenya, Mada- major reasons for these losses. Furthermore, implicit gascar, Uganda, and Zambia, the share of total loans taxation—such as through confiscation of deposits, and advances is approximately one-third of total as- as evidenced in 1979 and 1982 in Ghana as part of sets; in Malawi and Tanzania, the number is less currency conversions—does not promote confidence than one-fifth. The strikingly low levels of credit to in the banking system. Losses are also often hidden the private sector in sub-Saharan Africa are the re- by inappropriate accounting procedures. sult of (1) the crowding-out effect of a large domes- The lack of competition arising from the small tic debt (treasury bills or central bank bills); (2) an number of banks in most countries remains a serious inefficient payments system, which requires banks problem. Although an increase in the number of to hold unusually large excess reserves; and (3) a banks does not necessarily enhance competition and high required level of unremunerated reserves. Addi- alleviate credit rationing, it is often easier for banks tionally, given the historically poor experience with to collude when they are fewer in number. However, default on credit in most of these countries, treasury privatization of state-owned banks and licensing of bills or central bank bills are viewed as better new banks, including foreign banks or joint ven- sources of investment and revenue. Therefore, de- tures, should alleviate this problem.

11 ©International Monetary Fund. Not for Redistribution Ill Status of Financial Sector Legislation and Banking System Supervision

ike other aspects of the financial sector in sub- was adequate internal management control to LSaharan Africa, supervision was a late arrival. In ensure that the absence of supervisory capacity in some respects, this is not surprising; banking in this sub-Saharan Africa had little impact. The govern- region had been dominated by foreign banks (even ment-owned banks were different in that they had at the retail/consumer level) since the beginning and less management expertise and experience on which subsequently also by government-owned institu- to draw. They were also more susceptible to politi- tions. The former are largely the responsibility of cal influence and, as a result, rapidly became en- home-country supervisors and the latter, of their cumbered with low-quality assets, often claims on principal shareholders. As a result, there was not a other government-owned businesses. Despite the great need for supervision. More recently, the depar- low asset quality and profitability, however, there ture, in whole or in part, of some of the foreign- were few supervisory problems because govern- owned institutions and the privatization of some of ment ownership prevented the standing of these the government-owned banks, together with the banks in the market from being seriously ques- opening up of the financial sector to new investors, tioned. As the markets became more competitive radically changed the operating environment. More- and were opened up, a number of smaller institu- over, weak macroeconomic performance, or even tions emerged, which in many countries were of simply greater reliance on market mechanisms for limited significance. In some, they were not for- macroeconomic policy, led to much greater volatility mally licensed as banks and operated as finance in financial markets and institutions, which exposed companies, sometimes without formal deposit- latent weaknesses in the banking systems of Africa. taking powers. In others, they were licensed as Despite these changes, dominance by foreign- banks, sometimes by virtue of their owners' apply- owned banks is still relatively significant, especially ing political pressure. For example, in Kenya and in comparison with other emerging markets. In some Rwanda, a number of banks owned by local busi- countries (Botswana, for example), the entire system ness entrepreneurs emerged and soon began to cre- is foreign-owned. The South African system, where ate significant supervisory problems. the two largest banks used to be foreign-owned, is now largely indigenously owned, although some foreign banks have recently entered the corporate and fi- The Supervisory System nancial market areas. In most other countries, more than one-fourth of the system is foreign-owned, typi- There are three major needs for an effective super- cally with one or more major market leaders being visory scheme. First, a comprehensive and effective subsidiaries or affiliates of major international banks. set of banking laws and accompanying regulations The decline of government-owned banks, often must be developed. Second, the agency charged with originally set up as a foil to the dominant foreign administering the laws must have adequate financial banks, has been gradual. Partly because of resistance and human resources to carry out its obligations. to the loss of patronage, but more often because of And, finally, and most important, the agency needs insufficient domestic savings, it has proved difficult the political will and government support to make to privatize institutions in an industry as capital in- decisions that are often politically and commercially tensive as banking. unpopular. The foreign-owned bank was, typically, a relatively small affiliate of a large institution from one of the major industrial countries and was subject Legal Framework to supervision in the home country. Although these Most sub-Saharan African countries have made supervisors for the most part paid little direct atten- considerable progress in modernizing their banking tion to the African operations, in most cases there laws. A large number of them have recently enacted,

12 ©International Monetary Fund. Not for Redistribution The Supervisory System

or are planning to enact, new legislation putting the have not been imposed on the banks, is also less of a legal basis for supervision into law. Only in one or problem when the activity is within the central bank. two countries has this legislation proved controver- Nonetheless, staffing has been a problem, particu- sial. For example, in Zimbabwe and earlier in Zam- larly in the smaller countries. Supervisory depart- bia, disputes have arisen over the residual role of ments tend to be small. The average length of expe- the government in regulating banks and its power to rience is also relatively short, rarely exceeding five override the supervisory authority. Disputes occur years. Also, the central bank is not always able to re- in particular when new institutions are licensed and cruit private sector skills in sufficient numbers. failing banks are closed. In a number of countries, Nonetheless, a considerable amount of training has the government has not allowed the supervisor to been provided, both internally and externally. More act without government approval. In many cases, recently, regional associations of supervisors have the law has also been backed up with detailed regu- identified training as their first priority. With the lation giving the supervisor the power to enforce the backing of the South African Reserve Bank, the east- law in detail. Aspects that have been less fully cov- ern and southern countries of sub-Saharan Africa ered are the right of the supervisor to question the have conducted a number of courses and workshops banks' shareholders on "fit and proper" grounds and for supervisors. In western and central Africa, the re- the institution of tight single-borrower and con- gional group is beginning to do the same, although nected-borrower rules. To some extent, this is be- its resources are less deep. Work has also progressed cause most sub-Saharan African countries are very in the design and use of manuals of procedure for small, as are the banks. Basle-style single-borrower both on-site and off-site supervision. limits, of 10 percent of capital, would result in very small lending limits to borrowers that may be creditworthy for sizable amounts, such as the affiliates Political Will of major internationals like the oil and mining It is the final test that has proved most difficult. companies. Even where the supervisory authority has apparent The supervisor has also been able to set up exami- power to act alone, in practice—as with other cen- nation functions in virtually all sub-Saharan African tral banking activities—it finds itself subject to countries. The only exception is South Africa, where overall control from the minister of finance, at the supervisor is nevertheless able to rely to a large whose pleasure the governor often exercises office. extent on an effective external audit system, which In most countries, the central bank has some legal acts on the supervisor's behalf. Thus, the absence of autonomy, but in most, the government still has the bank examination has so far at least proved less of a power to overrule the central bank and does not al- drawback than it could have been although there is ways use it for the best of motives. The examples of an ongoing need for more training. Classification Bank of Credit and Commerce International (BCCI) and provisioning are also mixed; in some countries, and, subsequently, of Meridien Bank are instructive. the supervisory authority now has fairly rigid and Both banks failed to meet standard requirements for tight rules, while in others less progress has been consolidated supervision, but were able to obtain made. Often the impact on government-owned banking licenses and avoid effective supervision in banks is a particular problem; if the government is many sub-Saharan African countries. Following the unable, for budgetary reasons, to enforce guarantees failure of BCCI, these problems became well of loans to government-controlled businesses and to known and supervisors became aware, if they had subscribe additional capital, then often the govern- not been before, of the pitfalls of having the government will resist tighter provisioning. ment exert some control over the central bank. But still, Meridien was able to establish banking pres- ences in a large number of sub-Saharan African Human Resources countries without any effective home-country su- In almost all countries, supervision has been pervision. The Basle standards, which were an- vested in the central bank, where at least some sort nounced with some fanfare after the BCCI failure, of experienced manpower is usually available. In were deliberately ignored, and local supervisors contrast, in some Latin American countries supervi- were often overruled by governments amenable to sion is the responsibility of a separate agency that is pressure and influence. Several countries including unable to tap the central bank for staff and other re- some in which BCCI had been authorized to operate sources. Even in the BCEAO and BEAC countries, nevertheless resisted pressure and were commend- where supervision lies within separate agencies, they ably quick to take action when Meridien began to are nevertheless closely allied with the central suffer liquidity problems. But others were not, and banks, with a considerable amount of staff inter- both banks took far too long to be closed throughout change. Financing the activity, even where charges the continent.

13 ©International Monetary Fund. Not for Redistribution Ill FINANCIAL SECTOR LEGISLATION AND BANKING SYSTEM SUPERVISION

Safety Net Table 2. Selected Sub-Saharan African One ongoing problem is the less than discriminate Countries Classified on the Basis of Status use of the safety net. Central banks have often been of Banking System Supervision reluctant to allow banks to fail. Consequently, support of insolvent institutions has not only been ex- 2 3 pensive in budgetary terms, but has also given the Group I1 Group II Group III wrong signals to other banks, which have seen poor Angola Ghana Botswana management rewarded. There are signs, however, BCEAO countries Madagascar Kenya that some countries are becoming tougher with BEAC countries Malawi South Africa poorly and imprudently managed institutions. A few Ethiopia Mauritius countries have also set up limited-coverage deposit Lesotho Namibia insurance schemes. In Kenya—a regional leader in Mozambique Tanzania Rwanda Uganda following best practices developed elsewhere— Swaziland Zambia banks have been allowed to fail, fraudulent manage- Zimbabwe ments have been prosecuted, and depositors who are not covered by the deposit insurance scheme have 'Initial stage of building supervisory structures. 2 been allowed to lose money. But such a situation is Basic structures and regulatory system in place. 3Well-designed and effectively implemented system with su- still rare and has been possible in Kenya only be- pervisory authority well supported at a political level. cause the government has supported the central bank rather than overruled it, and even these legal processes have not proved very effective in supporting the supervisory actions. clearly an area of great concern to bankers in sub- Saharan Africa and weakens the ability of the super- Infrastructure visory authorities to strengthen the banking system. Major problems in the banking system can weaken the efficacy of the supervisory process. Assessment They include many aspects of the infrastructure that are not always fully within the control of the central The basic criteria for assessing a system of bank- bank. Disclosure and accounting arrangements are ing supervision could be the legal and regulatory one concern, although many sub-Saharan African procedures, the effectiveness of the staff of the super- countries now assert that they are following interna- visory body, and the degree of high-level and poli- tional accounting standards. However, in many tical commitment to the process. To attempt a general countries, it is not the central bank that determines classification, therefore, it is important to consider accounting procedures and auditing standards but not just the formal position but also evidence that the rather the industry itself. In a small country, it is dif- supervisory process is being followed, that is, that ficult to control these arrangements. Another task the necessary difficult decisions are being made (see closer to the central bank function is managing the Table 2 and Appendix I, Table A4). For example, is payments system, in which inefficiencies—particu- there evidence that weak banks are closed and that larly in respect of clearing in remote towns—en- managements and shareholders who are unfit to con- courage various fraudulent practices, such as check trol banks are excluded from the industry? kiting, which recently caused a major problem in In some countries, the institutional structure may Ghana. Here also progress is being made, particu- be quite impressive, but the political commitment larly in southern Africa, where the countries of the may be in doubt. For example, the quality of supervi- Southern African Development Community are en- sory effort in Zimbabwe may be relatively good, but gaged in a major project supported by the South the failure of the government to pass modern legisla- 8 African authorities. A more difficult area is the legal tion and the tendency of the registrar of banks in the system. Bank intermediation is often expensive be- ministry of finance to disregard the supervisor's view cause it is very difficult for bankers to seize collat- on licensing, for example, suggest that there is still eral and pursue recalcitrant debtors in the courts. It is some progress to be made. Other countries have the necessary commitment, but the technical qualities of supervision need considerable improvement. In sev- 8 The countries forming the Southern African Development eral other countries, the environment is not con- Community are Angola, Botswana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zam- ducive to sound banking because the legal remedies bia, and Zimbabwe. available to banks to protect their assets are deficient.

14 ©International Monetary Fund. Not for Redistribution Areas for Further Reform

Areas for Further Reform Box I. Main Recommendations Although in the last decade the sub-Saharan on Supervision African countries have improved the statutory and regulatory framework and recruited and developed • Press ahead with the adoption of, or improve the the human resources necessary to make it work, adherence to, the Basle Core Principles. most of the banking systems in the region are still • Revise the regulatory framework to increase the very fragile. In part, this fragility reflects a historical ability of supervisors to take firm and decisive action in problem cases. In this connection, tighten lack of confidence—particularly in indigenous insti- licensing policies, and restrict the licensing and tutions, in some cases involving past bank failures— revocation of licenses to a single entity for pur- but also in part macroeconomic circumstances that poses of consistency, equity, and efficiency and to inhibit the development of sound banking. Of greater enhance competition. concern, weak banking systems also reflect the polit- • Set up clear accounting rules in line with interna- ical and institutional framework and the view that tionally accepted standards of accounting and au- banking institutions are a source of patronage. diting for all financial institutions. This is likely The most fundamental problem in all the countries to make on-site and off-site supervisory work in the region except South Africa is the absence of more evenly applicable, and errors and weak- an effective court system that will ensure the en- nesses more easily identifiable. • Focus attention on training bank inspectors and forceability of contracts and enable banks to perfect enhancing on-site inspection programs. their security. This area is usually beyond the scope • Strengthen the judicial system so that supervi- of central banks and supervisors, but is nonetheless sory decisions are not unduly delayed but are of prime importance to the health of the banking sys- promptly adjudicated, and enhance the ability of tem. Some national authorities, Kenya's for exam- banks to enforce the contractual obligations of ple, are beginning to take steps such as setting up their customers. special courts, but progress is inevitably slow. The • Develop a credit rating system and set up credit second area of crucial importance is the political au- rating agencies. tonomy of the supervisory authority. Much has been written about the desirability of divorcing monetary policy from short-term political influences. Much less attention has been devoted to the even more ability of its senior officers to withstand improper pressing need to ensure the separation of supervisory pressure from government. The additional steps that decisions from the political process. As a result, sub-Saharan African countries need to take to even when responsibility lies with a technically pro- strengthen banking system supervision are high- ficient central bank, there are often doubts about the lighted in Box 1.

©International Monetary Fund. Not for Redistribution IV Development of Monetary Instruments and Financial Markets

n the early stages of economic development, cen- I tral banks typically rely on direct instruments of Table 3. Selected Sub-Saharan African monetary policy, notably credit controls and controls Countries Classified by Development of on interest rates. With these instruments, they Monetary Instruments and Financial attempt to control directly the balance sheets of Markets, 1997 commercial banks. When countries move to a market-based system, central banks rely on indirect instruments to influence the level of bank reserves Group 1 Group II1 Group III through financial markets. The main indirect instru- Angola Botswana Kenya ments are reserve requirements, lending facilities Ethiopia BCEAO South Africa such as a rediscount facility or a Lombard facility, Lesotho BEAC and open market operations. With indirect instru- Mozambique Ghana ments, central banks influence the levels of bank re- Namibia Madagascar Rwanda Malawi serves by buying and selling securities, particularly Mauritius government or central bank securities. In the begin- Swaziland ning stages, before financial markets are active and Tanzania deep, it is generally necessary to rely on "open mar- Uganda ket-type" instruments, such as auctions of treasury Zambia bills. Later, when a secondary market develops, cen- Zimbabwe

tral banks can buy and sell securities either outright 1In this group, some countries are more advanced than others. or through the use of repurchase (repo) and reverse repurchase (reverse repo) agreements.9 The countries of sub-Saharan Africa have made some progress in developing their instruments of monetary policy and their financial markets. Most of kets are small and underdeveloped. Essentially, there the countries in the study have liberalized interest is no active primary or secondary market for govern- rates and are shifting from direct to indirect instrument securities in these countries. Interest rates, ments of monetary policy. which tend to be somewhat regulated, are often neg- In Table 3, the countries have been classified into ative in real terms. three groups according to the stage of development The main challenges facing Group I countries are of their instruments of monetary policy and of their privatizing commercial banks, fully liberalizing in- markets for government or central bank securities. terest rates, and developing a primary market for More detailed information on each of these countries treasury or central bank bills with which to conduct is provided in Appendix I, Tables A5, A6, and A7. open market-type operations. The broad challenge is to free markets of controls and to substitute market processes for administrative solutions. In this regard, Group I Countries central banks will need to develop market-type auctions for issuing government or central bank bills and Countries in Group I continue to rely primarily on for allocating refinance credit to banks. Also, central direct instruments of monetary policy, either credit banks in these countries need to gradually develop or interest rate controls or both. Their financial mar- the capacity to gather, monitor, analyze, and project important information, including especially bank reserves, credit, and broad money. In allowing markets 9For a more detailed discussion, see Alexander and others to begin functioning, central banks will need to de- (1995) and Popiel (1994). velop the capacity to regulate and supervise banks.

16 ©International Monetary Fund. Not for Redistribution Group II Countries

In this group, Mozambique has recently liberal- Most of the countries in Group II are in transition ized interest rates—an important step in the transi- from a paper-based system of government or central tion to indirect instruments. Also, the Bank of bank securities to an electronic book-entry system; Mozambique reduced the reserve requirement to others have already shifted to a book-entry system 15 percent from 25 percent in early 1996 and to 12 (Malawi and Zambia). The book-entry system holds percent in 1997. This will help reduce the spread be- the potential to simplify and greatly speed up trading tween bank deposit and lending rates. As a way of and to facilitate secondary market activities. In this absorbing the liquidity from these reductions in the regard, improvements in the payments systems be- reserve requirement, the authorities have begun issu- come crucial, so that clearing and settlement can be ing treasury and central bank bills. However, the pri- made fast and reliable. mary market—including, in particular, auctions— The experiences of Ghana, Tanzania, Uganda, and still needs to be developed. While the Bank of Zimbabwe are representative of the more advanced Mozambique is developing its indirect instruments, countries of Group II. In Ghana, the transition to an it continues to use bank-by-bank credit ceilings in a indirect system of monetary control was gradual. In "belts and braces" approach to monetary policy 1989, as a first step, the banking system was im- implementation. proved and banking supervision was strengthened. Ethiopia, in contrast, has introduced treasury bill Gradually, the reserve requirement was also auctions, but its financial sector is dominated by a strengthened, and open market-type operations were government-owned commercial bank, which ac- begun. Interest rates were liberalized, and credit counts for about 80 percent of total banking sector controls were lifted. A stock market was established. assets. In view of the lack of a level playing field Currently, money market financial instruments or se- owing to the quasi-monopoly position of the bank, it curities are traded through weekly auctions at the is very difficult to foster competition and interbank Bank of Ghana. Auctions are open to banks, dis- market activities and, ultimately, full implementa- count houses, and selected brokerage firms. How- tion of indirect instruments of monetary policy. ever, the secondary market for government and Bank of Ghana securities remains very thin. Some work has gone into the development of repo opera- Group II Countries tions, including drafting of a master repurchase agreement, but so far the Bank of Ghana does not ac- Group II countries have made good progress in tively use them. developing indirect instruments of monetary policy, A contributing factor to the lack of activity in and there is some limited secondary market activity Ghana's secondary market is the relatively high liq- in government securities. They have liberalized fi- uid asset requirement (35 percent of deposits), which nancial markets, and interest rates are free of con- creates a captive market for government securities. trols. Some of them also have stock markets. This However, with real interest rates relatively high at group is very diverse and includes members of the present, the liquid asset requirement may no longer WAEMU and the CAEMC. be needed to induce banks to hold government In general, the countries of Group II are placing in- securities. creased emphasis on indirect instruments, including A primary dealer system has recently been estab- the use of open market-type operations. However, lished; however, the primary dealers are not for- they have generally not yet developed full-fledged mally obligated to make a market for securities, secondary markets or full open market operations in- which is crucial to the development of the secondary volving buying and selling government or central market. Also, at this stage, primary dealers are paid a bank securities as a means of exercising close control subsidy for selling treasury bills to the public, which over bank reserves. These countries are in the process is not a usual feature of a well-functioning primary of developing repo operations for short-term mone- dealer system. In addition, the Bank of Ghana has tary management. They are also developing systems made considerable progress in developing a book- to organize activity in the secondary market and to entry system for treasury bills. provide underlying support for the primary market. Ghana has put in place many of the building Most of them are considering the creation of a pri- blocks needed for an active and efficient money mary dealer system. With this system, some of the market. Nevertheless, money markets are still rudi- most active dealers are invited to become primary mentary. Also, interest rates on auctioned govern- dealers, with special responsibilities and privileges. ment and central bank instruments tend to remain One of the main responsibilities of primary dealers is constant over long periods. Thus, interest rates fre- to make a market for government or central bank se- quently do not convey much useful information curities and to participate on a regular basis in the about market conditions. In the absence of active primary auctions for these securities. secondary markets, the Bank of Ghana controls the

17 ©International Monetary Fund. Not for Redistribution IV MONETARY INSTRUMENTS AND FINANCIAL MARKETS

money base primarily by adjusting the net amount of Recently, the Bank of Uganda began issuing (oc- treasury and central bank bills issued each week. casionally) its own bills to enhance short-term li- Since the early 1990s, Tanzania has made good quidity management, but the experience has been progress in liberalizing interest rates and making the mixed. There have been five issues since February transition from direct to indirect instruments of mon- 1997, and all have been undersubscribed. Authori- etary policy. Interest rates have been fully liberal- ties attribute the weak demand in part to the short ized, and the Bank of Tanzania uses a variety of indi- notice given to banks. In addition, the Bank of rect instruments of monetary policy. In particular, it Uganda does not discount its own bills. conducts regular auctions of treasury bills (182-364 Zimbabwe's monetary instruments are also among days) and occasionally auctions its own bills. It the most developed of Group II countries. In particu- maintains a reserve requirement of 10 percent of de- lar, the country relies entirely on indirect instru- posits, including foreign currency deposits, and a ments, and its open market operations include some liquid asset requirement of 20 percent of deposits. transactions in the secondary market. It has a rela- As yet, the secondary market for government securi- tively well developed interbank market and an active ties has not developed, which severely constrains stock exchange. Some of the current issues or chal- open market operations. Tanzania is planning to lenges facing Zimbabwe include introducing repo adopt a book-entry system for government securities and reverse repo operations for more refined liquid- and to develop a primary dealer system or some ity management. Also, Zimbabwe is introducing a other approach to organizing the secondary market. system of primary dealers, comprising the former In Uganda, the level and structure of interest rates discount houses and the banks, and is implementing were administered by the Bank of Uganda until a book-entry system. 1992. Real interest rates were negative during much Zambia's experience is interesting from the point of the 1980s, but in 1992 Uganda liberalized interest of view of a smaller country in the region. It has rates and began shifting from direct to indirect in- managed to make considerable progress in develop- struments of monetary policy. Since April 1992, the ing monetary management capacity by increasingly Bank of Uganda has relied on treasury bills as an in- relying on market mechanisms, despite its small strument of monetary policy, with weekly auctions, size. The Bank of Zambia conducts weekly auctions using a multiple-price method (see also Sharer and of treasury bills and auctions repos and Bank of others, 1995, especially Section VI). It regularly Zambia term deposits. In July 1994, it established a publishes auction announcements and results, as special sterilization account for the proceeds of trea- well as the rediscount rate, the bank rate, and the sury bills sold for monetary policy purposes. The weighted-average lending rate in the very thin inter- Bank of Zambia maintains a relatively high liquidity bank money market. Recently, it modified its reserve requirement, although recently it has come down to requirement to allow averaging over a two-week 38.5 percent of liabilities from 43.5 percent. The maintenance period to enable banks to improve their secondary market for treasury bills is still small and liquidity management. A rediscount facility is also relatively inactive. An automated book-entry sys- available, with the rediscount rate tied to a moving tem, however, was introduced in August 1997. Some average of the yield on 91-day bills plus a margin. work has gone into developing a primary dealer sys- At present, however, Uganda has no repo facility tem; however, selection of an appropriate group of and essentially no secondary market for government dealers has proved to be difficult, in part because of securities. In April 1997, the government in conjunc- political considerations. tion with the Bank of Uganda moved from order- to Countries in the WAEMU, which were formerly bearer-type treasury bill certificates to promote the French colonies, have not made much progress with transferability and marketability of the treasury bill indirect instruments; the same applies for the CAEMC instrument. However, buyers view the bearer certifi- countries. The countries in each group share a com- cate as too risky and subject to fraud, which runs mon currency, the CFA franc, which is pegged to the contrary to one of the objectives of improving trans- French franc. Monetary policy is conducted by the ferability and thus promoting secondary trading of BCEAO and the BEAC at the regional level. Because the instrument. A book-entry system, developed by of the exchange regime, there is little room for the the IMF's MAE Department, is being considered to two regional central banks to exercise any type of in- address the issue of payment and settlement of gov- dependent monetary policy—monetary policy is de- ernment securities.10 termined by the exchange rate policy. During 1989-93, the BCEAO and the BEAC shifted from direct to indirect instruments of monetary policy. Cur- 10 rently, they rely primarily on operations in the money MAE's book-entry system is based on the personal computer operated on Access. It is operative in Malawi, Zambia, and market and reserve requirements to control money Zimbabwe. and credit. By having a regional interbank market for

18 ©International Monetary Fund. Not for Redistribution Obstacles to Transition central bank securities and refinance credit, these two add to and refine. In particular, since early March banks have a number of advantages that would not be 1998, it has used repo operations much more ac- possible for some of the smaller members individu- tively than in the past, when legal uncertainties hin- ally. In particular, the regional financial market in- dered their use. In addition, South Africa is introduc- creases the number of potential participants, making ing a modern, large-value gross settlement system as competitive conditions possible. However, the bank- a means of improving the payments system. In ing system continues to suffer from chronic excess March 1998, the South African Reserve Bank re- liquidity in part because of the easy access of banks placed its rediscount facility with a marginal or to the standing facilities. In turn, because of the ex- Lombard-type facility that offers overnight credit at cess liquidity, banks have little incentive to become penalty rates. active in the interbank market. There is mutual excess liquidity, which is not used because of a lack of demand for credit. (For more detail, see Clement and Obstacles to Transition to Indirect others, 1996, especially Annex III.) Monetary Instruments and Market Development Group III Countries Practically all of the countries of sub-Saharan Africa now want to adopt indirect instruments of Only two countries are in Group III: Kenya and monetary policy and develop their financial markets. South Africa. Kenya embarked on financial liberal- What then is preventing or slowing their progress? ization and conversion to indirect instruments during The obstacles are many and varied. In some coun- the late 1980s. In 1991, it abandoned credit ceilings tries, they include the small size of financial mar- and liberalized interest rates. However, Kenya's kets, the limited number of commercial banks, and progress was interrupted by a period of relatively high the absence of fully commercial behavior by com- inflation. Although inflation has since come down, mercial banks—in part because of continued state there is still not much demand for longer-term gov- ownership and control. In addition, in many of the ernment securities. Moreover, government debt accu- countries, banks have relatively large portfolios of mulated from the 1980s contributes to high real inter- nonperforming loans. These loans contribute to the est rates. However, the Central Bank of Kenya has segmentation of the market, because healthy banks shifted completely from direct to indirect instruments are unwilling to lend to weak ones. Moreover, inade- of monetary policy. Even so, there is still very little quate information on banks, because of poor ac- activity in, or development of, the secondary market counting, exacerbates such problems. These factors, for government securities. The authorities are also at and the long delays by the authorities in dealing with the stage of adopting some system of primary dealers, insolvent banks, create in many sub-Saharan African while government securities have been dematerial- countries the suspicion, though sometimes erro- ized and a book-entry system introduced. In July neously, that all banks other than the reputable for- 1997, the Central Bank of Kenya introduced a two- eign ones are to some extent in financial difficulties. way repo operation, and it and several commercial banks have signed a master repurchase agreement. Lack of Interbank Market South Africa, in addition to liberalizing its financial markets and developing indirect instruments of Largely as a result of the obstacles described, and monetary policy, relies heavily on open market oper- the risk associated with lending to insolvent banks, ations and has a well-developed secondary market interbank market activities in sub-Saharan Africa are for government securities. In particular, financial very thin and confined to a few, mostly foreign, markets are active and modern in South Africa, pro- banks. While interbank market activities are essen- viding a strong basis for conducting open market op- tial for the development of capital markets in these erations. South Africa is the leading member of the countries, overnight and weekly interbank interest Common Monetary Area and plays a key role in de- rates are also better indicators of short-term market termining monetary policy in the region.11 Johannes- conditions than are daily movements in bank re- burg is a major regional financial center, and its serves. Without an active interbank market, most of stock exchange is relatively active and sophisticated. the countries are heavily handicapped in their short- The South African Reserve Bank uses a range of in- term monetary policy intervention. direct monetary instruments, which it continues to Lack of Securities Portfolio 11 Other members—Lesotho, Namibia, and Swaziland—are very small by comparison, and their monetary instruments far In many sub-Saharan African countries, govern- less developed than South Africa's. ment deficits either are not now under control, or

19 ©International Monetary Fund. Not for Redistribution IV MONETARY INSTRUMENTS AND FINANCIAL MARKETS

were not under control sometime in the past, thereby over on a continuous basis. Such a system facilitates leaving a large stock of government debt. Typically, the collection of statistics and information on the large fiscal deficits have to be financed by the cen- ownership, maturities, payments, and movements of tral bank, which for some of these countries is the securities. In addition, it greatly facilitates secondary only alternative because markets for government se- market activities. In several countries that do not curities are undeveloped. The monetization of these have such a system, IMF missions have encouraged deficits leads to inflation, which in itself is an obsta- its introduction to facilitate fully collateralized inter- cle to the development of markets for debt instru- bank market activities as well as quick settlement of ments. Even if fiscal policy is now prudent and infla- delivery-versus-payment activities in the securities tion is under control, the large stock of government market (Kenya, Malawi, Uganda, Zambia, and Zim- debt acquired in the past contributes to high real in- babwe). Through this system, commercial banks terest rates. will be more willing to engage in interbank market Because of such issues as large fiscal deficits or activities with other banks, independently of their the unlimited access of banks to lending facilities, solvency status, as long as banks have securities to the financial systems in many of these countries suf- offer as collateral. An automated book-entry system fer from excess liquidity, and central banks face also reduces the risk of loss or theft and, ultimately, common obstacles in sterilizing such liquidity. One generates savings by eliminating the cost of printing such obstacle is that central banks may not have an high-quality securities certificates and of moving adequate portfolio of government securities with bills from place to place. which to perform open market operations in order to absorb the liquidity. Acquiring a suitable portfolio of government securities for this purpose requires coor- Reserve Requirement and Liquid Asset Ratios dination and support from the ministry of finance, Some of the countries in the region stipulate high which may be difficult to achieve because of politi- reserve requirements, such as Angola (40 percent of cal considerations. Another common strategy for ab- deposits), and high liquid asset requirements, such sorbing liquidity is for the central bank to issue its as Ghana (35 percent of deposits). The former oper- own securities or for the central bank to offer a de- ates as an implicit tax, adding to the spreads between posit facility to banks. This strategy can, however, deposit and lending rates and thereby retarding in- be costly to the central bank and can threaten its fi- vestment. Reserve requirements, while contributing nancial stability. In principle, therefore, government profits to the central bank, raise the costs of financial should stand ready to back the central bank in its intermediation and thus contribute to financial disin- monetary operations, but in practice sub-Saharan termediation. This often results in the growth of the African governments are reluctant to do so because "informal" financial sector, which is typically large they look on the central bank as a source of revenue in these countries. rather than as a drain on the budget. High liquid asset requirements are frequently adopted to create or strengthen the demand for gov- Inefficient Payments System ernment debt. However, such regulations tend to segment the market and retard the development of In most of sub-Saharan Africa, the inefficient pay- the secondary market for treasury bills by creating a ments system represents a major impediment to captive market for securities. Moreover, in the face same-day, or short-term, settlement among investors of high real interest rates on government securities, and hence reduces the liquidity of the securities. In liquid asset requirements become inoperative be- addition, the large float generated by inefficiencies cause commercial banks will willingly invest in gov- in the payments system, coupled with the lack of an ernment debt anyway. This development crowds out active interbank market, forces commercial banks to the private sector, eroding investment and hence hold large excess reserves in their current accounts growth. Ultimately, liquid asset requirements should with the central bank in order to avoid the stiff not be used as a monetary policy tool. Indeed, their penalties for noncompliance with the daily clearing usefulness is somewhat justified only as a prudential settlement. The existence of a large and erratic float requirement at the very early stages of development is one of the major impediments to the transmission of a supervisory framework in the financial sector. of monetary policy signals (see Ugolini, 1996). Absence of a Primary Dealer System Absence of an Automated Book-Entry System It is easier to establish an active secondary market An automated book-entry system is becoming es- for government and central bank securities if a pri- sential in those sub-Saharan African countries that mary dealer system is in place. There are common have large volumes of securities to auction or roll obstacles to establishing a primary dealer system in

20 ©International Monetary Fund. Not for Redistribution Obstacles to Transition

Box 2. Main Recommendations on Development of Monetary Operations and Financial Markets Supporting actions and conditions. Create a level and transparently. Central banks should have the capac- playing field in the financial sector. Eliminate the mo- ity to conduct outright purchases and sales of securities nopoly of large government-owned banks, restructure to adjust flows of liquidity and repo (and reverse repo) and recapitalize banks, deal with bad loans, and operations for fine-tuning short-term operations. The strengthen banking supervision. The need for these central bank should also have a portfolio of high- supportive conditions may require a number of con- quality securities with which to conduct reverse repo comitant reforms and a gradual "belts and braces" ap- operations or to sell directly in the market to mop up proach to the transition to full reliance on indirect liquidity when needed. instruments. Standing facility for banks. The central bank needs Financial markets. Liberalize financial markets. In- to maintain a collateralized short-term lending facility terest rates should be market-determined and free of for banks at the banks' initiative, such as an overnight controls. There should be no controls on bank lending Lombard facility. The terms should be higher than in and deposit rates. Interest rates on treasury bills and the treasury bill market or the interbank market. Banks central bank bills should be determined in the market. would thus have the incentive to participate first in the Reserve requirements. Cash reserve requirements interbank market and would have less opportunity to should be uniform to facilitate liquidity projections, make risk-free profits by borrowing from the central and banks should be allowed to meet the requirement bank to invest in treasury or central bank bills. on an average basis during the maintenance period. Re- Reserve money programming. The central bank serves should not be used as the sole instruments of should also be able to monitor and project banks' re- monetary operations, but should be used only to adjust serves and the main factors influencing reserves. As a to trends and patterns. They should be kept low so as corollary, it should be able to coordinate its various in- not to increase spreads between lending and borrowing struments of monetary policy to achieve specific tar- rates. (In the short run, the appropriate level depends on gets for bank reserves. monetary conditions and the range of monetary instruments that are available.) Where reserve requirements Development of secondary market for govern- cannot be kept low, consideration should be given to re- ment securities. In general, the ultimate stage involves munerating them. In parallel, noncompliance with the full-scale development of the secondary market for requirement should be subject to penalty at an applica- government securities. Development at this stage usu- ble rate that is the highest in the market. ally involves adopting a primary dealer system to facilitate market-making and to ensure that there will be ad- Liquid asset requirement. Lower the high asset equate demand for government or central bank requirement in many sub-Saharan African countries be- securities in the primary market. An automated book- cause this is typically a prudential requirement. There- entry system could also greatly facilitate and enhance fore, in the medium to long term, appropriate pruden- delivery versus payment, interbank market activities, tial requirements may be needed to replace the liquid and open market operations (of the central bank). How- asset requirement. ever, it may not be feasible to develop an active sec- Open market-type operations. These operations ondary market, in which case the central bank could be are conducted at the initiative of the central bank (open prepared to conduct open market-type operations market operations) and differ from those conducted at through repos and reverse repos, rather than through the initiative of the banks (standing facility; see below). outright purchases and sales. An active repo and collat- With respect to the former, there should be an active eralized interbank market can be an effective substitute primary market for treasury or central bank bills, with for a secondary market and may be possible to develop regularly scheduled auctions that are run professionally at a lower cost.

sub-Saharan African countries. The main one, which political dilemma in deciding on the composition of is political, involves choosing the financial institu- the primary dealer group. tions that are the strongest and most active in the market for government and central bank securities. Local financial institutions are not frequently in this Large Interest Rate Spreads select group because they tend to be less well capi- Most of the factors that impede the full use of in- talized and are overburdened with relatively large direct instruments of monetary policy and the devel- portfolios of nonperforming loans. In addition, in- opment of interbank market activities also contribute vestors may not trust the smaller, local institutions to the large spread between deposit and lending rates with transactions. The authorities thus often face a offered by commercial banks in sub-Saharan Africa.

21 ©International Monetary Fund. Not for Redistribution IV MONETARY INSTRUMENTS AND FINANCIAL MARKETS

The spread is the result of the quasi-monopolistic In most sub-Saharan African countries, the monetary role played by large banks, mostly government- authorities do not send clear signals about the mone- owned, that are burdened with nonperforming loans tary policy direction of the country, and commercial and other operating inefficiencies. If the implicit banks are, at times, confused by the policies of the cost of holding large unremunerated cash reserves central bank. Although there is usually a bankers' as- and excess reserves for clearing and payments is sociation that can aid communication, the associa- added to this cost, and if one considers the risks in- tion may be divided between the stronger banks— volved in lending to borrowers with limited collat- often the foreign banks—and the weaker domestic eral, the courts' inefficiency in collecting nonper- banks, which tend to be isolated and less vocal. forming loans, and, ultimately, the profit margin of There is also often a dearth of information available the investors, it is not surprising that the spread be- to the public, such as on interest rates and volumes tween deposit and lending rates is often very large. in markets. These spreads can be between 10 and 25 percentage points depending on the country. Typically, the large spreads make domestic instruments very expensive, Areas for Further Reform and hence unattractive, and discourage financial intermediation and savings. For sub-Saharan African countries to make the ultimate transition to indirect instruments and to de- Lack of Communication and Information velop financial markets, they must make progress on a number of fronts simultaneously: get fiscal policy Too little communication between the central under control, restructure banks so that essentially bank and commercial banks—which is more of a all banks have adequate capital, acquire the means to problem in less developed systems—is an obstacle mop up excess liquidity, and modernize the pay- to effective policy development and implementation. ments system (see Box 2, page 21).

22 ©International Monetary Fund. Not for Redistribution V Exchange Arrangements and Liberalization of the External Sector

s of the end of 1996, sub-Saharan African were market determined in auctions and fixing sys- A countries displayed wide diversity in their ex- tems, in spontaneous market trading, or in organized ternal systems in terms of their foreign exchange interbank markets. arrangements, market structures, and convertibility The regulatory frameworks in sub-Saharan status. Although a few have achieved full convert- African countries are now on the whole quite liberal ibility in both external current account and capital in the making of payments and transfers on current account transactions, others remain very restrictive transactions, but, on average, are still restrictive in in their external sector practices. This diversity is a terms of underlying transactions, particularly with reflection of the restrictive exchange practices that respect to capital account transactions. (See Table 4 most sub-Saharan African countries adopted follow- for individual country groupings.) ing independence in the 1960s and 1970s and the varying degrees of success that they achieved subsequently in dismantling these practices and liberaliz- Group I Countries ing the external sector in the 1990s. External Current Account Convertibility Following independence, many of the countries opted for controls and restrictions to achieve rapid A number of the countries are rated restrictive in economic progress. This strategy was as visible in the terms of current account convertibility. These are external sector as in any other area of their economies. Angola, all BCEAO and BEAC countries, and During this period, exchange rates were fixed, and Ethiopia. various forms of exchange control regulations were All the CFA franc zone countries (see footnote 2) introduced, including provisions to restrict current apply restrictive controls, including requiring the and capital account transactions. Foreign exchange surrender of imported foreign banknotes. Moreover, was also largely rationed. As a result of these restric- financial intermediaries are granted only limited tions, sub-Saharan African countries did not benefit open positions, which are directly monitored by the from the expansion of world trade and private capital two central banks—the BCEAO and the BEAC— flows that have occurred in the 1980s and 1990s. with a view to centralizing holdings of foreign as- Since the early 1990s, however, a number of coun- sets. The freedom of transfers within the CFA franc tries have made substantial progress in applying in- zone and, through France, to countries outside the ternational market standards to external transactions zone is still considered a fundamental principle of and in balancing policies to sustain greater external the CFA arrangement. However, the prevalence of openness. A trend toward greater reliance on market discretionary controls over transfers outside the zone forces can now be perceived in the determination of significantly limits the practicability of the principle. exchange rates and the liberalization of external In particular, the suspension of the repurchase of for- transactions. Countries are consistently striving to eign banknotes in August 1993 constitutes a signifi- strengthen financial soundness, accept market disci- cant limitation on the free circulation among France pline, enhance the efficiency of payments systems, and the two CFA franc subzones. and develop the central bank's capacity to intervene In Angola, the formal financial sector is directly in foreign exchange markets. (See Appendix I, Table controlled through restrictive foreign exchange bud- A8 for a schedule summarizing developments in the gets, positive import lists, and advance import de- external sector in the selected sub-Saharan African posits. As a result, an informal financial sector has countries.) developed and is abundantly supplied by free im- By the end of 1997, almost all sampled countries ports of foreign banknotes largely associated with maintained unitary exchange rate structures through the illegal diamond trade. However, this informal fi- either (1) a peg to a major convertible currency; or nancial sector, which finances most imports, is al- (2) independently floating exchange rates, which most completely uncontrolled.

23 ©International Monetary Fund. Not for Redistribution V EXCHANGE ARRANGEMENTS AND LIBERALIZATION OF EXTERNAL SECTOR

from the other rand zone countries because they Table 4. Status of External Convertibility in apply stricter controls over credit extended by Selected Sub-Saharan African Countries, 1997 nonresidents. In the CFA franc zone, controls on inward flows are fairly liberal except that direct investment and its Overall Convertibility: Current and liquidation require prior approval and agreements Capital Account Article VIII/XIV under the various investment codes. Opportunities for foreign portfolio investment have so far been Group 1 very limited, and access to money market instru- Angola XIV ments is restricted to authorized banks. The estab- BCEAO VIII BEAC VIII lishment of a regional stock exchange in Abidjan, Ethiopia XIV Cote d'lvoire, in September 1998 may open new op- Ghana* VIII portunities. Credit extended by nonresidents is prac- Lesotho* VIII tically free of restrictions. Foreign borrowing by fi- Madagascar* VIII nancial intermediaries, however, also requires prior Rwanda* XIV Swaziland* VIII approval. Regarding outward flows, all transfers of Tanzania* VIII foreign exchange funds to nonresidents are subject Zimbabwe* VIII to prior approval, which may be more easily granted Group II for transfers within the French franc zone. Commer- Botswana VIII cial credit to nonresidents is free. Malawi VIII In Angola and Ethiopia, all capital movements are Mozambique XIV Namibia VIII subject to prior approval, and inward direct invest- South Africa VIII ment is subject to explicit restrictions. Ghana applies indirect control over foreign inward investment in Group III Kenya VIII securities listed on the Ghana Stock Exchange Mauritius VIII through ceilings on foreign portfolio holdings (over- Uganda VIII all 10 percent, and individual 74 percent, of any se- Zambia XIV curity listed). Foreign investment in domestic money market instruments is prohibited, and direct invest- Note: I: Restrictive (controls on most transactions); II: Partial (combination of direct controls and some liberalization); III: Full ment, inward and outward, is subject to prior ap- convertibility (elimination of most restrictions). *Current ac- proval. All other capital transactions are directly count convertibility as for Group II. controlled, although banks are free to borrow abroad The ranking of countries under the three groups has been and extend credit to nonresidents. based on an assessment of de facto and not de jure convertibility. Therefore, the grouping does not necessarily reflect the legal Madagascar, Rwanda, and Tanzania do not have requirements of convertibility under the IMF's Articles of Agree- capital markets, but apply liberal control over in- ment. Some countries, such as Mozambique and Zambia, continue ward investments, particularly direct investments, in to avail themselves of the transitional provisioning of Article XIV selected areas and activities as determined by the even though they have eliminated most capital and current ac- governments. However, the repatriation of proceeds count restrictions. derived from liquidation is subject to prior approval. Direct investment in Madagascar's export zone is practically free, and the repatriation of proceeds is facilitated by liberal foreign exchange regulations In Ethiopia, although trade transactions are being applied to that zone only. In Zimbabwe, most inward progressively liberalized, direct and restrictive con- and outward capital movements including those trols still apply to most transactions. Residents, who going through the Zimbabwe Stock Exchange are di- have been permitted to open foreign exchange ac- rectly controlled. counts with the 10 percent of proceeds that they are not required to surrender, are further restricted in the making of payments. Group II Countries External Current Account Convertibility Capital Account Convertibility Botswana, Ghana, Lesotho, Madagascar, Malawi, A number of countries are also restrictive in terms Mozambique, Namibia, Rwanda, South Africa, of capital account convertibility (Angola, all Swaziland, Tanzania, and Zimbabwe are partially BCEAO and BEAC countries, Ethiopia, Ghana, liberalized in terms of current account convertibility. Lesotho, Madagascar, Rwanda, Swaziland, Tanza- These countries took significant steps toward liber- nia, and Zimbabwe). Lesotho and Swaziland differ alizing external trade-related transactions in the

©International Monetary Fund. Not for Redistribution Group II Countries

1990s, although they still apply indirect controls to repatriation of savings by workers employed in other current transactions, particularly invisibles not South African mines. related to trade. In addition, the surrender of foreign exchange proceeds and the opening of foreign ex- Capital Account Convertibility change bank accounts are still subject to some form of control. Except for Mozambique and Rwanda, Although fairly liberalized on inward portfolio in- they all accepted the obligations of Article VIII of vestment, the five countries that have been rated par- the IMF's Articles of Agreement during 1994-96. tially liberalized in terms of capital account convert- Botswana and Namibia, which enjoy considerable ibility are still characterized by essentially direct and mining revenue and have a strong balance of pay- restrictive control over most outward capital account ment position, liberalized current external transac- transactions. These countries are Botswana, Malawi, tions beyond prevailing controls in South Africa, Mozambique, Namibia, and South Africa. South with which they are partners in the rand zone. As re- Africa is well developed in terms of its use of indi- quired under the South African exchange control rect instruments of monetary policy and secondary regulations, both countries maintain licensing re- markets.12 quirements for imports from outside the Southern In Botswana, Namibia, and South Africa, as in the African Customs Union and require the surrender of other two smaller rand zone countries, all inward foreign exchange proceeds. However, unlike South capital flows—particularly direct investment and re- Africa, they are both fairly liberal on payments and lated regulations governing the liquidation thereof— transfers on account of "other" invisibles, the open- have been significantly liberalized. The receipt of ing of foreign exchange bank accounts, and bank foreign commercial credit extended by nonresidents transactions between residents and nonresidents. In and the acceptance of deferred payments on imports addition, exemptions to surrender and authorizations are also treated liberally although more so in to open foreign exchange bank accounts are liberally Botswana and South Africa than in the other rand granted to residents to facilitate external trade opera- zone countries. Regarding portfolio investments in tions. There are no restrictions on foreign exchange the rand zone, the capital market operations of all bank transactions among nonresidents. This liberal countries are conducted through the Johannesburg regime is particularly effective in Namibia's export Stock Exchange. Local financial markets outside processing zone arrangements. Financial intermedi- South Africa are small and practically limited to cen- aries may keep foreign exchange open positions, but tral bank operations for liquidity control purposes. only on customers' account in Botswana. Nevertheless, portfolio investment in Botswana is Madagascar, Malawi, Mozambique, Rwanda, and treated liberally in principle, although nonresidents Tanzania have market-determined exchange rates are prohibited from buying Bank of Botswana cer- that float independently. They made great strides to- tificates traded in open market operations. Financial ward liberalization in 1995-96 and are planning fur- intermediaries' borrowing from abroad for their own ther quick progress toward full convertibility. Except account requires prior central bank approval in all for Mozambique, they participate in the Cross- rand countries except Namibia, where borrowing is Border Initiative with Zimbabwe. The Cross-Border free. Initiative countries do not require licensing in either However, the transfer of foreign exchange funds export or import trade and authorize the opening of to nonresidents for outward direct and other invest- foreign exchange bank accounts by residents and ments requires the prior approval of the exchange nonresidents. Ghana and Malawi still require partial control authorities in all rand countries; only in surrender of foreign exchange proceeds for certain Botswana may authorized dealers grant approval commodities. Mozambique, Tanzania, and Zim- within quantitative limits. Sales or issues of market babwe do not require surrender. Payments on non- securities and instruments by nonresidents are sub- trade invisibles are practically free in Tanzania, ject to prior approval, but portfolio investment while Ghana, Madagascar, and Malawi indirectly abroad by institutional investors has been substan- control such payments through authorized dealers. tially liberalized in Botswana, unlike in Namibia and Mozambique, Rwanda, and Zimbabwe require prior South Africa. approval of income-related and "other" invisibles. In Financial markets in Malawi and Mozambique are all these countries, financial intermediaries may still very small and do not yet offer significant op- freely keep foreign exchange open positions within portunities to foreign investors. Although direct in- the limits of prudential requirements, except in Zim- ward investment is practically free, most outward babwe, which limits overnight open positions. In addition to regular arrangements, Malawi, Mozambique, and Zimbabwe maintain special 12The rating on external convertibility is not necessarily consis- arrangements with South Africa to facilitate the tent with that of the development of monetary policy instruments.

25 ©International Monetary Fund. Not for Redistribution V EXCHANGE ARRANGEMENTS AND LIBERALIZATION OF EXTERNAL SECTOR

capital movements are subject to direct control. Except in South Africa, weaknesses relate mainly to Box 3. Main Recommendations on the coordination of domestic and foreign exchange Development of External Sector operations in financial markets, which are still Liberalization undeveloped. • Countries that have not yet achieved the status of current account convertibility must take active steps toward liberalizing current payments and Group III Countries transfers, including removing restrictions on all underlying transactions. This should facilitate the External Current Account Convertibility acceptance of the obligations of Article VIII of The sample survey shows that Kenya, Mauritius, the IMF's Articles of Agreement by all countries. Uganda, and Zambia, have achieved the highest • Countries should choose foreign exchange degree of external current account liberalization, and, arrangements on the basis of their structural char- accordingly, are rated III in current account convert- acteristics and the nature of the external shocks ibility. Exchange rates are market-determined and affecting them. independently floating; liberal regulatory frame- • All countries must continuously improve their works have also allowed for unlimited market open- policy mix with respect to macroeconomic bal- ness. These four countries are among those that ance, bank soundness, and political stability. have taken the boldest steps toward external liber- • Monetary operations should not substitute for fis- alization since the early 1990s. They participate in cal policies or realignment of the exchange rate. the Cross-Border Initiative, and Kenya and Uganda • Coordinate external and domestic monetary oper- are also members of the East African Community ations and organize interbank markets. Area with Tanzania. While Kenya, Mauritius, and • Proceed with structural reforms, such as privati- Uganda accepted the obligations of the IMF's Arti- zation of public financial institutions. cle VIII in 1993-94, Zambia continues to avail it- • Strengthen supervision and prudential regulations self of the transitional arrangements of Article XIV, in the banking and external sectors because these although it no longer maintains restrictions other steps are essential for external liberalization. than external payments arrears. However, shortcom- • Develop efficient payments systems. ings in the payments system affect the smooth set- • Liberalize the capital account in step with tlement of external transactions, particularly in the progress in structural reforms. East African Community Area, where adequate channels of communication for policy coordination • Countries in the CFA franc zone must take steps to are still lacking. harmonize member countries' external regulations.

Capital Account and Full Convertibility Kenya, Mauritius, Uganda, and Zambia have also ments by nonresidents in Kenya requires prior ap- achieved the highest degree of openness to inward proval from the Central Bank of Kenya. To counter- and outward capital movements and to sales of as- act capital volatility, the Central Bank of Kenya pro- sets between residents and nonresidents. The con- ceeds with open market operations and manages the trols that remain exist only for statistical purposes, flexibility of the exchange rate. the surveillance of the securities and money markets, Mauritius pursues a policy of openness to off- the monitoring of external indebtedness, and the ob- shore banking based on an easy-to-set-up "interna- servance of prudential requirements. tional status." Opportunities for foreign investment In Kenya, although stocks and secondary securi- are offered by the offshore banking community, ties markets are just beginning, opportunities for for- which is expanding rapidly. However, control, eign portfolio investment are offered in the Nairobi which is essentially prudential, is still imperfectly Stock Exchange. The Capital Market Authority ap- regulated. plies overall and individual limits on purchases of Zambia applies no control to outward capital securities by nonresidents—that is, 40 percent and 5 transfers or asset sales between residents and non- percent, respectively—of primary and secondary is- residents. The Bank of Zambia, however, requires sues. It directly controls sales or issues of securities registration of all foreign borrowing for statisti- abroad by residents for the same purpose. Trading in cal purposes, and prior approval is required for for- government securities is based on the high real inter- eign borrowing by financial institutions. Moreover, est rates yielded by the sizable portfolios of public the small and shallow financial market does not debt, which is equivalent to some 26 percent of offer significant opportunities for foreign portfolio GDP. The issue of securities or money market instru- investment.

26 ©International Monetary Fund. Not for Redistribution Areas for Further Reform

Areas for Further Reform for progress in external sector liberalization are contained in Box 3, page 26. Despite these countries' progress in external liber- In general, with the worldwide integration of fi- alization, they need to reinforce the gains by improv- nancial markets, attention has to be focused not ing the policy mix with respect to macroeconomic only on the benefits but also on the risks of external balance, bank soundness, and political stability. liberalization. While there should be general inter- Progress in structural reforms, such as privatization est in reaping the benefits of financial technolo- of public and state enterprises, recapitalization of fi- gies and integration into external trading systems, nancial institutions, and removal of obstacles to in- countries must carefully weigh the risks associated terbank trading and efficient payments systems, is with capital volatility. To liberalize capital markets greatly needed to establish the systemic resilience without having laid the foundation in terms of struc- required to withstand financial shocks associated tural reforms and financial soundness could be with capital volatility. The main recommendations counterproductive.

27 ©International Monetary Fund. Not for Redistribution VI Legal Infrastructure: Central Bank Autonomy

key requirement for the development of the fi- some others are currently discussing amendments to Anancial sector is an institutional environment them. that is conducive to the effective and efficient for- To a certain extent, while the new laws have in- mulation and implementation of monetary policy. creased the autonomy and accountability of central The regulatory and operating frameworks within banks, none of the selected central bank laws meets which financial systems operate must be simple, un- all the indicators that are typically used to measure ambiguous, transparent, and sound. With regard to autonomy. In this study, the following indicators have the regulatory framework, the legislations governing been used: first, the primary objective of the central the conduct of banking business must follow sound bank should be price stability; second, the central principles. Given that the central bank acts as the nu- bank should be given sufficient authority to imple- cleus of the financial system, the central bank law, ment monetary policy without direct government in- particularly, needs to be clear and precise and must terference; third, the governor and other members of support the development of the financial sector. the bank's governing bodies should be isolated from Specifically, the law should be clear about the pri- short-term political influence; fourth, the economic mary objective of monetary policy and how to autonomy of the central bank should be guaranteed achieve it. On the basis of a growing body of empir- by provisions that limit direct credit to the govern- ical evidence, it is now generally accepted that the ment, prohibit the central bank financing of quasi-fis- primary objective of monetary policy should be cal activities, and ensure that the central bank is fi- price stability and that authority over the pursuit of nancially sound and solvent; and, finally, central bank this objective should be conferred on an autonomous accountability should be ensured through provisions central bank.13 If the authority over monetary policy, requiring prudent reporting on both monetary policy and in particular its implementation, is delegated to and the financial condition of the bank. an autonomous central bank having sufficient au- On the basis of these indicators, a single, un- thority to pursue price stability, uncertainties about weighted legal index of central bank autonomy was price signals are minimized as the signals become developed for this study (see Appendix I, Table Al). more reliable. Not only will this lower inflation and There are, of course, different ways of measuring au- keep it from rising again, but it will also help in allo- tonomy, and a legal index of central bank autonomy cating resources efficiently, leading to high and sus- may have some element of arbitrariness, partly be- tainable output of goods and services. The question cause very different factors are combined into one then is, to what extent have sub-Saharan African indicator and partly also because practices, as they countries been able to meet the requirements of an develop, may not be fully reflected in the central institutional framework that is conducive to finan- bank law. cial sector development? When the index was correlated with inflation rates During the 1990s, these countries took steps to in the selected countries, increased central bank modernize their central banking laws, which had autonomy was found to be associated with lower in- initially been created in the 1960s and 1970s when flation. However, central banks without much auton- central banks were being established. To date, ap- omy were still able to achieve relatively low infla- proximately one-half of the selected countries have tion, but only when the government's monetary amended or completely revised their laws, while policy was sound and credible. The ability to achieve relatively low inflation may have been facilitated by their having a fixed exchange rate policy or

13 an IMF program (see Appendix I, Table A9). Never- A central bank has autonomy if it has sufficient authority theless, increased central bank autonomy, in general, (both de jure and de facto) over the level of reserve money to meet its primary objective and if it can use that authority without further increased credibility in monetary policy and the government's influencing it in a nontransparent manner. thus reduced inflation. As Table 5 shows, most sub-

28 ©International Monetary Fund. Not for Redistribution Objective

tral bank laws include price stability or maintaining Table 5. Degrees of Central Bank the internal and external value of the currency as Autonomy for Selected Sub-Saharan part of other objectives. It is thus difficult to know African Countries, 1997 which objective is accorded priority at any given time or to hold the central bank accountable for its monetary policy actions. However, some of the Group 1 Group II Group III amendments currently being discussed, for instance, Angola* Botswana Kenya in Mauritius and Zimbabwe, give price stability ex- BCEAO Lesotho* Madagascar plicit priority. BEAC Namibia* South Africa As is true of central banks in general, all the se- Ethiopia Tanzania lected sub-Saharan African central banks also seek Ghana Malawi to ensure a safe and efficient financial system, in- Mauritius* cluding the payments systems. Safeguarding the in- Mozambique tegrity of the financial system is critical for the Rwanda transmission of monetary policy signals. Hence, the Swaziland obligations to ensure price stability and a safe finan- Uganda Zambia* cial system will often complement each other, but Zimbabwe* they could also conflict, particularly in the short run. Experience indicates that expansionary monetary Note: * indicates that the central bank law is currently under policy intended to mitigate problems in the financial review. See Table AI for index of autonomy. I: Index is less than sector often ends up aggravating them. For example, 12; II: Index is between 12 and 14; III: Index is 15 or greater. if borrowers, banks, and the general public believe that the government and central bank will always bail out problem banks, there is no incentive to deal promptly with underlying structural problems. Therefore, efforts to ensure a safe and efficient fi- Saharan African countries still confer only limited nancial system should generally be subordinated to autonomy on their central banks in the conduct of price stability, because price stability itself con- monetary policy. tributes to a sound financial sector. There are both benefits and costs in letting the central bank conduct banking supervision, but in Objective countries with less developed financial markets, the benefits may outweigh the costs.15 In particular, An autonomous central bank should have a single given that the central bank is the lender of last resort, objective, or, at least, one clearly defined primary close coordination is always necessary, and skilled objective, to avoid becoming subject to conflicting banking supervisors who are immune to political interests that cause time-inconsistency and credibil- pressure are crucial for efficient supervision. In the ity problems. A clearly defined objective provides selected countries, with the exception of those in the the central bank with some implied powers and also CFA franc zone and Madagascar, the central banks yields a more precise basis for holding the central are in charge of banking supervision. Indeed, in An- bank accountable for its monetary policy actions. gola, Ethiopia, Lesotho, Namibia, Malawi, Tanzania, Furthermore, price stability is, in the final analysis, and Zambia, the central bank also supervises other conducive to sustainable real growth. categories of financial institutions, such as building All the selected sub-Saharan African countries societies and insurance companies. have as an objective either price stability, the value Although overall authority for supervising the of the currency, or monetary stability. However, banking sector may rest with the central bank, in only a few of the central bank laws (those of some countries responsibility for licensing financial Angola, Kenya, Madagascar, South Africa, and institutions either is shared between the central bank Tanzania) give price stability explicit priority. Un- and the ministry of finance or takes place in consul- like many countries, South Africa includes price tation with, or with the approval of, the minister of stability as part of its constitution.14 The other cen- finance or even the prime minister. This setup is likely to make accountability difficult and increases

14The objective is stipulated in the South African Constitution of 1996 (Article 224(1)): "The primary object of the South African Reserve Bank is to protect the value of the currency in 15See for example, Tuya and Zamalloa (1994) and Goodhart the interest of balanced and sustainable economic growth in the and Schoenmaker (1995) for an overview of the pros and cons of Republic" (Government of the Republic of South Africa, 1997). placing banking supervision in the central bank.

29 ©International Monetary Fund. Not for Redistribution VI LEGAL INFRASTRUCTURE: CENTRAL BANK AUTONOMY

the risk of relying on purely subjective criteria for Governing Bodies the granting of licenses and may even encourage rent-seeking behavior in the process. Thus, the bank- The Governor ing supervisor's authority should be made clear and The governor, as chief officer, is usually responsi- objective and must include sole authority for grant- ble for implementing monetary policy; it is therefore ing and revoking licenses. critical that he or she be separated from day-to-day political influence. Thus, the governor should be appointed for a term longer than the political election Political Autonomy cycle, and it must be stipulated that he or she should be dismissed only for breach of qualifications, mis- Political autonomy, that is, independence from conduct, or unsatisfactory performance.17 In almost government, makes the central bank a more credible half of the selected countries, the governor's term is agency.16 In this regard, three features are important longer than four years, which is the usual election in determining the degree of autonomy delegated to cycle. In some extreme cases, such as Ethiopia, the the central bank: the structure of the governing bod- governor does not have a fixed-term appointment. ies of the central bank, the manner in which coordi- However, while most of the laws define breach of nation is ensured, and how conflicts between the qualifications and misconduct as grounds for dis- government and the central bank are resolved. missal, only a few explicitly state that these are the only reasons for dismissal. A few other central bank Coordination and Conflict Resolution laws, however, allow dismissal only for a "just cause," as in Mozambique, but this leaves room for Coordination between the central bank and the interpretation, particularly if no clearly defined pro- government is essential for the proper functioning of visions for conflict resolution are in place. In some the economy. However, it is important, when con- countries, including Botswana, Kenya, and Lesotho, flicts arise between the two, that they be resolved in one possibility is to allow dismissals to be tested in a transparent way. If a central bank can be overruled court or by a special tribunal to avoid arbitrary dis- by the government or if the central bank's authority missals resulting from conflicts with the govern- is at times limited by factors outside its control, there ment. Dismissals could even require approval by the should be legal provisions that make it absolutely legislature. clear to the public that the central bank can no longer Credibility may be further improved if the gover- be considered accountable for the results of the mon- nor is nominated by one body—say, the board—and etary policy pursued. Such an institutional frame- appointed by another body—say, the head of state. work guarantees that the public will be notified in In Lesotho, Namibia, South Africa, and Swaziland, time about policy intentions and that the government either the minister of finance, the prime minister, or will justify its policy choice publicly. Some of the the cabinet nominates or advises, and the head of selected countries in sub-Saharan Africa—namely, state appoints, the governor. In Zambia, the presi- Botswana, Kenya, Namibia, South Africa, Tanzania, dent appoints the governor subject to the ratification and Uganda—have clearly defined provisions in of the national assembly. In several other countries, place to ensure conflict resolution. In these coun- however, the same body, often the head of state, tries, the government can instruct the central bank to nominates or appoints the governor. pursue a specific monetary policy, but only if it is geared toward price stability. In any case, both the government and the central bank must prepare state- The Board of Directors ments, which are presented to the legislature and Monetary policy decisions should be made by a published. In some other countries, there is no for- body that reflects a broad range of views. The num- mal legal obligation to ensure that these divergences ber of board members ranges from 6 in Namibia to are published. In a few of the countries, no conflict 14 in South Africa. In Angola and Mozambique, resolution provisions at all are in place. In Malawi, there is, in addition to the board, a smaller advisory for instance, the president can replace the members committee or a consultative body, which may in- of the governing bodies of the central bank at any clude members of the board and some experts. time, implying that in practice the government can Cooperation with the government on monetary instruct the central bank. policy can be ensured without direct government representation on the board. It is achieved through

16Autonomy should, however, be balanced by accountability regarding both its monetary policy performance and its adminis- 17Dismissal for lack of performance presumes that clearly de- tration of public resources. fined performance criteria are established.

30 ©International Monetary Fund. Not for Redistribution Economic Autonomy provisions that stipulate that the central bank and the sorb in the budget.18 To avoid these losses, some government shall consult with each other but that the central banks may run their operations with the pri- central bank shall not accept instructions unless pub- mary, if not sole, objective of making a profit. This licly announced. Thus, it is not necessary to have practice may in many cases conflict with the objec- government representatives or public officers on the tive of price stability. Also, a central bank law board. The only countries that follow this practice, should ensure that monetary policy can be separated however, are Angola, Madagascar, Mauritius, South from fiscal and exchange rate policies in a mutually Africa, and Zimbabwe. In some countries, a repre- consistent manner. Central banks should thus have sentative of the minister of finance participates in the right instruments in sufficient quantities to man- meetings and makes motions, but has no right to age the overall level of liquidity in the banking vote, as in Kenya and Zambia. In several other coun- system. tries, however, the representative of the minister of finance has the right to vote. Although most of the remaining countries limit the number of public offi- Credit to the Government cers that can be directors, there is no such explicit re- Restrictions on monetary financing of the budget striction as in Uganda. To avoid vested interests, deficit make it possible to separate monetary and fis- most of the countries have provisions in place to pre- cal policy and to leave sufficient authority to the vent officers and shareholders in financial institu- central bank.19 Without explicit limits on credit to tions from becoming members of central bank government, the central bank should not be made re- boards. Nevertheless, if the main role of the board is sponsible for price stability. to monitor the central bank, then it may not be harm- All the sub-Saharan African countries in the study, ful to have some government representatives on the with the exception of South Africa, have provisions board. As an alternative, a special audit board may that explicitly limit direct credit to the government. be established, as in Angola, Botswana, Mozam- However, a few of the laws stipulate that the limits bique, and Rwanda. should be set through an agreement between the cen- The appointment procedures of board members in tral bank and the government at the beginning of Madagascar are interesting because the head of each year (for instance, Ghana). This arrangement state, the government, the national assembly, and may create some uncertainty in inflation expecta- the senate each nominate two members, while the tions. But where there is strong seasonality and a tim- council of ministers actually appoints them. In ing mismatch in the flow of the government's rev- South Africa, the approximately 670 shareholders enues and expenditures, and where only a nascent of the Reserve Bank elect half of the 14 directors, market for government securities exists, it may be ac- who come from different sectors of the economy. ceptable to allow small temporary access to the gov- While these are interesting variations, in the vast ernment.20 The limit of advances varies from 5 per- majority of other cases either the minister of finance cent of the previous year's revenue in Botswana and or the head of state both nominates and appoints the Kenya to 25 percent of estimated annual revenue in directors. Mauritius. However, the more direct credit to the To further avoid any potential influence on mem- government a central bank can extend, the less likely bers of governing bodies, several of the selected cen- it is that the central bank will be able to neutralize the tral bank laws stipulate that remuneration is set at monetary and inflationary effects of such credit. the outset of a term and cannot be changed to the Central bank advances to government should be disadvantage of a member during the term. To but- repaid as soon as possible, certainly within the finan- tress this practice, in Rwanda, for instance, the gov- cial year. Admittedly, some spillover into the next fi- ernor continues to receive his salary one year after nancial year may be needed because of uncertainties his term ends. During this period, the governor is regarding revenue and expenditure projections. forbidden to assist public or private enterprises. Many of the laws allow advances to be repaid within three to six months of the new financial year. Some countries—such as Ethiopia, Madagascar, Economic Autonomy Mauritius, Swaziland, and Tanzania—set an explicit The central bank should be protected from pressures resulting from government policies that de 18See, for example, Leone (1993) and Mackenzie and Stella facto limit the central bank's authority over mone- (1996) for a discussion of quasi-fiscal activities. tary policy. For example, the authority of the central l9For a detailed discussion on limiting credit to government, see Leone (1991) and Cottarelli (1993). bank is diminished when it suffers losses resulting 20Several countries with more developed financial markets pro- from the government's quasi-fiscal operations, hibit the central bank from extending direct credit to the govern- which the government is not legally obligated to ab- ment (for example, the future European Central Bank).

31 ©International Monetary Fund. Not for Redistribution VI LEGAL INFRASTRUCTURE: CENTRAL BANK AUTONOMY

limit for indirect financing, including the part of the laws, either explicitly or implicitly, allocate the right central bank's portfolio resulting from open market to oversee the exchange rate regime to the govern- operations. A few other countries, such as Namibia, ment, often with an explicit requirement for consul- set an aggregate limit for all loans and advances. tation between the central bank and the government, This limit may be very useful if the central bank is as for instance in Botswana, Malawi, and Uganda. the major player in the market for government secu- However, a few of the more recent central bank laws rities and can thus perceptibly influence the interest allow the central bank to actually formulate the ex- rate of government securities through its actions. change rate policy, as in Kenya and Tanzania. In One way to exclude operations conducted with the Botswana, the government reports when the ex- sole purpose of managing the liquidity in the system change rate policy becomes unsustainable, and the is to exempt open market operations for monetary central bank can in principle then denounce its re- policy purposes. sponsibility for price stability in accordance with the Loans and advances should bear market-related provisions for conflict resolution. In most countries, interest rates, which, in principle would encourage however, the central bank is required to report only the government to approach the financial markets in problems in ensuring reasonable levels of foreign the first instance. In a few of the selected countries, exchange reserves. Unfortunately, if the government such as Kenya, the law explicitly stipulates the use does not react, most countries do not legislate when of a market-determined interest rate, while in the the central bank can temporarily abandon its objec- vast majority of the other countries, the central bank tive of price stability. A few countries have adopted is allowed to set the rate, as in Mauritius. Most cen- provisions to further improve trust in the currency, tral bank laws explicitly prohibit the central bank mainly through backing requirements, as, for exam- from participating in the primary market, but all the ple, in Mauritius and Swaziland. selected central banks can participate in the secondary market. Financial Conditions In many developing countries, central banks get involved in quasi-fiscal activities that result in se- Financial provisions should ensure that the cen- vere losses and thus eliminate whatever autonomy tral bank does not become subject to indirect influ- they might otherwise have had. Activities such as ence from the government, which could happen if undertaking foreign borrowing on behalf of the gov- the central bank received frequent appropriations ernment, financial sector restructuring that gives rise from the government. Without provisions to ensure to the central bank's taking over nonperforming the solvency of the central bank, insufficient profits debt, guaranteeing an unsustainable exchange rate, could encourage the central bank to pursue higher financing development activities, and conducting inflation or to use direct monetary instruments that banking functions for state-owned commercial cor- may function as implicit taxes. The laws in the sub- porations can cause significant losses. These activi- Saharan African countries stipulate that the central ties should be separated from the central bank to im- bank can make prudent provisions and allocations prove transparency and avoid endangering monetary to general reserves before the residual profit is stability. Several sub-Saharan African countries nev- transferred to the government. In most of the se- ertheless allow quasi-fiscal activities in their laws— lected countries, a share of profits must be allocated in particular, for development purposes (Malawi, to reserve funds until such reserves reach a certain Swaziland, and Uganda). In some countries, the cen- ratio of the initial capital. In Botswana, however, tral bank's involvement in institutions to develop the the central bank in consultation with one minister economy is explicitly limited. determines the allocation of net profits. Another means of ensuring the financial viability of central banks is the following: given that most of the coun- Exchange Rate Policy tries have experienced high inflation in the past, the Monetary and exchange rate policies are closely level of general reserves retained is related to the related. Even without a free-floating exchange rate central bank's monetary liabilities, as in Malawi, regime, the central bank can achieve sufficient au- because this approach better reflects the risks the re- thority over exchange rate policy. The law should serves are intended to cover. Moreover, in all the stipulate that the central bank shall report on signifi- countries, the government is obligated to transfer cant changes in the level of reserves and the causes capital to the central bank in the form of nonnego- of this development and suggest measures to the tiable securities if the value of the assets is less than government to mitigate the situation if the foreign the sum of its liabilities and capital. Therefore, in exchange reserves reach critical thresholds. If the principle, the financial provisions in the selected central bank can determine the exchange rate central banks should in general be sufficient to en- regime, then there is no conflict. Most central bank sure autonomy.

32 ©International Monetary Fund. Not for Redistribution Accountability

Monetary Instruments nual report on the operations of the central bank. In addition to conferring on the central bank the However, an increasing number of countries, includ- authority to conduct monetary policy, the law also ing Kenya, Tanzania, and Zambia, now require the usually includes a range of more or less specific central bank to present semiannual monetary policy monetary instruments that the central bank can use. statements. Some central bank laws stipulate, in ad- The paradigm behind central bank autonomy pre- dition, that minutes must be taken on the delibera- sumes that the central bank does not direct credit tions of the central bank board, but they often leave within the financial system, because to do so would it to the board to decide on the manner of their publi- distort decision making about economic policies. cation. In practice, most central banks analyze and Specific allocation of credit should be left to the fi- publish information about the economy in their nancial sector, which would then determine the need bulletins. for credit according to profitability criteria for the Central banks control public money, and so sound private sector and according to economic criteria for business and financial practices are important to en- the government. However, in countries with less de- sure central bank credibility. Lavish or unnecessary veloped financial markets, the central bank may expenditures endanger credibility and, hence, auton- have to rely on more direct instruments during a omy. To ensure sound financial practice, the central transition period to affect the level of money in the bank must publish financial statements that are in banking system. accordance with international accounting standards, In addition to the right to set key short-term inter- and when practice deviates from these standards, est rates and to rediscount and conduct open market deviations should be fully disclosed. Many sub- operations in a specific list of financial assets, sev- Saharan African central bank laws are quiet about eral of the selected central bank laws have detailed accounting standards while explicitly stipulating that provisions on indirect monetary instruments. Many "sound accounting principles" should be used and of these instruments, such as restricting credit to spe- "proper books" kept. However, all the selected sub- cific sectors or limiting interest rates for certain de- Saharan African central banks are required to pro- positors or borrowers, have quasi-fiscal elements. duce annual audited statements, and these statements must be supplemented by other, more frequent—if less rigorous—statements. For example, a summary Accountability balance sheet must be published in most of the selected countries, at a minimum, by the end of each When the state delegates authority to an au- month. Such documents further facilitate the moni- tonomous central bank, the bank should be made ac- toring of the central bank. countable for how it uses that authority to conduct Most central bank laws require independent ex- monetary policy and for how it administers the often ternal auditors, but a few countries (for instance, significant amounts of public money. A precondition Ghana and Uganda) use the auditor general. While for monitoring the monetary policy performance of it is reasonable that the minister of finance, or the the central bank is that the objectives must be clearly person in charge of monitoring the central bank, defined, subject to ranking if there is more than one have the right to make ad hoc investigations, it is objective, and easy to monitor. important that independent, external, authorized au- Most of the sub-Saharan African central banks are ditors also be used to ensure full disclosure accord- accountable for monetary policy to the minister of ing to well-established accounting practices. finance, who then forwards the annual report and the On the basis of the foregoing, it is evident that audited financial statements to the legislature. Some- most sub-Saharan African countries recognize the times the central banks forward copies directly to the importance of providing a favorable legal and regu- legislature, which reduces the possibility of short- latory framework for the efficient conduct of mone- term government influence on the implementation of tary policy and, ultimately, of ensuring price stabil- monetary policy. However, in a few cases the minis- ity. It is also evident that most countries have made ter of finance (Namibia) or the council of ministers some progress in providing such an environment, al- (Madagascar) must approve the format in which the though progress has been rather slow for many rea- report is published. This could reduce the credibility sons. First, considerable inertia has been created be- of monetary policy. cause of tradition. Most sub-Saharan African central To facilitate performance monitoring, the central banks were established in the tradition of the Bank of bank law should stipulate that transparent reports on England or the Bank of France, both of which, until monetary policy should be published. Frequent in- quite recently, enjoyed only limited autonomy. Even formation on monetary policy can also make it more with the trend toward liberalization of financial sys- difficult for the government to intervene. Central tems, sub-Saharan African governments and their bank laws generally require, at a minimum, an an- central banks see little compelling reason to change;

©International Monetary Fund. Not for Redistribution VI LEGAL INFRASTRUCTURE: CENTRAL BANK AUTONOMY

Box 4. Main Recommendations on Central Bank Autonomy and Accountability Objectives and targets. Price stability should be the pointment/confirmation should be by different bodies; preferred primary objective of monetary policy. Con- terms should be longer than the election cycle of the sistent with this broad objective, specific targets— main body in the appointment process and should be which could involve direct inflation targets, mainte- staggered; and dismissal of board members should nance of a fixed exchange rate, or monetary aggregate occur only for breaches of qualification requirements targets—should be established and published. These and misconduct and on performance grounds only if targets may be determined by the central bank (goal or clearly defined. The latter could be ruled upon by the target autonomy) or by the government in agreement supreme court or an independent tribunal and be with with the central bank to be implemented autonomously the other board members' prior consent. by the central bank (instrument autonomy). To facilitate accountability, the targets should be easy to Credit to government. If not prohibited, direct monitor. credit to the government should be carefully limited to what is consistent with monetary policy objectives and Monetary policy. A central bank should be free to targets. For example, temporary advances and loans implement monetary policy to achieve its target. To this could be allowed if (1) they are explicitly limited to a end, the bank should have authority to determine quan- small ratio of average recurrent revenue of preceding tities and interest rates on its own transactions without fiscal years (say, 5 percent); (2) they bear a market- interference from the government. related interest rate; and (3) they are securitized by negotiable securities. The central bank should not under- Conflict resolution. A clear and open process should write and participate as a buyer in the primary market be established to resolve any policy conflict between for government securities, except with noncompetitive the central bank and the government. Some of the bids and within the overall limit for credit to govern- points below (for example, the nature of government ment. Indirect credit to the government, or buying out- representation on the board) are potential channels for right existing government securities held by the mar- such a resolution; another approach is to allow the gov- ket, or accepting them as collateral, should be guided ernment to direct or overrule the central bank, but such by monetary policy objectives. The central bank should a power should be constrained to avoid other than ex- not finance quasi-fiscal activities. ceptional use. It should be absolutely clear to the executive, the legislature, and the general public that re- Exchange rate policy. Basic consistency must be sponsibility for the results lies with the government, ensured between exchange rate and monetary policy. If not the central bank, if the latter is overruled, its advice exchange rate policy (including choice of regime) is ignored, or its effectiveness significantly limited by not solely the responsibility of the central bank, the government policies. bank should nevertheless have sufficient authority to implement monetary policy within the constraint of ex- Governor. For balance, nomination and appoint- change rate policy (for example, in a fixed-rate regime, ment/confirmation of the governor should be handled to support the exchange rate as the specific target of by separate bodies. The term should be longer than the monetary policy) and should be the principal advisor election cycle of the body with the predominant role in on exchange rate policy issues (for example, as to selecting the governor. Dismissal should be only for whether the current regime is most suitable for the fun- misrepresentation of qualifications or misconduct; lack damental price stability objective). In a conflict with of performance could also be grounds if clearly defined the government on exchange rate issues, the conflict in terms of the primary objective and specific targets. resolution procedures as above should come into The latter could be ruled upon by a suitable and inde- effect. pendent judicial process and perhaps be with the consent of the legislature. Financial conditions. The law should ensure that the central bank has sufficient financial autonomy to Board. Composition of the board should ensure a support policy autonomy, but with matching financial reasonably well informed and balanced view, but accountability. Its budget should not be subject to nor- should avoid conflicts of interest. Precisely what is rea- mal annual appropriation procedures (but could be sub- sonable depends in part on the role of the board (deci- ject to a longer-term appropriation—for example, on a sion making, monitoring, or purely advisory) and cycle consistent with the term of the governor). Only whether it is a single or multiple board structure. The realized net profits, after prudent provisioning by the highest level board should include a majority of nonex- central bank and appropriate allocations to general re- ecutive, nongovernment directors. Indeed, direct gov- serves, should be returned to the government. The government representatives should be eliminated from a ernment should ensure the solvency of the central bank policy board and probably also from a monitoring by transferring interest-bearing negotiable securities if board. If a government representative does participate the authorized capital is depleted. The body to which in a policy board, it should at least be without the right the central bank is accountable should be allowed to to vote (though it might be with a limited, temporary ask external auditors or the auditor general to review veto power). As with the governor, nomination and ap- the central bank's accounts and procedures.

34 ©International Monetary Fund. Not for Redistribution Areas for Further Reform on the contrary, most of these governments believe it that give explicit priority to price stability as the ob- is in their interest to maintain the status quo. Second, jective of monetary policy; give authority to the cen- the concept of an autonomous central bank and the tral bank to supervise the financial system; consoli- role it plays in the development of the financial sys- date the licensing and revocation of licenses in one tem have gained acceptance only within the last body, preferably the central bank; require an institu- decade; it may take time for sub-Saharan African tionalized, transparent mechanism for resolving di- countries, which are only now making a break- vergences between fiscal policy and monetary pol- through with financial sector reform, to embrace all icy; ensure that governors of central banks and the tenets of an autonomous central bank. Third, members of boards of directors do not come under most sub-Saharan African governments are not as undue political influence; place explicit and reason- committed to structural reform of the economies as able limits on the amount of credit that the central would be desirable for longer-term growth. Except bank can grant to the government; require such cred- for a few countries, even in those where central its to be collateralized by income-yielding assets banking laws have been amended, structural reform bearing market-determined rates; protect the central has been initiated at the recommendation of the IMF bank from the obligation to undertake quasi-fiscal and other similar partners and not because of a deep- activities; and ensure the financial viability of the seated desire in the country for reform. Fourth, and central bank. (See Box 4 for a detailed description of perhaps most important, progress toward central required reforms in central bank autonomy and bank autonomy has been slow because of political accountability.) considerations arising primarily out of governments' A well-conceived legislation, however, represents unmitigated desire to exert control—directly or indi- only a minimum condition for central bank auton- rectly—over central bank finances in order to fund omy. A sufficient condition would be commitment government budget deficits. by governments to ensure compliance with the provisions of the legislation. In this regard, it would be necessary to set up independent, specialized courts Areas for Further Reform that deal only with matters relating to the financial sector. This is not only likely to speed up the settle- To attain a suitable level of central bank auton- ment of financial contractual cases, but will, above omy, therefore, governments need to promulgate all, send a clear signal regarding the direction and in- legislation that contains, at a minimum, provisions tention of financial policies.

35 ©International Monetary Fund. Not for Redistribution VII Payments System

he payments system is an essential part of the fi- payments systems strategies, coordinate regional ap- Tnancial infrastructure in a market economy. It proaches to cross-border payments, and use the same ensures that transactions are settled in a timely and terminology and standards. A project team based in reliable manner. While an efficient payments system South Africa provides much of the technical input can facilitate the smooth operation of markets and for the project. support sustainable economic growth, an inefficient The World Bank has also been involved in im- one easily creates bottlenecks that impede real proving payments systems in several countries, as growth and undermine confidence in payments has the IMF through MAE's technical assistance in media and the financial system as a whole. such countries as Lesotho, Malawi, Mozambique, The quality of payments systems in sub-Saharan Tanzania, and Zambia, as well as the countries for Africa varies significantly. Cash is the most important which the BCEAO serves as central bank. means of payment for the vast majority of the population, reflecting a lack of development in the noncash payments systems in many of the countries of the re- Weaknesses in the Payments System gion. Electronic payments systems are available to only a limited extent. Although banks in several coun- For the vast majority of people in sub-Saharan tries have introduced automatic teller machines African countries, cash is the only medium for (Botswana, Mauritius, South Africa, Zambia, and making payments. With the exception of Botswana, Zimbabwe), typically only the banks' own customers Lesotho, South Africa, and Swaziland, cash con- can use them, and there are no linkages between bank stitutes a relatively high share of GDP and of broad networks. In addition, there is no clear distinction be- money. Low denominations of circulating cash, re- tween noncash systems for large and time-sensitive flecting a high velocity of circulation in the face of payments and those for retail payments, although high inflation, make large transactions difficult and some countries—such as Mauritius, South Africa, and inconvenient because of the large number of notes Zimbabwe—are working toward the introduction of a involved. In some areas, there is a shortage of do- real-time gross settlement system for large-value and mestic currency, and foreign currencies are sometime-critical transactions. In general, therefore, most times used as a means of payment ("dollarization"). of the noncash systems are paper based, relying pri- In some areas, bankers resort to bargaining, which marily on checks, and are often manual in that they do directly increases the cost of transactions. not use automated sorting and truncation. In several of Where significant noncash payments systems these countries, the rules for clearing and settlement have been emerging, these too have exhibited a are poorly enforced, resulting in erratic float, fraud, number of weaknesses. First, they are generally not and significant systemic risks for the central bank. separated into retail and large-value systems, and Several countries have taken major initiatives to second, most of the noncash systems are paper reform their payments systems—a demanding and based. The check is the most common paper instru- time-consuming task. But with increasing growth ment. While post office payment services exist in and a general movement toward the use of indirect some of these countries (Botswana, for example), in monetary instruments, the urgency for such reforms the region as a whole these services have tended to intensifies. Unless they progress quickly, payments decline even though the advantages of a comprehen- system inadequacies will become a significant hin- sive post office network can support the use of drance to the development of financial systems in postal orders as an alternative to checks. Third, in sub-Saharan Africa. some countries, the noncash payment system has Recognizing this problem, the Southern African been subject to significant dollarization. Development Community has established a project Banks typically exchange checks and other paper to assist individual countries in the region to define at clearinghouses in major cities and centers each

36 ©International Monetary Fund. Not for Redistribution Improvements to Noncash Payments System morning; centers often hold a second clearing in the afternoon, sometimes just for large-value checks. Box 5. Lamfalussy Standards: Minimum Members and the supervisor of the clearinghouse Standards for the Design and Operation calculate and agree on the net multilateral settlement of Cross-Border and Multicurrency positions for each member, which are then settled Netting and Settlement Schemes across the members' current accounts (settlement accounts) at the central bank, generally once each busi- I. Netting schemes should have a well-founded ness day. The sorting of checks is mostly manual, the legal basis under all relevant jurisdictions. coordination of clearings nationwide is poor, and the II. Netting scheme participants should have a clear rules and procedures of the clearinghouses and the understanding of the impact of the particular allocation of responsibilities for settlement, resolu- scheme on each of the financial risks affected tion of disputes, and enforcement of compliance are by the netting process. often vague. In many countries, there is the possibil- III. Multilateral netting systems should have ity for increased automation of clearings and for im- clearly defined procedures for the management of credit risks and liquidity risks that specify provements to the rules and procedures that govern the respective responsibilities of the netting clearing operations and their settlement. provider and the participants. These procedures In major cities throughout South Africa and other should also ensure that all parties have both the sub-Saharan African countries, there are often auto- incentives and the capabilities to manage and mated or electronic payments systems operating. contain each of the risks they bear and that lim- Some banks have automatic teller machines, issue its are placed on the maximum level of credit credit and debit cards, provide direct debit and credit exposure that can be produced by each services, and offer electronic transfers of funds at the participant. point of sale. However, an absence of interbank co- IV. Multilateral netting systems should, at a mini- operation arrangements limits these services to in- mum, be capable of ensuring the timely com- house transactions between customers of the banks pletion of daily settlements in the event of an offering them, except in the case of major debit and inability to settle by the participant with the credit cards where other banks in the same country largest single net debit position. also issue the same brand cards (for example, in V. Multilateral netting systems should have objec- Botswana and Mauritius). Development of interbank tive and publicly disclosed criteria for admis- cooperation would considerably improve the pay- sion that permit fair and open access. VI. All netting schemes should ensure the opera- ments services available to bank customers. tional reliability of technical systems and the Some countries have local foreign exchange availability of backup facilities capable of clearings in which members interchange foreign- completing daily processing requirements. denominated checks issued by local banks. The settlement agent is then often a reputable international Source: Bank for International Settlements (1990), bank (for example, in Tanzania in recent years) or p. 26. sometimes the central bank, or correspondent banks abroad may settle various positions. Typically, central bank oversight of these arrangements has not been as thorough as is desirable because of an insuf- significant systemic risks. The clearing system may ficient awareness of the risks associated with these have basic rules that are sometimes little more than arrangements. expressions of clearing processes. This situation Several countries that now issue government se- often leaves bank customers, bank members of the curities and have stock exchanges are introducing clearing system, and, in particular, the central bank book-entry systems, which have already facilitated financially exposed if there is a crisis or a bank fail- the settlement of the security leg of transactions. ure. Solutions include the development of clearing However, often there has been little progress in orga- rules that cover not just the technical processes of nizing the associated payment settlements to support the clearing and exchange of paper, but also settle- standards, such as delivery versus payment. ment processes and procedures to follow if a member fails to settle. In sum, netting systems should comply with the Lamfalussy standards, and this is a Improvements to Noncash high priority for large-value systems. Payments System In countries where manual clearings dominate, banks are slow to provide final funds to depositing In general, the multilateral netting clearing sys- customers. In some countries, interregional clearings tems do not comply with the Lamfalussy standards can involve significant delays, which means that the (see Box 5) and therefore expose the central bank to period between the initial deposit of a check and the

37 ©International Monetary Fund. Not for Redistribution VII PAYMENTS SYSTEM

depositor's access to funds from the deposit can be difficult. But float may also affect monetary aggre- unduly long—sometimes several weeks.21 The rea- gates and credit aggregates that are used as indica- sons for delays are many, including the legal require- tors of the monetary policy stance. ment to present checks to the paying bank branch for Float may be decreased through a reduction of payment. This requirement, combined with infre- some of the operational delays and backlogs, which quent secure transport links between paying and col- can often be achieved through better staffing, im- lecting banks' branches, results in long delays. Other proved operational procedures, and better training of problems include high levels of fraud and other re- processing staff, or through the establishment of lated criminal activity that increase the amount of dedicated document delivery services to eliminate processing and checking that banks do before they transportation delays where possible. Short of more credit or debit an account, as well as built-in incen- fundamental reforms to speed up the payments tives, such as float, that discourage rapid clearing process, several more partial solutions can be and finalization of payments. adopted to reduce float. Availability schedules, for The authorities should encourage banks to example, may delay the credit for a check (or debit process, clear, settle, and transport checks more for a payment order) to a time equivalent to that in quickly. Central banks should also encourage com- which the corresponding debit (credit) would nor- mercial banks to automate their internal clearing mally be processed and posted. Another example is procedures when the benefits outweigh the costs of the provisional crediting of checks, where the value doing so. Perhaps the largest gains will result from is credited to the payee's bank account, but the value legal changes allowing the banks to "present" a pay- cannot be withdrawn until the payment is finally set- ment instrument electronically to the paying bank. tled. It may also be possible to discourage float Such a change, when combined with the necessary through appropriate pricing, which will tend to off- infrastructure, can radically speed up the availability set the costs of float.22 of funds to depositors, particularly in those areas In a number of sub-Saharan African countries, where telecommunications are satisfactory. Further- fraud is a significant problem to the extent that it has more, enforced standards for checks, use of mag- undermined the use of the payments system in sev- netic ink character recognition, and optical character eral countries. Fraud may include simple kiting recognition would allow automation of the process- schemes or can involve bank staff, forgers, and often ing and improve security in many payments systems. clearing clerks. In designing measures to combat However, in many rural regions, the infrastructure is fraud, policymakers should avoid regulations and not developed or reliable enough, or the volumes are arrangements that may overburden the payments sys- simply too small, to warrant investment in such tems and slow the processing of transactions. In processes. Thus, two systems may be required: man- some countries, relatively simple improvement can ual in rural areas and automated in urban areas. be made to clearinghouse operations and to other A lack of synchronization between accounting procedures to improve security. The prevalence of (posting) of final funds to the accounts of the payer, fraud and forgery can also be decreased in many the paying bank, the receiving (collecting) bank, and countries through actions that make it more difficult the payees can result in float. For example, in manual for forgers to alter checks or other bank paper. The check systems, it may take several days before a introduction of secure check paper and secure print- bank debits a payer's bank account for a check. Thus, ing can significantly improve matters, as can auto- the payer, who has initiated payment, retains the use mated processing with automated verification of the funds for several days. Such a situation creates procedures. incentives to exploit the float and thus act in a way The legal systems in some countries also impede that will degrade the effectiveness of the payments the development of noncash payments systems. system. Sometimes the arrangements benefit banks at They are slow, outdated, and often unpredictable in the expense of bank customers, as in Zambia. business and financial matters. Without improve- Float can also increase the difficulty of implements in the legal systems that will ensure financial menting monetary policy. In particular, if the central discipline, it will be difficult to significantly im- bank is the government's fiscal agent, the liquidity prove the payments system. Legislation of insol- effects of the government's spending will be highly vency, netting arrangements, and the authority of ad- unpredictable, making liquidity management very

22When the United States adopted the Monetary Control Act of 21 For instance, the 1991 regulation of clearing in Mozambique 1980, for example, it introduced measures to reduce the float by stipulated that the deadline for returning payments drawn in the adopting availability schedules and pricing the remaining float same city was 24 hours; for payment documents between provin- (Young, 1986). The pricing involved an explicit interest charge cial capitals, 60 days; and as long as 90 days for some other by the Federal Reserve on the proportion of banks' reserves that cases. could be attributed to float.

38 ©International Monetary Fund. Not for Redistribution Areas for Further Reform

Box 6. Main Recommendations on Payments Systems Objectives. Reduce the economy's explicit and im- tem. Consideration must be given to proper pricing plicit transactions costs in making payments; improve with sound incentives, queuing systems, collateraliza- the integrity of the payments systems by reducing sys- tion, and/or limits on central bank intraday credit to temic risks (mainly at the wholesale level); and en- minimize demands on liquidity. The RTGS system hance efficiency (mainly at the retail level). must have fair and open admission, and the operational reliability and backup facilities for completing real- National payments council. The central bank should time processing should be ensured. establish a national payments council (NPC), which should (1) develop a long-run payments system strat- Netting schemes. Systemic risk can also be reduced egy; (2) meet on a regular basis (for example, quarterly) if netting schemes comply with the Lamfalussy stan- to discuss developments in both wholesale and retail dards. Among other features, compliance will ensure payments systems, in particular, regarding risk and effi- that there are incentives and/or regulations to ensure fi- ciency issues; and (3) establish working groups to as- nality without a public guarantee and that time lags in sess and make recommendations on specific payments settlement are short (at least same-day settlement). The system issues as necessary (for example, adopt new uni- Lamfalussy standards are contained in Box 5. form formats and standards for checks and similar procedures). The central bank should take a leadership role: Securities settlement. Book-entry systems facilitate a high-level central banker should chair the NPC, and the clearing and settlement of securities. Settlement the central bank should provide secretariat functions for and transfer arrangements, particularly delivery versus the NPC. Membership should include providers and payment, should meet the recommendations of the users of payments system services, such as the banking Bank for International Settlements, the International sector and other financial and nonfinancial institutions Organization of Securities Commissions, and the (for example, telecommunications suppliers) that are Group of Thirty Countries. actively participating in the payments system, govern- Foreign exchange settlement. Measures should be ment agencies, and consumer representatives. taken to reduce the settlement gap between the two legs of transactions in foreign exchange (Herstatt risk). Ide- Role of the central bank. The central bank, in addi- ally, delivery-versus-payment arrangements should be tion to setting up an NPC, should oversee the payments established to eliminate the risk of nonsynchronous set- systems and promote the necessary legal framework tlement. Netting arrangements for transactions in for- (for example, for truncation) for a sound payments sys- eign exchange should also comply with the Lamfalussy tem. Therefore, the central bank should develop a sepa- standards. rate payments system unit. In particular, the central bank should centralize the commercial banks' settle- Retail payments systems. The NPC and the central ment accounts at the central bank. bank should promote adequate pricing, strengthen reliability, develop clearinghouse organizations, and encour- Large-value transfer systems. Reduce systemic age private sector participation in clearing retail pay- risk in wholesale systems by ensuring that large and ments. The NPC should also be involved in consumer time-sensitive payments are cleared, are settled on the and development issues—for instance, by promoting books of the central bank, and are final (that is, the pay- confidence in the payments systems, ensuring that suffi- ment is irrevocable and unconditional) in a predictable cient payment services are provided to all regions and and timely way. the whole population, promoting fair treatment of cus- Real-time gross settlement. Systemic risk can be tomers and consumer organizations, and ensuring effec- reduced by a real-time gross settlement (RTGS) sys- tive and fair dispute resolution procedures.

ministrators and liquidators all need to be clarified the central bank is often legally committed to over- and enforced. However, even countries in which the seeing the safety and efficiency of the payments sys- legal system operates satisfactorily may need to clar- tem. Second, the other participants in the payments ify the rules for electronic fund transfers so as to system, including users, banks, and other providers allow truncation, which will support the further de- of payment services, will typically have vested inter- velopment of the payments system. ests—for instance, with regard to exploiting the float—and will thus not have the incentive to reform the system. Third, the central bank will typically Areas for Further Reform bear the costs of an inefficient payments system, either by lower seigniorage or by assuming the risk of The central bank should take the lead in reforming the system. A major first step to ensure continued the payments system in all sub-Saharan African improvement of the payments systems is to establish countries—a continuous and arduous process. First, a national payments council, which should be

39 ©International Monetary Fund. Not for Redistribution VII PAYMENTS SYSTEM

headed by a high-ranking dynamic central banker. payments, ensuring that multilateral netting systems Several countries have now established a national comply with the Lamfalussy standards, and perhaps payments council, among others, Malawi, South establishing a real-time gross settlement system for Africa, Zambia, and Zimbabwe. large and time-critical payments. A real-time gross A newly established payments council will typi- settlement system and a linkage to the depository for cally have a two-pronged strategy: first, to identify government securities, which ideally should ensure and address immediate problems; and, second, to es- delivery versus payment, are important elements of tablish a strategy for the development of the pay- the infrastructure for a central bank to conduct quick ments system. The long-run strategy would include and efficient open market operations. Further actions revising the legal framework to facilitate electronic in this area are summarized in Box 6, page 39.

40 ©International Monetary Fund. Not for Redistribution VIII Central Bank Accounting, Internal Auditing, and Information Technology

he accounting system is key to the proper and stantial donor assistance to promote the education of Teffective functioning of a central bank. Sound professionally skilled independent accountants. and transparent accounting principles are crucial for MAE has provided technical assistance in central providing credible and timely information that al- bank accounting and internal audit procedures to lows decision makers to formulate and assess several of the sub-Saharan African countries, includ- macroeconomic policies. As sub-Saharan African ing Angola, Botswana, Malawi, Rwanda, Tanzania, countries rely increasingly on market signals and be- and Zambia. Its goal has been to assess the overall come more dynamic, access to timely and reliable accounting framework and create an action plan that accounting information becomes crucial to sound is then supported by short-term resident experts. The decision making. Furthermore, the expanding use of action plans have highlighted such areas as improv- indirect monetary instruments (in particular, open ing accounting and financial reporting; ensuring im- market operations in government securities) puts partial and independent audits; establishing a regula- some new demands on central banks' accounting tory framework for sound financial reporting and systems (see Dalton, 1997). Given that many central monitoring; establishing national accounting boards; banks are also issuing regulations for commercial and improving public sector accounting. Central banks' accounting (especially important for off-site banks that have committed themselves to reform in banking supervision), it is important that the central these areas have witnessed substantial progress in banks themselves practice what they preach. their accounting and auditing standards. In addition to sound financial accounting, central National accounting boards have now been estab- bank management also requires information systems lished in most of the countries, and in some, a class that identify operational weaknesses and improve of independent auditors has also been created. For the effectiveness and efficiency of central banks' use instance, in the region's anglophone countries, the of resources. This places a special emphasis on the majority of accounting bodies are recognized under development of management and budgeting ac- a legislative act, which may also regulate the posi- counting systems. The operation of a sound account- tion of auditor. The national accounting boards also ing system also should be complemented by an inde- follow general accounting practices to reduce diver- pendent and objective internal audit function that sity and harmonize accounting practices in the con- examines the appropriateness and effectiveness of text of the local institutional framework and other both financial and operational internal controls. In requirements, such as taxation. In Zimbabwe, for ex- sum, continuous improvement in central bank ac- ample, the Accounting and Practices Board, which is counting and internal audit procedures will facilitate an independent body consisting of representatives the accountability and thus the credibility of the cen- from the accounting profession, government, and the tral bank. business community, has adapted international ac- A survey conducted by the UN Centre on Transna- counting standards to the local environment. These tional Corporations, the International Labor Office, standards are mandatory for parastatals and local au- and the World Bank in 1990 revealed that develop- thorities, as well as all businesses. The Accounting ment of accounting and auditing standards in sub- and Standards Committee in Mauritius, established Saharan African countries generally has not been by the government, also uses international account- given high priority (United Nations, Centre on ing standards as a point of reference for national Transnational Corporations, 1991). This was, in par- standards. In addition, several countries, including ticular, a problem in the government sector, where Malawi, South Africa, and Zimbabwe, have estab- accounting apparently was often considered a mere lished special reviews of the accounting profession clerical function (United Nations, Department of to guarantee the quality of external auditing. Technical Cooperation for Development, 1991). While some countries have made progress, central However, several countries have since received sub- bank accounting is often still considered a mere

41 ©International Monetary Fund. Not for Redistribution VIII ACCOUNTING, AUDITING, AND INFORMATION TECHNOLOGY

bookkeeping and recording function, and a good come statement. For instance, some of the recent number of others pay inadequate attention to the in- currency crises have not been addressed in time be- formation needs of a more market-oriented econ- cause of imperfect information about future obliga- omy. As a result, sub-Saharan African countries con- tions (forward contracts). Some countries prefer to tinue to have problems with reporting timely and transfer all unrealized foreign exchange losses and relevant financial information. gains to a separate revaluation account, while others prefer to show the effect through the profit and loss statement. As a related matter, most of the central Typical Problems bank laws also recommend that only realized foreign exchange gains be distributed as profit to the gov- Some accounting problems are common to all ernment. This serves to avoid monetization of cen- central banks, not just those in sub-Saharan Africa. tral bank profits that may not have involved an ac- They include accounting for operations in foreign tual flow of resources to the central bank. exchange, in particular how to treat revaluation Another relevant issue for central banks is choos- gains and losses, recognition and measurement of ing the appropriate basis for valuing major assets. It off-balance-sheet items often involving foreign exis always difficult to assess the current value of a fi- change financial instruments, and proper accounting nancial asset, such as a government security, without for and disclosure of quasi-fiscal activities. Quasi- deep and liquid markets. Accordingly, when markets fiscal activities could involve, for example, financ- are not well developed, there is a general agreement ing the development of such sectors as rural finance to translate monetary assets using their historical or possibly providing implicit subsidies through prices. If market prices are available, and the values guarantees or incentive schemes.23 The motives not of central bank assets fall, the central bank should to publish separate information about these activities immediately make provisions when such losses are may vary, but they are often political. However, as identified even though they are not yet realized. Sev- noted above, it is crucial that the accounting frame- eral central banks in sub-Saharan African countries work provide decision makers with the best informa- have experienced such losses and have, in general, tion available so that they will be able to identify the been able to make the necessary provisions. costs of quasi-fiscal activities. If these activities cre- In addition to these problems, many central banks ate losses for the central bank that in fact deplete its in sub-Saharan African countries have experienced a capital, the result is tantamount to providing the gov- range of operational problems resulting in delayed ernment with direct credit. Because the government and incomplete accounting. Delays can be caused by should bear the consequences of these actions and an insufficient flow of information between central should also ensure the solvency of the central bank, bank branches or even between departments. For ex- the central bank should have a strong motive to es- ample, in 1993, although the Zanzibar branch of the tablish an accounting system that can identify these Bank of Tanzania produced a daily balance sheet, losses properly. the branch transmitted only a weekly balance sheet Accounting for operations in foreign exchange is because greater frequency was not requested. In particularly difficult, and practices vary.24 The gen- some countries, it may be necessary to improve erally accepted accounting principles require that in- communication links, which also are important for come and expenditure accounts related to foreign the development of the payments system. Delays can exchange transactions fairly present the results for also occur if transactions are not duly entered at the the operations of the period covered. The accounting time they take place. The objective should be for the principles represent a prudent and conservative posi- accounting department to produce a daily balance tion on income and gains and require that they not be sheet with a lag of no more than 24 hours (if neces- recognized until realized in cash or in other assets, sary for clearing and settlement balances). The sys- whereas risks and losses must be reflected in the in- tem should also allow for flexibility in creating additional reports and making relevant queries in the database on an ad hoc basis. For instance, the Cen- 23For a discussion of quasi-fiscal operations, see, for example, tral Bank of Lesotho, besides producing a daily bal- Mackenzie and Stella (1996). ance sheet, also prints a profit and loss statement. 24For a discussion of accounting for central bank foreign exchange operations, see Valencia (1997). MAE recommends that There may be various reasons for incomplete re- (1) foreign exchange transactions be recorded at the rate at which porting. In some countries, unclear classification, they are transacted; (2) assets and liabilities in foreign currencies complicated verification procedures, and unclear co- be reported at the period closing rate; (3) realized gains and losses ordination among different central bank departments from transactions in foreign exchange be recorded in the income statements; and (4) unrealized foreign exchange gains or losses may generate problems. If each department enters its be deferred and posted in a revaluation reserve account in the bal- own transactions into the system, the responsibilities ance sheet. of the accounting department and other departments

42 ©International Monetary Fund. Not for Redistribution Information Technology within the bank must be clearly defined. The lack of The information technology found in African cen- thorough accounting manuals may also result in in- tral banks spans the whole range of possible alterna- correct recording, in particular, if the staff has no tives. The traditional centralized type, typically training in accounting. Those central banks that lack found in central banks with a longer history of au- skilled accountants can correct the problem by offer- tomation, has become less common, although some ing intensive training in accounting. countries (Kenya, Malawi, Ethiopia) still have a Computerization will often reduce delays and the strong preference for such environments. Most risk of manual mistakes. Some level of computeriza- African central banks are currently moving toward tion can be found in all the selected central banks, more decentralized infrastructures composed of de- including off-the-shelf programs. Generally, an inte- partmental networks and many stand-alone personal grated accounting system proves to be the best strat- computers. Except for South Africa, none of the egy for addressing such problems. countries sampled has a true client-server environ- The inability of central banks to address weak- ment, but many—like Uganda, Zambia, and Zim- nesses in accounting and operating procedures has babwe—have plans and/or strategies in place. also been compounded by relatively underdeveloped internal auditing systems and procedures. The ab- Uses sence of a well-functioning and independent internal audit function not only increases the risk that failures The accounting system is the heart of a central in existing central systems may go undetected, but bank information system, and all central banks have also increases the likelihood that senior management automated accounting to some degree. The account- is unaware of the real risks confronting the bank. The ing systems can range from traditional, batch- development of internal audit systems should initially oriented, mainframe-based, general ledger posting focus on establishing a work plan for important and programs to modern, fully integrated, online, multi- high-risk areas of central bank operations, such as user, multifunction packages. foreign exchange operations, domestic market opera- Most sub-Saharan African central banks have tions, currency distribution, banking and payment ser- been slow to migrate to newer client-server versions vices, and accounting and information systems. Initial because the older systems, although more limited, work should concentrate on developing skills for as- are stable and reliable, while the benefits of the sessing the adequacy and effectiveness of internal newer ones are not well understood. Nevertheless, controls. As audit skills are developed, attention can the need to modernize and the unfavorable econom- also be focused on assisting management to assess the ics of maintaining obsolete software and hardware efficiency of central bank resource utilization. are driving most banks to convert to the newer tech- nologies. Those that have included conversion to a new accounting system in their overall information Information Technology technology strategy have tended to favor the larger and more expensive integrated financial packages. The term information technology refers to the This preference for the most sophisticated and ex- technical resources—hardware, software, and sup- pensive accounting systems ignores the fact that port staff—that are available to an organization's pro- most of the banks are relatively small institutions fessional and management personnel and that support that handle a relatively low volume of accounting the organization's performance of its functions. transactions. Their needs can be met quite satisfactorily by commercial off-the-shelf accounting soft- Infrastructures ware, although these programs can also cause problems if they are not compatible with the other The infrastructure includes computers, the con- systems used by the central bank. necting equipment, and the basic software environment that are required for the various information Some sub-Saharan African central banks have systems to operate. The three most common types are used information technology to develop computer- (1) the traditional, batch-oriented, totally centralized, based systems of commercial bank reports for analy- mainframe-based environment; (2) a mix of depart- sis and research as well as for off-site surveillance in mental networks and some centralized applications; bank supervision. In the Bank of Zambia, for exam- and (3) a totally decentralized, modern client-server ple, the authorities have been developing, under a environment.25 technical assistance program jointly run by the IMF and the United Nations Development Program, an

25 automated early-warning system for the supervision A client-server environment is one where many specialized department. computers called servers (database servers, print servers, and communication servers) are interconnected with general-purpose Although central banks in sub-Saharan Africa workstations, called clients, in a single, integrated network. have attempted to provide general office automation,

43 ©International Monetary Fund. Not for Redistribution VIII ACCOUNTING, AUDITING, AND INFORMATION TECHNOLOGY

Box 7. Main Recommendations on Central Bank Accounting and Auditing National accounting board. A national accounting Central bank accounting. The central bank should board should be established to define, adopt, and imple- have formal accounting policies that are approved by ment national accounting standards, in consultation the national accounting board and that provide the with regulators, accounting professionals, and industry basis for the accounting procedures and controls used generally. Ideally, the standards should follow generally in daily operations. There should be a central area of accepted accounting principles and be consistent with the bank that is responsible for developing accounting international accounting standards as promulgated by policies and coordinating procedures. Accounting can the International Accounting Standards Committee. be performed on a centralized or decentralized basis, Adoption of fundamental principles, such as the accrual but the central area should be responsible for supervis- principle (revenues and expenditures are recognized ing on a daily basis the operation and balancing of the when they occur and not as they are received or paid) accounting system. and the going-concern principle (where financial state- Accounting policies should support maintenance of ments are prepared on the assumption that an entity will the financial soundness and policy responsibilities of continue in operation for the foreseeable future), are es- the central bank. Adequate reserves or provisions sential. Achieving transparency, through adoption of should be maintained to cover the bank for losses that substance over form, prudence, and faithful representa- may arise, and profit distributions should not include tion principles, is also essential. The board should also amounts that have not been realized by a flow of re- promote adherence to standards of professional qualifi- sources to the central bank. cations, ethics, and continuing professional development. Accounting information systems should be capable The central bank should seek to be involved in the of providing financial information for both external re- work of the national accounting board, particularly in porting and management purposes. Important manage- areas of relevance to its statutory responsibilities, and ment systems include, but are not limited to, budget have regard to standards in the preparation and presen- and planning systems, cost control systems, and asset tation of its own financial statements. management systems. External auditors. Fully independent and objective Internal audit unit. The central bank should estab- external auditors are essential to verify that financial lish an internal audit unit that reports directly to the statements comply with national accounting standards governor and whose prime functions include examin- and present a true and fair view of the financial position ing, evaluating, and monitoring the adequacy and and performance of an entity. Within the framework of effectiveness of the accounting and internal control the national accounting board, there should also be a set systems. Other important functions will include a of auditing standards for application in the audit of fi- broader-based analysis of control systems to keep risks nancial statements. National auditing standards should within acceptable levels and a focus on assessing the be consistent with international standards on auditing as efficiency of central bank resource utilization. These promulgated by the International Federation of Accoun- functions in turn require an increasing focus on infor- tants. External auditors must be qualified to practice as mation from management accounting and budgeting such and should be subject to special certification or systems, and informing and educating managers about recognition procedures, by either the national account- potential improvements in efficiency, including the po- ing board or another appropriately qualified agency. tential benefits of computerization.

in most, automation ranges from a few stand-alone ment because they do not have (1) a well thought- personal computers, used mostly for word process- out development strategy, (2) adequate budgetary re- ing, to departmental networks and limited use of E- sources, or (3) enough competent technical and man- mail. Nevertheless, as part of their overall informa- agement staff. tion technology strategy, some banks are pursuing The lack of qualified technical personnel is wide- the installation of fully networked client-server envi- spread throughout the region and is the greatest obsta- ronments with the objective of providing up-to-date cle to the effective deployment of information tech- office technology, including internal and external In- nology and to an orderly transition to newer client- ternet E-mail to most professionals. server environments. Although some of the region's central banks are actively pursuing technical training for their staff, the need for very aggressive recruiting Reasons for Slow Development and continuous training of internal and external tech- The majority of sub-Saharan African central nical support resources is not clearly understood. banks are facing a great deal of difficulty in achiev- The lack of adequate information technology ing a complete transition to a fully developed and skills represents a critical vulnerability that the well-functioning information technology environ- banks must address as they pursue modernization. In

44 ©International Monetary Fund. Not for Redistribution Areas for Further Reform fact, it is probably the most important prerequisite as quences of this problem grows worldwide, they will African central banks begin to deploy modern sys- be competing for scarce and expensive resources. In tems, such as automated large-value transfer sys- many cases, the only solution may be wholesale re- tems, real-time gross settlement systems, check pro- placement of existing equipment and software; in cessing systems, securities book-entry systems, and some cases, expensive reconditioning projects may international trading desks. be possible, but in all cases some kind of disruption In conclusion, most sub-Saharan African central to normal operations is very likely. banks are at some stage of transition toward more Clearly, given that the deadline is immovable and desirable information technology environments. the technical resources available to sub-Saharan While some, like Zimbabwe, have developed a more African central banks for corrective action are lim- formal strategy and have recruited outside consul- ited, there is a high risk of disruption to those coun- tants to guide them through the process, most others tries' financial systems unless urgent remedial action are attempting the transition with their own internal is taken. technical resources. Considering that, on the whole, the internal technical and management resources are insufficient at best, most African central banks face a Areas for Further Reform much more difficult, slow, and expensive modernization process than would be possible if the proper The implementation of central bank accounting re- technical staff were available. forms or, for that matter, national accounting reforms reflecting internationally acceptable accounting principles and standards has proceeded very slowly in The Year 2000 Problem sub-Saharan African countries. This was one of the The Year 2000 problem (also known as the Y2K early areas in which technical assistance was pro- problem or the millennium bug) refers to the possi- vided by MAE and continues to be provided by other bibility that some computerized systems will fail institutions. Although a few good examples of ac- when dealing with dates beyond December 31, counting education and practice can be identified, for 1999. All types of computerized applications may be the vast majority of countries the pace of progress affected, from financial information systems to per- has been slow. The former Portuguese-speaking sonal computers and from networks to the circuitry countries and the former centrally planned countries, that controls industrial machinery and consumer ap- for example, are faced with inventing new account- pliances. Financial and accounting systems world- ing systems. The main reason for this slow progress wide are at very high risk. Because many of the sys- is that most countries still consider accounting a tems are older and are based on obsolete technology, bookkeeping and recording function and do not give they have more problems that are difficult, if not im- it high priority. These countries do not appear to possible, to repair. This matter is of fundamental im- fully recognize the link between the increasing re- portance to central banks in general and to central liance on market forces and access to timely and reli- banks in sub-Saharan Africa in particular because of able information for sound decision making. Accord- their greater reliance on outdated, often obsolete, ingly, education should be a major area of emphasis hardware and software. for countries attempting to modernize their account- Sub-Saharan African central banks will face the ing systems. Additional measures to be implemented additional difficulty that, as awareness of the conse- are detailed in Box 7, page 44.

45 ©International Monetary Fund. Not for Redistribution IX Overall Assessment

ince the mid-1980s but more so since the turn of fragility of the financial system was manifested in Sthis decade, sub-Saharan African countries have the growing contamination of loan portfolios, signif- made more progress reforming their financial sys- icant losses, liquidity crises, and interest rate sticki- tems than they did for the first 20 years of indepen- ness. Like the rest of the economy, the financial sec- dence. Indeed, in the 1970s and 1980s, a combina- tor actually deteriorated during this period. tion of poor policy choices and internal and external Consequently, by the mid-1980s, these disap- economic and, in some cases, political shocks not pointing developments coupled with advice from the only militated against the early development of the international donor community, particularly the IMF financial sector, but may also have led to a deteriora- and the World Bank, began to force a change in per- tion of the institutional arrangements for efficient ception and a rethinking of the role of government monetary policy formulation and implementation. and how the financial sector should be controlled. During this period, newly independent countries' This change has been further supported by perception of the financial sector's role in economic • the growing emphasis in the rest of the world on development shifted: financial systems were viewed the private sector as the engine of growth; as conduits for financing government expenditures • the increasingly important role of private re- (both fiscal and quasi-fiscal) and as instruments for sources—domestic and foreign—in economic the disbursement of directed credit to "priority" sec- development; and tors of the economy. This shift and the resulting pol- • the increased globalization of commercial and icy choices stemmed largely from these countries' financial markets. perceived need to accelerate their economic devel- All of these elements demand robust and transpar- opment following independence, and the govern- ent institutions as well as institutional arrangements ment was seen as the best vehicle for achieving rapid in the financial sector. economic growth. Hence, the dominance of govern- These imperatives therefore triggered an aware- ment in the financial sector during this period. ness in sub-Saharan African countries of the need to By the mid-1980s, the region's economic perfor- move to a market-oriented economy and reform mance did not match expectations. Instead of the an- their financial sectors in order to guarantee their effi- ticipated economic growth, GDP per capita at con- ciency and viability. The results of this study show stant prices declined by more than 5 percent on that, almost without exception, these countries have average during this period, while the consumer price now come to that realization and are taking steps to index increased by more than 10 percent a year. The reorient their economies toward medium-term value of the local currency in terms of the U.S. dol- viability. lar also depreciated by more than two-thirds, and the The measures they have undertaken include grant- balance of payments deteriorated as sizable foreign ing more autonomy to central banks in the conduct debts were incurred.26 of monetary policy, liberalizing interest rates and With respect to the financial sector, the numerous eliminating administrative allocation of credits, in- controls that were introduced and the weak institu- stituting a transition from direct to indirect monetary tions that developed sowed the seeds of inefficiency policy implementation, restructuring banks to re- and financial repression. The scenario was further store their solvency, developing financial markets, complicated by inadequate supervision. Banks be- and improving infrastructures—including bank su- came overexposed and undercapitalized, thereby un- pervision—and accounting and auditing practices. dermining the viability of the entire system. The The outcome of these efforts for the region as a whole has been quite varied and uneven. Some countries have progressed quickly and are gradually 26These figures represent the average for the region as a whole. transforming their overall economies, the financial There are significant country variations from this average. sector in particular, whereas others have not yet

46 ©International Monetary Fund. Not for Redistribution Overall Assessment

Box 8. MAE Technical Assistance to Sub-Saharan African Countries Consistent with its purposes and within its area of programs in sub-Saharan African countries be- expertise and comparative advantage, the IMF has pro- cause of their concentration in only one or two vided technical assistance to member countries on the areas of reform at a time. basis of their expressed needs (see Appendix II). MAE • Reforms in the financial sector play a central and played a key role in the sub-Saharan African catalytic role in overall macroeconomic reform. economies, particularly in the 1960s and 1970s, in es- If progress in macroeconomic reform is to be tablishing central banks and developing central bank- achieved, it will require accelerated and compre- ing functions. In more recent years, with the introduc- hensive financial sector reform. The associated tion of the IMF's Structural Adjustment Facility and technical assistance for these reforms must reflect Enhanced Structural Adjustment Facility arrangements, this necessity. MAE has helped those countries, in terms of policy for- • A comprehensive approach to technical assistance mulation and implementation, that either entered into has been tried and tested in Poland, Russia, the program arrangements with the IMF or were likely to Baltics, and the other countries of the former So- do so in the near future. viet Union, and has proved to be significantly Currently, MAE is intensifying its technical assis- more effective than the piecemeal approach tance to these countries by placing regional experts in adopted under past technical assistance programs key areas of reform. These experts, while located in a for sub-Saharan African countries. For this reason, given country, will work as peripatetic experts in sev- sub-Saharan African governments' commitment to eral countries in a given region. This will enable re- reform represents a necessary condition for the form efforts to proceed simultaneously in key areas in success of any technical assistance program aimed many countries. The rationale for undertaking this at reforming the financial sector. Successful form of technical assistance is based upon four main achievement of reforms, of course, will occur considerations: through the provision of the appropriate legislative • The development of market-based management of and regulatory framework conducive to market- monetary and exchange policies—particularly the based development and the willingness to reform transition from direct controls to indirect monetary existing instruments and structures. management—requires a wide range of reforms in In addition, technical assistance will be delivered the financial sector in general. Ideally, the manage- through regional institutions. For reforms to be effec- ment of this transition requires simultaneous active, member countries must have personnel capable of tion in several interrelated areas. For example, suc- formulating and efficiently implementing financial sec- cessful management of interest rates through tor policies. Present technical assistance activities indirect and market-based instruments and alone can help develop or reinforce the skills of those progress toward convertibility are usually associ- officials. However, separate and complementary train- ated with (1) a relatively stable macroeconomic ing arrangements will be necessary to build up the ca- environment; (2) strict limits on the government's pacity of member countries, both in the short run, when access to central bank financing; (3) adequate measures must be taken expeditiously, and in the long competition and reasonable financial strength run, when policy management skills must be sustained in the banking sector; (4) an active and well- and developed on a larger scale. The short-term train- functioning money market; (5) sufficiently strong ing needs would be met through the IMF's task- banking supervision policies and instruments; and oriented seminars, workshops, and study tours focusing (6) consistent and mutually supportive reforms in on concrete issues. exchange and trade systems, exchange arrange- To further increase efficiency in organizing training, ments, and an institutional framework for foreign much more effective use will be made of regional insti- exchange trading. tutions, many of which face similar problems in re- • The components of financial sector reforms must forming their financial sectors. This study has shown be carefully sequenced and coordinated to ensure that considerable progress with reform has already that specific reforms are mutually supportive—in been achieved in southern and eastern Africa, where both speed and substance—to prevent a lack of countries have set up regional institutions to provide progress in one area from becoming a bottleneck training for nationals in financial sector reform and to to progress in another. Such bottlenecks could well share experiences of tackling similar problems in this have developed under past technical assistance area. made significant headway with general reforms. In region as a whole continues to be faced with a num- like manner, considerably more success has been ber of difficulties in key functional areas of the fi- achieved in some areas of reform than in others, nancial sector, which require urgent attention if these even in the same country. In general, in spite of the countries are to fully integrate themselves into the progress that some of the countries have made, the global economy.

47 ©International Monetary Fund. Not for Redistribution IX OVERALL ASSESSMENT

Overcoming these difficulties is clearly a formi- to reform and must create an atmosphere of eco- dable task because it calls for sub-Saharan African nomic security and good governance within which countries to accelerate reform in virtually all areas reforms can take place. In this connection, the au- relating to the financial sector. These tasks are thorities must, among other things, make construc- crucial for a number of reasons: first, success with tive amendments to existing legislative and regula- financial sector reform—particularly reform of the tory frameworks so as to provide more authority to legal and regulatory framework, and the develop- the central bank, reduce the level of government in- ment of national human resource capacity—will terference in the conduct of monetary policy, and facilitate private sector investment and production, ensure the effective supervision and monitoring of which in turn will promote long-term economic the financial sector. Guaranteeing an enabling and growth. Second, because of the direct linkage conducive legal and regulatory framework consis- between success in financial sector reform and tent with a diminished government role and interfer- success with macroeconomic reform, wide-ranging ence constitutes a necessary condition for any accel- structural changes in the financial sector are erated reform of the financial sector. often needed for the effective and efficient con- The second necessary course of action is to de- duct of monetary and exchange policies, without velop local capacity for the efficient design and im- which progress toward macroeconomic and finan- plementation of monetary and exchange policies on cial stabilization would be difficult to achieve. a routine basis. In view of the technical, institutional, Third, an efficient and well-functioning financial and human resource constraints facing most of the system is a prerequisite if sub-Saharan African countries, the international community—the IMF, countries are to mobilize and retain large volumes the World Bank, and other bilateral and multilateral of foreign capital to restore and speed up economic institutions—can, through technical assistance, sup- growth and development, thereby improving living port the reform efforts of those countries that demon- standards. strate the requisite commitment. The IMF, through Accordingly, these countries must pursue two MAE, is already reorientating its technical assistance vital and complementary courses of action. First program to make it more relevant to the changing and foremost, they must make a strong commitment needs of these countries (see Box 8, page 47).

48 ©International Monetary Fund. Not for Redistribution Appendix I Statistical Tables

©International Monetary Fund. Not for Redistribution APPENDIX I

Table AI. Indicators of De Jure Central Bank Autonomy and Accountability in Selected Sub-Saharan

Country/Year of Political Autonomy Most Recent Policy Amendment of Objective Foreign Governor Central Bank Law Economic Financial Monetary exchange Coordination Resolution Term Appointer Dismissal

1 1 i Angola, 1991* 1 % IM /4M /2 3 1 4 5 6 BECAO, I973 1 3/4 /4M IM 1/24 1/44 I I — 8 6 1 BEAC, I985 1 3/4 1/2M8 IM 1/28 1/28 3/4 I /4* 1 Botswana, 1996 3/4 3/4 IF /4M 1/2 I VA I 3 Ethiopia, 1994 /4 3/4 IF 1/4Ml0 VA VA — — — 1 Ghana, 1992 VA 3/4 IF /4M 1/2 VI 3/4 VA 1/22 Kenya, 1997 1 3/4 IF IF I I 1/2 I 1 Lesotho, 1984* VA 3/4 IF /4M 1/2 VA 1/4 I I 3 Madagascar, 1994 I I'5 IF IF /4 1/2 1/2 VA 3/4 3 1 Malawi, 1989 1/4 /4 IM /4M VA — % — — 3 3 1 Mauritius, 1974* /4 3/4 /4F /4M 1/2 — VA — 1/2I8 3 3 20 Mozambique, 1992 I /4 IF IF /4 y2 % — Namibia, 1990* VA 3/4 IM IM 1/2 3/4 % I 3/4 1 1 Rwanda, 1981* VA 3/4 IM /4M /2 — I — South Africa, 1996 I 3/4 IF IF I | 26 3/4 I II 3 1 3 II Swaziland, 1986 VA /4 IM /4M /4 3/430 VA I Tanzania, 1995 I 3/4 IF IF I 3/433 3/4 — II 3 3 3 Uganda, 1993 1/2 3/4 /4F /4F 3/4 I /4 I II 3 Zambia, 1996 3/4 3/4 IF /4M 1/2 _35 VA I — 1 Zimbabwe, 1984* — — IF IF — 35 3/A /2 3/4

Note: See accompanying notes for definitions of the weights that are as- 9A three-fourths majority vote is needed to dismiss the governor (Arti- sociated with the various indicators. cle 43). *Law is under review. l0When international reserves have declined and the situation persists, 'Provisions in legislation on labor contracts not inconsistent with the the governor may decline to issue further foreign exchange permits (Arti- central bank law may provide some guarantees against arbitrary dismissal. cle 50.3). dismissals for breach of qualifications and misconduct are explicit, but it "Only duly audited annual profit and loss statements shall be published is not made explicit that these are the only reasons for dismissal. (Article 14); there is no explicit requirement to publish a more frequent 3The West African Monetary Union and the BCEAO were established in summary balance sheet. November 1973, but were supplemented by theWAEMU treaty, which was l2The permanent secretary to the treasury participates in the board ratified in August 1994. Benin, Burkina Faso, Cote d'lvoire, Mali, Niger, Sene- meetings, but without the right to vote (Article I I .c). However, the presi- gal, and Togo are members. dent may waive disqualification requirements; that is, the president can 4The council of ministers can overrule the board, while the board can allow government representatives to become members of the board (Arti- overrule the national committees, which may have some authority over di- cle I4.c.ii). rect monetary instruments. These committees include government repre- l3The president can appoint executive directors exempted from qualifi- sentatives. However, while there are sound provisions for sharing informa- cation requirements and later dismiss them (Article 14). tion between the governments and the central bank, it is not explicitly l4Advances to the government are limited to 5 percent of the budgeted stated that the council of ministers shall publish its decisions and forward revenue of the current fiscal year.The central bank may apparently under- them to the legislature, and neither is it stated—as, for instance, in the write government securities in the primary market (Article 46). statutes of the European Central Bank—that the board shall not take in- l5Banking supervision is handled by an agency separate from the central structions from national governments. bank. 5Should external liquid assets be exhausted, the BCEAO shall require l6ln exceptional cases, the 15 percent ceiling may be increased by legisla- that external liquid assets held by the states of theWAMU be surrendered tion to 20 percent for a maximum period of six months (Article 28). for the benefit of the BCEAO in return for currency issued by it (Article 20 l7The central bank law only requires account statements to be published of the Treaty Establishing the West African Monetary Union). every three months. 6The council of ministers, with a representative from each country, ap- l8The governor-general defines misconduct (Article 6.12). points the governor, while the government of each country appoints execu- l9Terms are apparently staggered. tive directors, thus ensuring a balanced view. 20Dismissals only for "a just cause" (Article 45). 7The national monetary committees, with representatives from the re- ^'Implicit in Article 51 that board members cannot at the same time spective ministries of finance, may influence the board. WAMU's council of work for or represent the government. ministers ultimately determines the monetary and credit policy. 22lt is ambiguous if the limit for overdrafts (Article 18) includes or ex- 8The Central African Monetary Area and the BEAC were established in cludes loans for the government (Article 19). November 1972 and consist of Cameroon, the Central African Republic, 23Advances and the central bank's holding of government securities shall Chad, the Republic of Congo, Equatorial Guinea, and Gabon. The CAEMC not exceed 25 percent of the average annual revenue of the three fiscal was established in March 1994, but the customs union has not yet been rat- years immediately preceding (Article 47). ified.The national monetary committees, with representatives from the re- 24Advances and the central bank's holding of government securities, in- spective ministries of finance, have some authority, but can be overruled by cluding government securities used as collateral, shall not exceed I I per- the board, which appears to have more authority than the board of the cent of the annual average of ordinary revenue recorded the preceding BCEAO, where this authority is split with the council of ministers. three fiscal years (Article 58).

50 ©International Monetary Fund. Not for Redistribution Appendix I

African Countries, May 1998

Economic Autonomy I Political Autonomy Credit to Government Board Interest Ouasi- Accountability Index Gov. rep. Term Appointer Dismissal Limit rate Securitization fiscal Instruments Solvency Publication Auditing (Total = 21) —2 — 3 1 1 3/4 I 1/2 1/2 3/4 3/4 I 3/4 /4 M /4 3 3 1/27 l« — 1/4 I — 5/8 /4 1/2 /4 llVs 6 1 1 1/27 I — 1/4 3/4 — — 3/4 /4 1/2 I M /4 1/2 I 3/4 1/2 3/4 3/4 3/4 3/4 I I2V4 1 1 1/2 I I 5/8 2/3 /4 3/4II 8 /24 5 1/2 1/22 1/4 1/2 3/4 2/3 3/4 3/4 9 /i2 2 1 I' 3/4 1/2I3 3/4 I I I 7/8 I I I l7 /8 1 I 1/2I4 3/4 /4 I 3/4 I 3/4 3/4 12 7 1 I 1/2 I I 1/2I6 1/4 I 3/4 I 3/4 I' l5 /2 1 1 1/4 3/4 /4 3/4 I 3/4 I 8 /4 I 1/4I9 1/4 1/2I8 1/4 3/4 3/4 1/2 3/4 I 93/4 1 1 I 2I 3/4 20 1/422 22 /4 5/8 2/3 1/4 1/2 10 /24 19 — I 3/4 1/423 I 23 I 7/8 2/3 1/2 I l3 /24 1 1/4 I 1/424 1/225 24 1/2 5/8 2/3 3/4 I IO /24 I I 1/227 1/428 3/4 I 7/8 3/429 3/4 I l53/8 31 II 1/432 3/4 32 3/4 2/3 3/4 II 91/6 1 1 1 /4 — /4 1/2 1/2 I 7/8 5/8 I I l2 /4 3 7 2 31 3/4 11 3/4 3/434 3/4 2/3 /4 IM M /3 3 _3I — — 1/236 1/4 _36 I 5/8 I I I IO /8 1 1 1 5 37 1 I — /2 3/4 /4 — /4 — /8 I I 9 /2

25Higher interest rates, explicitly stipulated in the law, the more the gov- Notes: ernment uses its overdraft facility (Article 54). This index is based on components from the index on central bank inde- 26lf the minister of finance is of the opinion that the central bank does pendence by Grilli, Masciandaro, and Tabellini (1991) and Cukierman (1992) not comply with the act, he or she may ask the board to remedy the situa- and from the index on accountability by Briault, Haldane, and King (1996). tion within a specified time. If the board fails to comply, the minister of fi- For an overview of legal indexes for central bank autonomy, see, for exam- nance may apply to the supreme court (Article 37). ple, Eijffinger and de Haan (1996). Practice may have developed differently 27No explicit provision for dismissal; however, the fact that the share- from the formal legislation. For instance, the central bank may primarily use holders elect half the board provides some guarantee against arbitrary indirect monetary instruments, or it may publish monetary policy state- dismissals. ments twice a year, although it is not obligated to do so under the current 28The clearly defined objective of price stability, entrenched in the con- law. In some countries, unofficial translations of the central bank law have stitution, implicitly limits direct credit to the government. been used. 29No explicit requirement for the government to ensure the solvency of This legal index gives only a rough indication of the extent to which the the central bank, but international reserves are traded for the profit and existing central bank law formally supports central bank autonomy and ac- loss of the government (Articles 25-28). countability, but does not describe the central bank's de facto autonomy. 30The minister of finance may recommend that the prime minister in- The relevant indicators are subjectively weighted to achieve a maximum 1 struct the central bank, provided the government accepts the responsibility, weight of 21.The weighting ( /4, V2, ZA or I) is subject to discussion, and so but such directives are not explicitly required to be published (Article 54). are the elements included in the index and their interpretation.The defini- 3'Directors of the board are not explicitly prevented from being govern- tions of the weights associated with the various indicators are as follows: ment representatives. 32Advances and the central bank's holding of government securities, in- Objectives cluding government securities used as collateral, shall not exceed 20 per- Economic policy cent of the annual average of ordinary revenue recorded in the preceding I Price stability, stability of the internal and external value of the cur- three fiscal years (Article 47.2). rency, or the protection of the value of the currency conducive to 33However, such instructions are not to be laid before the legislature sustainable real growth is the sole or primary objective. (Article 10). % Monetary stability is given explicit priority (in contrast to price sta- 34The board may determine that the interest rate shall be different from bility, monetary stability may emphasize financial sector stability over the market rate (Article 34). price stability), or there is no clear priority between price stability 35The central bank shall implement and give effect to government poli- and the safety and soundness of the financial system. cies the minister of finance may convey to the governor, but it is not ex- 1/2 Economic stability is the ultimate objective and the central bank may plicit that such instructions shall be published or subject to discussions by interpret this as price stability. the legislature. VA Price stability, monetary stability, or stability of the currency is ex- 36The central bank shall not advance funds to the government, except in plicitly mentioned as one of several objectives. special circumstances (Article 49). Such advances, purchases of government securities in the primary market, or any other form for extension of credit Financial system to the government shall not exceed 15 percent of ordinary revenue of the I Banking supervision is delegated to an autonomous government previous financial year (Article 50). agency so that it will not impinge on monetary policy, or the central 37Although the current law is not explicit on publication of policy state- bank supervises banks and the payment system and has sufficient ments, the central bank currently publishes policy statements twice a year. authority to address financial sector weaknesses without endanger-

51 ©International Monetary Fund. Not for Redistribution APPENDIX I

Table A1 (continued)

ing monetary policy. That is, the central bank has authority to Conflict resolution issue prudential regulations after appropriate hearings; issue li- I In case of a conflict that in the opinion of the central bank or the censes according to objective criteria; conduct off-site inspec- government may endanger price stability and the government in- tions; conduct on-site inspections; conduct consolidated supervi- structs the central bank to pursue a specific policy, both parties sion; collaborate with foreign supervisors; impose sanctions, make statements, which are laid before the legislature and pub- including withdrawal of licenses according to objective criteria; lished, and the government takes the responsibility for the di- and supervise, or oversee, at a minimum, the large-value pay- rected policy. ments system, without improper interference from or approval 3/4 It is explicitly stated that the government must not instruct the of the government. governing bodies of the central bank or it is very strongly stated 3/4 There is a general statement that the central bank shall supervise that the bank shall be independent of the government. (This ap- financial institutions and a clear reference to the banking act re- proach is only as strong as the above approach when it is difficult garding the central bank's authority to conduct banking supervi- to amend the central bank law and is thus ranked lower.) Or sion. The ranking simply reflects the central bank legislation is ap- when the minister of finance may instruct the central bank, but propriate, while detailed provisions on these issues can be found such instructions can be challenged in court or are published, in commercial bank legislation. and so the legislature can initiate debates. 1/2 The monetary program does not need government approval (for Policy example, if it is submitted to the legislature for information), and it is stipulated that the central bank is formally independent Monetary policy within its authority or that the central bank shall not follow poli- I The central bank has objective or target autonomy; that is, it can cies contradictory to its objective, but there is nothing on how explicitly formulate and determine (F) monetary policy; or the to resolve and publish if the government instructions conflict central bank implements (M) monetary policy according to a tar- with the central bank's objective. get, including a pegged exchange rate, or a monetary program 1/4 It is stipulated that the central bank is formally independent determined by the cabinet or the legislature in consultation with within its authority, but nothing on how to resolve and publish the central bank, and the central bank can do so without prior government instructions if they conflict with the central bank's approval of the government (that is, instrument autonomy). objective. 3/4 The government needs to approve certain indirect monetary instruments, or the central bank's authority is not clearly defined. Political autonomy 1/4 The government determines monetary policy, and the central Term of governor bank has only partial authority to implement monetary policy. I Term is longer than five years. Foreign exchange 3/4 Term is five years. I The central bank can formulate and determine the exchange rate 1/2 Term is four-five years. (F) consistent with its monetary policy (for instance, a de jure re- 1/4 Term can exceed four years. quirement to float the exchange rate regime); or the central Appointment of governor bank implements (M) foreign exchange policy according to the I A "double veto arrangement" exists; that is, two arms of govern- government's instructions, but when foreign exchange reserves ment that truly balance one another respectively nominate and have reached a critical threshold, as defined by the central bank, appoint the governor. For example, the head of state or the legis- it shall report to the government and suggest measures. If the lature appoints after another party nominates, for example, the government does not react and a conflict remains, the central board, or the minister of finance. bank should have the right to temporarily abandon its responsi- 3 bility for price stability according to the provisions for conflict /4 The two arms of government are more closely linked, but not resolution. within the cabinet. For example, the chairman of the legislature nominates and the legislature appoints the governor. 3/4 As above in the case of implementation, but the central bank 1/2 One body, for instance, the head of state, appoints, but after cannot formally temporarily abandon its primary objective, but "consultations" with another body, for example, the board. continues to report and suggest measures to the government. Both nomination and appointment are within the government; The central bank regularly publishes information about macro- 1/4 say, the minister of finance nominates and the council of minis- economic developments. ters appoints the governor. 1/2 It is explicitly stated that the currency shall be convertible consistent with monetary regulation. Dismissal of governor 1/4 The central bank recommends measures to alleviate a situation I Dismissal can take place only in case of breach of qualifications, only when foreign exchange reserves deviate from a threshold misconduct, or poor performance, and these can be clearly de- determined by the central bank, or the central bank formally par- fined and ruled upon in court or by an independent tribunal, or ticipates in formulating the exchange rate policy, but otherwise approved by the legislature or the majority of the board. has no formal leverage to change the exchange rate policy. 3/4 Dismissal can take place only in case of breach of qualifications, misconduct, or poor performance and these can be clearly defined; oth- Coordination erwise, both the nominator and appointer approves the dismissal. I The central bank and the government consult one another, but 1/2 Dismissal can take place only in case of breach of qualifications, the government cannot instruct the central bank unless these in- misconduct, or poor performance, but there is no clear descrip- structions are published and laid before the legislature. tion of how and who defines poor performance. 3/4 The central bank and the government inform one another, and 1/4 Both the nominator and the appointer approve the dismissal. the central bank is also independent in its area of authority. 1/2 Representatives of the cabinet can participate in board meetings Government representation on board without right to vote, perhaps with the right to temporarily I The government has no direct representatives with voting rights postpone decisions, and a representative of the central bank can on the board. participate in cabinet meetings without the right to vote; or the 3/4 Government representative can temporarily postpone a decision central bank may render advice if, in its opinion, the decision will but can be superseded by a unanimous decision of the board. affect the objective(s) and functions of the central bank. 1/2 Direct government representatives together with the governor 1/4 The central bank explicitly comments on the budget and forwards and deputy governors cannot constitute a quorum (1/4) or a ma- its comments to the legislature and/or advises the government. jority (1/4).

52 ©International Monetary Fund. Not for Redistribution Appendix I

Table A1 (concluded)

Term of board members, excluding ex officio members 3/4 Quasi-fiscal activities are explicitly prohibited, but the central bank I Term longer than five years and staggered. may function as bank for publicly owned commercial entities. 3/4 Term is four-five years and staggered. 1/2 Quasi-fiscal activities are explicitly prohibited, but the central 1/2 Term is four-five years. bank may issue guarantees for development of special projects, 1/4 Term is three years or longer and staggered. or it may own shares in companies operating for the general good, but such shares shall be transferred to the government Appointment of board members within one year, etc. I A "double veto" arrangement exists—that is, one party of, for 1/4 Central bank law prohibits quasi-fiscal activities. example, the head of state, the legislature, or the cabinet appoints after another party nominates, for example, the governor Monetary instruments or chairman of the legislature, but neither the nominator nor the I The central bank can set its key interest rates on its own trans- appointer is a member of the cabinet. actions without interference from the government (1/4); the cen- 1/4 Both nomination and appointment are within the government, tral bank can freely conduct open market operations (1/4); the but handled by separate individuals—say, the minister of finance central bank uses direct monetary instruments only in extreme nominates the members and the council of ministers appoints situations (1/4); direct monetary instruments are primarily used them. to ensure fair competition and consumer protection, or direct monetary instruments are not explicitly mentioned (1/8); reserve Dismissal of board members requirements are limited to a maximum that can be increased I Dismissal can take place only in case of breach of qualifications only with the consent of qualified majority of the board, perhaps and misconduct, which should be ruled upon by the supreme with the consent of the government (1/8); and the central bank court or by an independent tribunal, with the other board mem- can, at its discretion, remunerate required reserves (1/8). bers' or the governor's prior consent, or approval is needed by the legislature. Solvency 3/4 Dismissal can take place only in case of breach of qualifications I The central bank is not subject to the government's appropriation and misconduct; board approval is required. (1/4); only realized profits can be allocated to the government (1/8) 1/2 Dismissal can take place only in case of breach of qualifications after prudent provisions to general reserves (1/8); and (1/2) the and misconduct. government is obliged to recapitalize the central bank in case the 1/4 The governor, with the approval of the legislature, can dismiss a value of its assets is less than the value of its liabilities and capital, board member, and the governor is formally protected from arbi- including any evaluation losses, by transferring either cash or se- trary dismissal, or both appointer and nominator approve the curities (1/6) that are interest bearing (1/6) and negotiable (1/6). dismissal. (Although there may not be specific reasons, it gives 1/4 The government is obligated either to recapitalize only the au- the legislature the possibility to initiate a debate.) thorized capital or to cover revaluation losses to be financed by the central banks' future profits, or it is stated the central bank Economic autonomy shall be economically independent. Limits I Direct credit to government (should not include securities re- Accountability sulting from open market operations) and participation in primary auctions of government securities (with the exception of Publication of statements noncompetitive bids, but to be included within the limit for I The central bank publishes more than one annual statement on credit to government) are prohibited. its monetary policy operations or an annual statement or when the central bank finds it necessary; publications are not subject 3/4 Direct credit to the government is explicitly limited to 5 percent to the approval of the government, and the central bank can ap- or less of average recurrent revenue of previous three fiscal pear before the legislature. years. 3/4 The central bank publishes one annual statement on its mone- 1/2 Direct credit to the government is explicitly limited to 15 per- tary policy operations that is not approved by the government cent or less of recurrent revenue. or president before publication. 1/4 Direct credit to the government is limited or to be limited by other legislation, or the bank's board approves direct credit to 1/2 The central bank publishes information about the economy and the government. (The latter is a strong concept only if the board its operations to be approved by the government. is truly independent of the government, and then an explicit limit 1/4 The central bank publishes general information about the econ- could just as well have been established in the central bank law.) omy and its operations, or the central bank is just expected to report to the government. Interest rates I The interest rate on credit to government is related to a market- Audit determined interest rate. I Independent external auditors or an audit committee, in addition 3/4 The central bank alone can determine the interest rate. to the auditor general, shall audit the annual financial statement, 1/2 The central bank determines the interest rate after consultation preferably to be in conformity with international accounting with the ministry of finance. standards and to be published together with monthly or more 1/4 The interest rate is agreed upon by the central bank and the frequent summary balance sheets. ministry of finance. 3/4 Only the auditor general of government or an audit committee appointed by the minister of finance shall audit the annual state- Securitization ment to be published together with more frequent summary bal- I Credit to the government is securitized by negotiable governance sheets. (Without prudent governance, the auditor general ment securities. could represent the government's interests.) 1/2 Advances are securitized, at a minimum, at the end of the year by 1/2 Only the auditor general of government shall audit the annual negotiable government securities. statement or a general statement about being audited not less than 1/4 The central bank can require securitization or government guarantees. once a year, but without an explicit requirement for publication. Quasi-fiscal activities 1/4 Annual statements are submitted to the supervisor of the central I Quasi-fiscal activities are explicitly prohibited. bank, but without a formal requirement for auditing or publication.

53 ©International Monetary Fund. Not for Redistribution APPENDIX I 4 I.I — — n.a 7.7 No No 4.2 n.a. n.a. n.a. n.a. 10.3 Yes 13.5 20.4 Malawi 2 banks (insurance companies) 3 5 55 45 — 7.2 s n.a. No No Yes 10.6 16.4 76.7 36.9 37.8 53.5 82.3 22.5 banks) No, but (all banks) under way 1.83 total, 6 r Madagasca (private banks) (private banks) (private banks), negative (public 2 4 1.4 31 69 21 — — No No n.a. Yes 20.3 25.8 35.7 145.9 40.45 o Lesoth companies, banks), 1.67 licensed and 3.33 (all govt. Yes (insurance (private banks) (private banks) (private banks) Negative for all supervised also (all govt. banks), by central bank) govt. banks, 14.4 1 4 8 4 6 7 1.5 31 34 36 33 33 54 40 — 63 Yes Yes 20.5 48.4 Yes Yes Kenya 7 2 0 17 20 9.1 8.9 n.a. No n.a. No Yes Yes 18.2 39.7 26.5 26.5 44.6 46.7 Ghana (significant) 2 6 13 96 No No n.a. n.a. n.a. n.a. 11.5 12.6 25.9 29.6 a Ethiopi of Ethiopia Yes (under consideration) Not permitted d Not permitte d Not permitte are concentrated Commercial Bank in the (state-owned) Yes, most of the assets 2 3 0 5 5 1.4 39 — 100 0.7 2.9 4.3 4.3 n.a. 25 Yes 10.2 19.8 27.4 a Botswan companies) Savings Bank Yes, Botswana Yes (insurance 6 2 7 12 1.8 30 No n.a. n.a. n.a. n.a. Yes 15.1 12.8 to 3 Bank to 20 BEAC No, but planned Yes, Savings From losses From losses privatization 5 53 22 22 49 6.2 2.3 8.3 n.a. No n.a. n.a. 19.6 Yes 19.3 18.7 28.8 1 No, but BCEAO ©International Monetary Fund. Not for Redistribution under way 1 3 4 6 10 80 — No No No n.a. n.a. 9.3 n.a. n.a. n.a. 28.4 >20 In the Angola 10 range of nonperforming loans) of total loans and advances) doubtful debts assets for banks with more of which than 50 percent (percent of total loans) Foreign owned last five years institutions with more than Government owned occurred in last five years (percent of total income) n banks Branches of foreig Total specific provisions (percent Total general provisions (percent 5 percent of total banking assets Central government f foreign banks Subsidiaries o with more than 5 percent of total banking assets Nonperforming loans Reduction in government control Provisions for loan losses and Mergers and acquisitions in ) Return on equity (percent ) Return on assets (percent Noninterest expenses d banks, of which Number of license Group of nonbank financial Ownership as proportion of total Group of deposit-taking institutions t GDP) Total loans (percen t GDP) Total assets (percen f GDP), Total deposits (percent o 7 , 199 n Countries n Africa d Sub-Sahara n Selecte m i g Syste e Bankin e of th . Structur e A2 Tabl

54 Appendix I - 7 3 15 1.4 1.6 70 14.8 n.a. n.a. Yes 19.8 27.6 55.6 21.7 banks e Zimbabw companies) Yes (insurance Yes, under way Yes, 8 merchant 9 7 0 32 21 No No 6.9 No 1.82 13.2 15.5 15.5 54.5 23.9 l2 51.6 20.5 a Zambi reporting directly to parliament corporation Yes, a statutory 0 II 20 No 5.2 7.9 No Yes 15.4 14.9 13.4 No, 38.2 27.5 47.6 2.63 0.17 51.56 a Ugand not required constitute 4.4 At least one, but 18 10 7.9 No No 3.3 3.7 No Yes 16.6 32.8 58.2 47.4 20.3" financial reserves financial No general 2.5 (banks), (two banks) institutions) institutions) 1.8 (nonbank a Tanzani 7.5 (nonbank d Not permitte - 15 4 3 85 0.5 No 6.3 3.2 2.4 n.a. 19.7 Yes 14.5 54.9 l0 71.3 26.1 34.4 Yes, only d Swazilan licensed banks l0 M l2 l3 l4 7 8 9 As of December 1996. AsofJune30, 1997. AsofJuly3l, 1997. AsofAugust3l, 1997. The Banks Act of 1990 eliminated the statutory institutional categorization of banks. g non-deposit-taking institutions con- The distribution of assets is skewed as four of the leadin ln addition, there are five mutual (community) banks. s to create subsidiaries for local The Zambian Companies Act requires all foreign companie operations. l assets in December 1996. trolled 57 percent of the non-deposit-taking institutions' tota 8 8 1 1 13 1.3 67 57 2.3 0.4 7.3 4.6 n.a. 14 Yes 5I 18.5 62.2 6I'3 80 n.a. None the Financial supervised by a Afric h Sout Services Board Yes, licensed and 1 7 5 19 30 45 No No n.a. n.a. No n.a. Yes 12.3 17.3 21.6 High High a Rwand 0 5 - 4 1.2 46 No 4.6 2.2 n.a. Yes Yes Yes 86.3 10 28.6 25.6 49.2 42.5 56.6 a Namibi - 15 8 1 2.7 n.a. 2.4 Yes n.a. Yes n.a. n.a. n.a. n.a. 56.24 None 20.67 23.43 28.55 e Mozambiqu ©International Monetary Fund. Not for Redistribution 3 - 10 5 61 73 91 2.2 49 8.7 2.2 No n.a. 0.2 Yes Yes 23 Yes 16.9 0.914 s Mauritiu nonperforming loans) doubtful debts JU percent total loans and advances) assets for banks with more than of which 1 3 5 2 6 4 : Burkina Faso, Cote d'lvoire, Mali, Senegal, Banking Supervision Agency 1996 Annual Report. BCEAO Foreign owned in last five years in last five years (percent of total loans) AsoftheendofJune 1997. As of the end of 1996. Government owned business in Botswana are majority or 100 AII of the five financial institutions licensed to do banking Most of the assets continue to be concentrated in a few banks with the top I I out of 50 Total general provisions (percent of Total specific provisions (percent of banking assets banking assets As of the end of March 1997. t Central governmen banks s of foreign Branche t of total with more than 5 percen t of total with more than 5 percen total income) n banks s of foreig Subsidiarie . Republic of Congo, Equatorial Guinea, Gabon (6 countries) l banking institutions. percent owned subsidiaries of well-established, major internationa commercial banks commanding 75 percent of total assets. : Cameroon, Central African Republic, Chad, Togo, Benin, Niger (and Guinea-Bissau as of 1997). BEAC Reduction in government control Mergers and acquisitions Nonperforming loans Provisions for loan losses and l institutions Group of nonbank financia Ownership as proportion of total s (percent of Noninterest expense ) Return on equity (percent ) Return on assets (percent s Group of deposit-taking institution h banks, of whic r of license d Numbe t GDP) Total assets (percen t GDP) Total loans (percen s (percent of GDP), Total deposit

55 APPENDIX I

Table A3. Selected Indicators for Financial Intermediation in Selected Sub-Saharan African Countries

1990 1991 1992 1993 1994 1995 1996

Base money in percent of GDP Twenty-three selected sub-Saharan countries 10.0 10.6 10.8 10.5 10.4 10.1 10.2 OECD countries1 8.4 8.2 8.2 8.5 7.9 8.6 8.3 Currency in percent of GDP2 Twenty-three selected sub-Saharan countries 6.0 6.0 6.4 6.1 6.5 6.3 6.0 OECD countries1 5.0 5.0 4.9 5.0 5.0 5.1 5.0 Currency in percent of M22 Twenty-three selected sub-Saharan countries 22.6 22.4 23.9 23.6 23.6 23.8 19.1 OECD countries1 8.0 7.8 7.5 7.4 7.6 7.5 7.6 Reserves (excluding currency) in percent of GDP Twenty-three selected sub-Saharan countries 4.6 5.3 4.8 4.7 4.3 4.1 4.5 OECD countries1 3.4 3.2 3.2 3.4 2.9 3.5 3.3 Reserves (excluding currency) in percent of M2 (excluding currency) Twenty-three selected sub-Saharan countries 19.6 24.0 22.8 22.0 18.9 19.6 22.9 OECD countries1 6.7 6.1 5.9 6.1 5.7 6.2 6.0 Broad money in percent of GDP3 Twenty-three selected sub-Saharan countries 27.0 28.2 29.5 29.8 31.0 29.9 34.8 OECD countries1 65.2 65.5 67.4 69.9 67.5 69.1 69.3 Banks' claims on private sector in percent of GDP Twenty-three selected sub-Saharan countries 17.8 17.4 18.7 18.8 18.2 18.1 19.2 OECD countries1 68.4 68.2 70.4 69.7 67.5 68.1 70.0 Banks' demand and time deposits in percent of GDP Twenty-three selected sub-Saharan countries 21.0 21.4 23.5 23.6 24.3 23.5 24.8 OECD countries1 57.9 58.4 60.6 63.0 60.6 61.9 62.6 Banks' demand and time deposits in percent of banks' claims on private sector Twenty-three selected sub-Saharan countries 143.7 149.5 147.7 143.8 151.3 151.0 168.9 OECD countries1 94.8 97.3 95.5 99.6 98.5 98.4 102.1 Real interest rate4 Twenty-three selected sub-Saharan countries -1.4 1.7 2.1 -0.2 -3.8 -3.5 OECD countries1 4.4 5.3 6.5 4.2 5.1 3.0 2.5 Spread between lending and deposit rates Twenty-three selected sub-Saharan countries 5.9 5.4 5.2 6.7 6.7 9.6 10.6 OECD countries1 5.0 5.1 5.2 4.9 4.3 4.5 4.3

Source: International Monetary Fund, various issues. 1Hungary, Korea, and Poland are included in the OECD average in 1996 (only after joining the OECD); the Czech Republic is included from 1995; and Mexico is included from 1994. 2Currency outside deposit money banks (line 14a in International Financial Statistics). 3Broad money is equal to base money and quasi-money (line 34 and 35 in International Financial Statistics). 4Money market rate, treasury rate, or discount rate minus inflation (consumer price index) for the past year.

56 ©International Monetary Fund. Not for Redistribution Appendix I No No Yes Yes Yes 375 1-4 36.2 1989 US$2 Likely million Malawi utilized) Yes (but Average of Malawi not actively Basle-based Banking Act, Reserve Bank 3 n.a. Full No Yes Yes Yes Yes 200 1996 Likely million US$0.3 Banking Detailed speaking) supervision r Madagasca Banking Act Basle-based, 8 agency (linked regulations (no manuals strictly to central bank) 5 150 5.5 No No Yes Yes No Yes Yes Low Likely (foreign o Lesoth Financial Act, 1973 definitions with Basle US$21,300 of Lesotho Institutions subsidiaries) of complying Yes (revision Central Bank is under way) In the process 3 8 18 22 Yes Yes Yes Yes Yes Yes Yes Yes 1991 Likely Partial Kenya million US$3.3 of Kenya Banking Act, Central Bank 14.7 n.a. n.a. n.a. Yes Yes Yes Yes Yes Yes Yes 624 1989 million million Ghana US$ 0.1 US$0.25 Average (local banks), Banking Law, Basle-based, 6 (foreign banks) Bank of Ghana mmmwmmmm 2 4.5 Yes Yes Yes Yes No Yes Yes 360 Yes Likely Basle's million US$1.5 Limited Banking Banking a Ethiopi Business of Ethiopia higher than No. 84/1994 No. 83/1994, Proclamation Proclamation Licensing and National Bank Monetary and f Supervision o ; 8, slightly wmmmmmmmm mmmmm 2 Full Yes Yes Yes No n.a. Yes Yes Yes Yes 1060 I9.8 1995 Likely US$1.4 Bank of (Financial million or Botswana is greater) a Botswan IMF recom- Institutions Banking Act, Department) mendation 15 Basle-based, 8 8% (whichevei 3.5 167 n.a. No Yes Yes 1 Likely million advice US$1.9 BEAC banking Average Detailed Regional speaking) Law, 1992 Basle-based supervision Yes (not all) No, but gives agency (linked regulations (no manuals strictly g Unified Bankin to central bank) i •••••••••••H 4 132 n.a. Yes No Yes Likely advice million 1 US$1.9 banking Average Detailed Regional speaking) BCEAO Law, 1990' ©International Monetary Fund. Not for Redistribution supervision Yes (not all) No, but gives Basle-based, 4 agency (linked regulations (no manuals strictly g Unified Bankin to central bank) (to be increased) 2 n.a. n.a. n.a. n.a. n.a. 333 Yes Yes US$4 Likely Draft million finance Limited Angola Yes, with (above 20) minister of completed Basle-based to very high Central bank From negative mmmmmmmmmm On-site examinations Off-site examinations institutions Licensing overrule Licenses banks staff (percent of banks) supervisory staff Supervises nonbank Revisions planned Amendments since 1990 I.A. Prudential regulations Capital ratio Startup capital Capital adequacy assessment Manuals available for Possibility of government Ratio of banking supervision Appeal procedure exists Autonomy Average years of experience of Supervisory authority y framework 1. Supervisor Banking law 7 , 199 Countries n n Africa Sub-Sahara d Selecte s in n Issue g Supervisio . Bankin e A4 Tabl

57 APPENDIX I 5% No Yes 15% Yes No Yes Yes 50% 100% Malawi 10-25% Yes, 10% Yes, 20% Yes, 25% No Yes n.a. n.a. Yes Yes Yes Yes different follows a statistical r Madagasca analysis and approach of in place that case-by-case provisioning. There is one No Yes 50% 100% None Yes, for o Lesoth Yes 30% approval subject to loans: 10% guidelines) 4 guidelines) short-term Yes, 25% of all deposits Yes (general Yes (general greater than Yes, for total Yes, 20% on for aggregate shareholders; 5% long-term liabilities; 25% up capital and up capital and medium-term; reserve account reserve account unimpaired paid- : unsecured loans of US$639 or 1% - unimpaired paid 1% No No Yes n.a. n.a. Yes 20% 100% Kenya 3 Yes, 25% Yes, 20% Yes, 15% Yes, 25% Yes,25% Yes Yes Yes Yes Yes 25% 50% 100% Ghana reserve Yes, 2% Yes, 25% Yes, 10% than one aggregate loan, 25% secondary unsecured subsidiary) 35% (more reserve, 35% secured loan Yes, 8% primary (one subsidiary); No Yes Yes 15% Yes Yes 25% 50% 100% a Ethiopi deposits Yes, 15% Yes, 10% individually and 30% in Yes, 15% of deposits, 5% total current the aggregate raised to 20% Yes, IO%-2O% of each bank's l of total capita Yes, 15%, to be Yes n.a. Yes Yes Yes Yes 20% 50% 100% banks, 3% for credit a Botswan Yes, 3.25% Yes, 1.25% institutions Yes, 10% for 0% No n.a. Yes n.a. Yes Yes Yes 20% 50% 1 100% BEAC Yes, 100% No n.a. Yes n.a. Yes Yes Yes 1.5% 50% 20% 100% 1 Yes, 60% BCEAO ©International Monetary Fund. Not for Redistribution No No No n.a. n.a. n.a. n.a. Yes Yes Under Angola Yes, 10% demanded deposits in Yes, 40% of development local currency supervisory activities bank capital Doubtful Loss exposure, as percent of Substandard Domestic subsidiaries (percent of shareholding) Single currency requirements requirements Aggregate rules General provisions Specific provisions Single borrower r Connected borrowe I.B. Supervisory practices Limits in investing in nonbanks Consolidation of accounting/ Limits on foreign exchange Minimum liquid asset Monetary reserve Provisioning requirements g Classification and provisionin Limits on 4 (continued) e A Tabl

58 Appendix I No Yes n.a. No s Ye Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Banking mended industry Quarterly No, unless IMF/World Bank recom- 1 2 No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes . n.a Yes Yes Monthly, quarterly standards accounting 4-12 weeks owned banks Yes, for state- Mostly French 2 0 No No No Yes Yes Yes Yes Yes Yes Yes Yes Yes s Ye Yes annually national accepted generally standards quarterly/ Standards principles/ 4-6 weeks accounting accounting Accounting Committee/ International owned banks Yes, for state- y explicitl Not 1 Monthly/ 2 5 o N No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No Public annually 4 weeks of Kenya Certified quarterly/ unde r No, Institute of Accountants t developmen owned banks Yes, for state- , 10 day/monthly 5 No Yes No s Ye Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes annually Weekly/ monthly/ 3 months standards quarterly/ accounting International semiannually/ 5 No No No No . n.a Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes policy Weekly/ adopted U.S./U.K. quarterly standards standards. 6-8 weeks accounting Yes, but no established No, not for No officially private banks 0 o N No No Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes 6 weeks Monthly/ quarterly Standards No, under No, under discussion discussion Accounting Committee International o N No n.a. n.a. Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes banks Mostly French No, but reached Monthly has been standards a scheme. Yes, for all agreement accounting to institute 6-12 weeks 6 o N n.a. No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes banks French banking Monthly standards No, under Yes, for all accounting accounting plan, mostly 6-12 weeks ©International Monetary Fund. Not for Redistribution consideration New compulsory 0 0 o N No n.a. n.a. n.a. n.a. n.a. n.a. Yes n.a. Yes Yes Yes Yes Yes Yes Mostly Monthly/ quarterly standards 4-8 weeks accounting Portuguese bank activities of last resort reports license Possibility of appeal n t selectio managemen s n subsidiarie Foreig external audit of safety net accounting standards guarantee Acted during last five years I.C. Entry and exit years Licenses issued in past five Rejections prudential returns/ Frequency of External audit required Deposit insurance is available II. Safety net Length of examination III. Disclosure e Supervisory power to revok o object to y power t Supervisor Supervisory veto in appointing Complying with international Central bank acts as a lender Origin of accounting standards t Supervisory power to restric e Supervisory powers to fin e examination Supervisory on-sit n y informatio g supervisor Sharin There is implicit understanding There is explicit government

59 APPENDIX I No No Yes Yes Yes 1-A 486 Low Low Malawi No, the of 1965. licensing authority under way. for banks) Revision is Zimbabwe ministry of registrar of Banking Act Highly likely banks in the of Zimbabwe finance is the Reserve Bank arrangements l Yes (no specia No Yes Yes Yes Yes Yes Yes 3^ 224 Low 1994 Bank of Zambia Zambia Unlikely Average No (to be produced) The Banking and Financial Services Act, r Madagasca 12 120 Yes No No Full Yes Yes Yes Yes Low Bills of Uganda Uganda Bank of Unlikely Institutions o Lesoth 1964; Bank of Statute, 1993 Yes, untested 1993; Financial Exchange Act, Uganda Statute, 5 No No n.a. Yes Yes Yes Yes 378 Low Kenya Bank of Average Financial Tanzania Tanzania available) regulation Institutions No (similar Banking and institutions) Act of 1991 to supervise microfinance No (intended 5 160 No No No No n.a. Full Yes Yes Yes Likely Ghana Average Swaziland Institutions Order, 1975 of Swaziland (by the king) Central Bank The Financial (Consolidation) 4 102 No No No No No n.a. Full Yes Yes Yes 1993 a Ethiopi Banks Act, Banks Act, 1990; Mutual South Africa Yes, untested South African Reserve Bank 2 160 No Full Yes Yes Yes Yes Yes Likely a Botswan address Rwanda adopted available) regulation No (similar about to be deficiencies) Central bank under way to e No (plans ar New Bank Act Above average 1 4 BEAC No No n.a. Yes Full Yes Yes Yes Yes 340 Low 1965 Likely Bank of Namibia Namibia Banks Act, No No n.a. n.a. n.a. n.a. n.a. Yes n.a. Yes Yes Low 1992 1 Average BCEAO Law No. 1, Mozambique Central bank ©International Monetary Fund. Not for Redistribution 14 No Full n.a. Yes Yes Yes Yes Yes Yes 280 1995 Low Angola Bank of Unlikely Mauritius Mauritius Exchange Banking Act, Dealers Act, 1966; Foreign 1988; Bank of Mauritius Act, institutions Licensing Revisions planned Licenses banks performance f provision for liquidation o overrule is staff (percent of banks) of supervisory staff Supervises nonbank g bank system protectin companies Amendments since 1990 Ratio of banking supervision Manuals available for Possibility of government k 1. Supervisory Framewor Payment system efficiency Banking law e IV. Infrastructur Supervisory authority Average years of experience Autonomy Appeal procedure exists e legal There is adequat e legal There is adequat 4 (continued) e A Tabl

60 Appendix I Yes 50% Yes 100% 10.1% 10-25% revision Yes, 10% Yes, 20% Yes, 10% y activel Yes, 50% Yes, 25% ) utilized (no t Yes No (under Yes, under Yes, 17.5% Basle-based consideration] US$4.2 million No Yes Yes 15% 20% 50% Yes, 100% 1995. million US$1.5 (Capital liabilities Yes, 15% Yes, 20% Yes, 25% Services Yes, 10% No, to be Yes, 3-5% of deposit Yes, 43.5% introduced Adequacy) the Banking Regulations, and Financial - Largely Basle y based. 10% b comprehensive Yes Yes No No No Yes 20% 50% days 100% 6.15% million million Yes, 25% Yes, 25% US$0.96 US$0.48 Yes, 25% Yes, 25% "past due" Basle-based (local banks), Yes, based on (foreign banks) n.a. n.a. n.a. Yes 10% No Yes 50% 100% 1.55% million US$0.8 (banks), to 10%) Yes, 20% Yes, 25% rewritten Yes, being g No (bein unsecured be changed (nonbanks) ) developed Basle-based secured, 5% Yes, 12% (to US$1.7 million No n.a. 8% No n.a. n.a. Yes million deposit liabilities US$0.25 Yes, 10% Yes, 10% Yes, 6% of Prohibited ) Yes (draft than 17.5% Basle-based Yes, not less 8 Yes No Yes Yes Yes Yes Yes n.a. Yes Yes 9.8% US$11 million Yes, 15% Yes, 15% maintain a new banks higher ratio Basle-based, in some cases n.a. n.a. 5% n.a. Yes n.a. Yes n.a. Yes Yes Yes 20% 50% 100% No Basle-based g No (bein ) developed n.a. No No No No Yes? million n.a. Yes, 15% Yes, 30% Yes, 20% US$0.44 6 , in Yes short-term Above 8% 5% long-term liabilities; 15% Not less than . $0.44 million medium-term; t form draf n Basle definitio No, but drafted d to be introduce n.a. n.a. n.a. n.a. n.a. n.a. Yes 13% 20% 45% 100% million US$1.5 deposits Yes, 10% Yes, 20% Yes, 25% total time Yes, 10% of Basle-based ©International Monetary Fund. Not for Redistribution 1% No Yes Yes Yes s Ye Yes 20% 50% 100% 9-10% zero in Bank of US$3.5 Yes, 15% in 1999) Mauritius July 1997 cash ratio approval of Reduced to Basle-based increased to Yes, required million (to be US$4.7 million ; Yes, 6% bank capital exposure, as percent of Doubtful Loss Substandard (percent of shareholding) Single currency requirements Aggregate rules General provisions Specific provisions Connected borrower Single borrower s examination Off-site s e examination On-sit Limits in investing in nonbanks Limits on foreign exchange Minimum liquid asset Monetary reserve requirement* Provisioning requirements Limits on Classification and provisioning s l regulation I.A. Prudentia Capital ratio Startup capital y assessment Capital adequac

61 APPENDIX I 9 2 No No No Yes No Yes Yes No Yes Yes Yes Yes limited Yes, but Quarterly No (only to e Zimbabw 2-3 months recommend) Yes, but new II No No Yes Yes No Yes Yes Yes Yes No Yes Yes Zambia No, but Monthly proposed 5-6 weeks under way No, work is 8 No No No Yes Yes Yes Yes Yes Yes Yes Uganda by law 1 month Weekly/ monthly/ provided quarterly under way under way for 2 years No, work is No, work is Moratorium Yes, but not 16 n.a. n.a. Yes Yes Yes Yes Yes Yes Yes Yes Yes n.a. Yes Yes 4 weeks Monthly/ a Tanzani quarterly (for deposits) Yes, required 0 No No No No Yes Yes No Yes Yes No Yes n.a. Yes policy Up to Yes, but was not Monthly 6 months No stated d Swazilan performed 22 No No n.a. Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No, but Monthly proposed a South Afric risk managers No, limited to meetings with e CEO, directors, th 1 No No Yes Yes No Yes Yes Yes Yes Yes No No Yes Yes Monthly a Rwand 4-6 weeks owned banks Yes, for state- 1 No No No No Yes Yes Yes Yes Yes Yes No Yes Yes Monthly/ quarterly Yes, but new a Namibi Not explicitly 5 No n.a. n.a. n.a. n.a. Yes n.a. Yes Yes Yes Yes n.a. n.a. n.a. n.a. ©International Monetary Fund. Not for Redistribution e Mozambiqu when needed Regular and/or No No No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes None Up to annually monthly/ 3 months s Mauritiu in revised Yes, to be quarterly/ Banking Act incorporated Daily/weekly/ guarantee five years s supervisory activitie of last resort Acted during last five years of safety net Possibility of appeal bank activities license returns/reports management selection s Domestic subsidiarie s Foreign subsidiarie Deposit insurance is available Central Bank acts as a lender II. Safety net There is implicit understanding Supervisory powers to fine There is explicit government I.C. Entry and exit Licenses issued in the past Rejections Supervisory power to restrict Supervisory power to revoke Length of the examination Frequency of prudential n Supervisory on-site examinatio n Sharing supervisory informatio t to Supervisory power to objec y practices I.B. Supervisor of accounting/ Consolidation 4 (concluded) e A Tabl

62 Appendix I No Yes Yes Yes special g Bankin Yes (no y industr Average for banks) arrangements No Yes Yes Yes Yes Two Low, but (close to accepted generally principles) g accountin accounting l professiona is under way s organization improvement Yes Yes Yes local Average ensuring contracts s Standard body (not accounting g Accountin Yes (but no functioning) ; Committee l Internationa performance) special facilities No Yes Yes Yes Yes Low l Nationa f Board o n Tanzania s Accountant and Auditors No Yes Yes Yes Good 0 of 199 t Banks Ac Yes (tacitly) n South Africa Yes Yes Yes Yes Yes Good d Chartere e of Institut s Accountant n South Africa No No Yes Yes Yes Low Belgian Yes Yes Yes Yes Yes Low 0 of 199 t Banks Ac n South Africa n.a. n.a. n.a. n.a. Yes of 1990 Average t Banks Ac ©International Monetary Fund. Not for Redistribution n South Africa Yes Yes Yes Yes Good Mauritius s Standard Standards accounting Accounting g Accountin e Committe l Internationa l (internationa , standards 30) 3 5 7 9 2 4 8 e protecting bank performanc external audit Accounting Standards s for liquidation of companie l African Republic, Chad,, Republic of : Benin, Burkina Faso, Cote d'lvoire, Mali, Niger, Senegal,Togo (and Guinea-Bissau as of 1997). BEAC: Cameroon, Centra 'Banking Supervision Agency 1996 Annual Report. BCEAO l and unimpaired reserves. s to a single borrower from the equivalent of 100 percent to no more than 25 percent of an institution's capita Central Bank of Kenya reduced the total lending and guarantee d with ministry of finance. y to impose penalties for violation of regulations that do not relate to monetary policy: this authority is veste Bank Supervision Department in central bank lacks legal authorit Unofficial data. t of medium-term liabilities. Five percent of short-term liabilities to the public, and 2 percen ln addition, five licenses were issued for merchant banks. As of December 31, 1996. , plus 9 percent of demand deposits. Three percent of savings deposits, 5 percent of time deposits . One percent of short-term liabilities, 2 percent of total liabilities e III. Disclosur IV. Infrastructure External audit required Payment system efficiency g Supervisory veto in appointin h International Complying wit g standard s f accountin Origin o Congo, Equatorial Guinea, Gabon. m There is adequate legal syste n Yes There is adequate legal provisio

63 APPENDIX I

Table A5. Monetary Operations and Financial Market Development in Selected Sub-Saharan African Countries, 1997

Monetary Instruments and Interest Rate Determination Country Procedures of Operation (Management) Financial Market Development

Angola Angola's main instrument of monetary policy Interest rates have not been Primary market. None. is credit controls. In the past, the National liberalized, in part because the Secondary market. None. Bank of Angola (BNA) has lacked control over authorities do not believe that money creation, which is a by-product of the financial market is Interbank market. None. budget deficits. However, monetary expansion sufficiently competitive at Stock exchange. None. is now limited to the purchase of foreign present. Until April 1997, real exchange by the banking system from the oil interest rates were generally sector, excluding tax receipts and other oil negative. The attempt to revenues accruing to the central government. maintain real interest rates at Inflation has thus been high, although it came positive levels since then has down to more moderate levels in the first half not been entirely successful. of 1997. Reserve requirement. Required reserves are 40 percent of demand and time deposits in domestic currency with no requirement on foreign currency deposits. Reserves must be in the form of deposits with the central bank; vault cash is not counted as part of reserves. BNA pays interest on excess reserves, though not on required reserves. Credit controls. In 1991, a system of credit ceilings was established, but not used until recently. Currently, BNA strictly monitors credit limits imposed on commercial banks to control overall and bank-by-bank credit expansion. Also, increases in central bank credit to government have been strictly limited.

BCEAO The countries of the West African Economic and Countries of WAEMU maintain Primary market. BCEAO conducts countries Monetary Union (WAEMU) share a common a common interest rate weekly auctions in the money currency—the CFA franc, which is pegged to structure. Interest rates have market—either withdrawing liquidity the French franc. The central bank (BCEAO) been largely liberalized. Since by selling central bank bills or adding conducts monetary policy at the regional level. 1989, the only interest rates to liquidity by auctioning credit. During 1989-93, BCEAO shifted from direct to that have been fixed by the Secondary market. There is essentially indirect instruments of monetary policy— central bank are the discount no secondary market. The Abidjan specifically, operations in the money market and rate; a usury rate, which is set Stock Exchange includes bonds, but reserve requirements; auction of central bank at two times the discount rate; there is little trading volume. bills was introduced in 1996. However, excess and a minimum rate on liquidity hampers effectiveness of the indirect passbook savings deposits Interbank market. Yes, although it is instruments. (interest rates paid on certain not very active. time deposits and certificates Yes. Established in Open market operations. BCEAO auctions Stock exchange. central bank bills or auctions credit, using a of deposits are indexed to the 1976, the Abidjan Stock Exchange lists volume auction. money market rate). approximately 35 companies. The exchange is being transformed into a Reserve requirements. Yes. Introduced in 1993, regional stock exchange with offices in reserve requirements have been maintained at all WAEMU countries. 1.5 percent of sight deposits and short-term loans. Refinance. On a weekly basis, BCEAO either auctions credit to banks or auctions central bank bills using volume auctions. Lending facilities. BCEAO maintains a discount window (not used); a "pension window," which functions like a discount window; and collateralized advances on certain claims of Senegal and Cote d'lvoire governments.

64 ©International Monetary Fund. Not for Redistribution Appendix I

Table A5 (continued)

Monetary Instruments and Interest Rate Determination Country Procedures of Operation (Management) Financial Market Development

BEAC Cameroon, Central African Republic, Chad, With pegged currency and Primary market. Central bank bills countries Republic of Congo, Equatorial Guinea, and Gabon free capital mobility, interest (7-, 28-, and 84-day bills) are auctioned subscribe to a common monetary authority—the rates are tied to those in weekly, using single-price auction. Bank of Central African States (BEAC). These France. BEAC regulates Secondary market.None . countries also maintain a common currency, the maximum lending rates and CFA franc, which is pegged to the French franc. minimum deposit rates of Interbank market. Yes, on a regional banks. It also determines basis, but it is not very active. Open market operations. On a weekly basis, BEAC interest rates for central bank auctions central bank bills and credit to banks, Stock market. None. bill and credit auctions. using volume auctions (interest rates are given by Interest rates on the interbank the central bank and banks make bids in terms of market are freely determined. volumes). Repos are also used to provide short- term credit to banks. Lending facility. Repos are offered to banks. Also, credit auctions are held weekly. Reserve requirement. Reserve requirement is available, but has not been activated.

Botswana Reserve requirement.Nonremunerate d reserve Interest rates are free of Primary market. BOB certificates are requirement of 3.25 percent on domestic (pula) controls. sold at periodic auctions. Uniform deposits; no requirement on foreign currency price method has generally been deposits. Requirement may be met by maintaining used; however, recently, mini auctions a monthly average balance in a segregated account. using multiple price method have been Shortfalls are penalized at the Bank of Botswana introduced for comparison. It is hoped (BOB) rate plus 6 percentage points. that eventually the main auctions can be changed to the multiple price Open market-type operations. The main monetary system. BOB certificates can also be instrument consists of purchases and sales of BOB purchased outside the auctions from certificates. Currently, there are 12 counterparties BOB. that are allowed to deal directly with the BOB. Limite d secondary Liquid asset requirement. Yes, 10 percent of assets. Secondary market. Qualifying assets include BOB certificates and cash. market exists, with BOB playing central role. Activity is sporadic. (No primary Lending facilities. (1) One-day borrowing with dealer system is in place.) BOB certificates as collateral, at bank rate plus 6 percentage points; (2) one-day borrowing with Interbank market. Small interbank commercial paper as collateral, at bank rate; and market has emerged. (3) sale of BOB certificates to BOB (auction rate Stock exchange. Yes. Established in plus 30 basis points). 1989, the stock exchange includes approximately 12 listed companies.

Ethiopia Reserve requirement.Ethiopia' s one commercial Interest rates were largely Primarymarket .Governmen t borrows bank, Commercial Bank of Ethopia (CBE), is liberalized in February 1998. directly from the financial sector, required to maintain at the end of each week at Commercial banks are free to including the NBE. least 5 percent of its net deposit liabilities in an set their own deposit and Secondarymarket . None. unremunerated account with the National Bank lending rates. The NBE sets of Ethiopia (NBE). only the minimum deposit Interbank market. Recently established. interest rate (currently None. Liquid asset requirement. CBE is also required to Stock exchange. maintain liquid assets amounting to at least 6 percent). 20 percent of total net deposits. Credit controls. NBE regulates and monitors loans provided by the banking system, and determines which activities are to be financed and under what conditions, particularly with regard to credit terms, maturities, and collateral. Refinance facilities. NBE provides short- and long- term refinancing facilities to banks and other financial institutions. However, because of excess liquidity, these facilities have not been used by the CBE for several years.

65 ©International Monetary Fund. Not for Redistribution APPENDIX I

Table A5 (continued)

Monetary Instruments and Interest Rate Determination Country Procedures of Operation (Management) Financial Market Development

Ghana In 1987, the Bank of Ghana (BOG) began the Interest rates are free of Primarymarket . There is an active transition from direct to indirect instruments. controls, but are relatively sticky. primary market for government and Currently, it relies entirely on indirect instruments. central bank securities with weekly auctions of treasury bills and BOG Open market operations. Currently, open market- type operations are its most important bills. BOG recently ended "on tap" instrument—primarily (weekly) auctions of sales between auctions. treasury bills and notes and BOG bills. Secondary market. Secondary market for government securities and BOG Reserve requirement. There is an 8 percent reserve requirement on all bank deposits bills exists, but is relatively thin. High (domestic and foreign currency deposits). liquid asset requirement for banks stifles development of secondary Liquid asset requirement There is also a liquid market. BOG has made progress with asset (or liquidity reserve) requirement of implementing a book-entry system 35 percent on deposits. and has adopted a form of primary Credit facilities. BOG operates an unrestricted dealer system. rediscount facility, at a penalty rate. Interbankmarket . Interbank lending occurs, but transaction volumes and liquidity are relatively limited. Stock exchange. Yes. Established in 1990, the stock exchange has approximately 19 companies listed.

Kenya Kenya began the process of financial liberalization Interest rate controls were Primary market. The primary market and conversion to indirect monetary instruments abandoned in 1991. Effective with its periodic auctions is active, during the late 1980s. It abandoned credit August 1, 1997, commercial with a relatively large stock of public ceilings and liberalized interest rates in 1991. banks are required to quote debt (approximately 25 percent of base lending rates in the daily GDP). Open market operations. Central Bank of Kenya press to enhance transparency (CBK) uses auctions and "on tap" sales of Secondarymarket . Secondary market treasury bills in its monetary policy. Also, the and competitiveness. for treasury bills is not well developed. use of two-way repos with commercial banks No primary dealer system is in place. was effected from July 1997. A rediscounting However, from January 1997, CBK window is also available at the initiative of banks, instituted a central depository system, with the rate at 5 percentage points above the which enhanced efficiency in the 91-day treasury bill rate. rediscounting and redemption of treasury bills. Reserve requirement On October 1, 1997, the cash reserve requirement was reduced to Interbank market. Activity is limited; 15 percent of total deposits from 18 percent. the market is segmented because of Reserves are not remunerated. Averaging of the risk of some banks. All quotes are reserves is permitted over 15-day periods, for overnight lending. corresponding to the first half and the second Stock exchange. The Nairobi Stock half of every month, with a minimum level of Exchange began operations in 1954. 12 percent on any given day. Currently, approximately 56 companies Liquidity requirement. In June 1997, the commercial are listed. bank minimum liquidity ratio was reduced to 20 percent from 25 percent. Standing facilities. CBK operates a Lombard window; borrowing rate is 3 percentage points above the 91 -day treasury bill rate; and also a window for last-resort borrowing at 5 points above 91-day treasury bill rate. These facilities require government paper of no more than 91 days to maturity or paper traded in the stock exchange as collateral.

66 ©International Monetary Fund. Not for Redistribution Appendix I

Table A5 (continued)

Monetary Instruments and Interest Rate Determination Country Procedures of Operation (Management) Financial Market Development

Lesotho Lesotho is a member of the Common Monetary The overall level of interest Primary market. Treasury bills are Area and the South African Customs Union. The rates is essentially determined auctioned monthly. Recently, central South African rand circulates as legal tender by South Africa, the dominant bank paper was introduced, intended along with the loti, which is pegged at par to the member of the Common to complement treasury bills. rand. The Central Bank of Lesotho (CBL), Monetary Area. Banks Secondary market. None. established in 1982, uses reserve and liquid asset determine their prime lending requirements as its main monetary instruments, rates. However, CBL controls Interbank market. None. along with interest rate and credit controls. the minimum savings deposit Stock exchange. None. rate, the treasury bill rate, and Credit controls. CBL maintains bank-by-bank rates on bank deposits at CBL. credit ceilings. Reserve requirement. CBL maintains a differential reserve requirement on demand and time deposits: 3 percent of savings deposits, 5 percent of time and call deposits, and 9 percent of demand deposits. Liquidity asset requirement Yes, 30 percent of short-term deposit liabilities, 20 percent of medium-term liabilities, 5 percent of long-term liabilities, and 10 percent of customers' liabilities under acceptance. Interest rate controls. Yes. Open market operations. Although treasury bills are auctioned, open market operations are not yet an important instrument for the CBL.

Madagascar Since 1996, the Banque Centrale de Madagascar Commercial bank borrowing Primary market. Treasury bills are (BCM) has used only indirect instruments. and lending rates are determined generally issued by means of auctions; freely with no controls. however, real rates on these securities Open market operations.Treasur y bills are auctioned; however, open market operations have generally been negative, although are not yet an important monetary instrument. in the last two years they have turned positive. Reserve requirement. A 20 percent reserve requirement on deposits is in effect. Requirement Secondary market.Littl e secondary is determined on the basis of deposits at the end trading of treasury bills takes place. of the month. Interbank market.A n interbank market exists, but is not active. Standing facilities. A Lombard facility is available to banks, with the interest rate on borrowing equal Stock exchange. None. to a reference rate established by the central bank plus a markup.

Malawi Reserve requirement. The reserve requirement Interest rates are freely Primarymarket . Treasury bills are is 35 percent on banks' domestic and foreign determined. auctioned regularly. Book-entry system currency liabilities. is used by the RBM, but approval of legislation is pending. Standing facilities. Reserve Bank of Malawi (RBM) maintains a discount window. Loans are Secondary market.Secondar y trading collateralized, with maturities from overnight of treasury bills takes place on the to two weeks. stock exchange; however, turnover and volumes are low. Open market operations. RBM conducts treasury bill auctions. Full-fledged open market operations Interbank market.Yes , but very thin. are not yet conducted. Stock exchange. The Malawi Stock Refinancing. The commonly used type of Exchange began operations in 1995; refinancing is the repurchase agreement, however, trading activity and volume collateralized by short-term government remain low. securities. However, liquidity reserve requirements may be drawn upon for settlement balances in the clearinghouse (run by the RBM) at a penalty interest rate.

67 ©International Monetary Fund. Not for Redistribution APPENDIX I

Table A5 (continued)

Monetary Instruments and Interest Rate Determination Country Procedures of Operation (Management) Financial Market Development

Mauritius Open market operations. As its main monetary Interest rates have not been Primary market. Since April 1992, BOM policy instrument, Bank of Mauritius (BOM) liberalized except for interest has auctioned treasury bills and BOM regularly auctions treasury bills and BOM bills. rates on treasury bills and bills on a weekly basis, using multiple- Reserve requirement. The reserve requirement is BOM bills-ln June '997'the Price method 6 percent of deposits net of interbank deposits rate of mterest on savm§s Secondary market. A pseudo form of and retained foreign currency accounts. deposits was 8 percent— thjs actjvjty consists of BOM slightly above the inflation rate traneactjonc w;th commercial banks transactl ns Wlth commercial Danks Liquid asset requirement. This requirement was of 7 9 ent for the , 2.mOnth ° recently reduced to zero from 20 percent. oeriod ended tone 1997 °UtS'de ** aUCt'°nS-Unt'' ^"^ K Penod ended June '9VA secondary activity was inhibited by Standing facilities. BOM provides a rediscount relatively high liquid asset requirement, facility. Under the first tranche, banks can rediscount nonsugar export bills at I percent Interbank market Yes, but very thin, over the bank rate, or government securities Stock exchange. Operations began in including BOM bills at 1.5 percent over the bank 1989; approximately 28 companies rate.To encourage activity in the interbank are listed currently, market, BOM charges very high interest rates for the second and third tranches. BOM acts only as lender of last resort. Interest rate and credit controls. Despite a general move to more market-based monetary management—credit ceilings have been removed—there has been some reversion to special administered financing for priority sectors.

Mozambique Direct instruments of monetary control— Interest rates have been Primary market BOM and treasury central bank credit and ceilings on commercial liberalized. Bank lending and issue short-term securities on a bank credit—continue to be the main monetary deposit rates were fully quarterly basis, which are sold mainly instruments in Mozambique; however, the liberalized in June l994.The to commercial banks, importance of indirect instruments has authorities have maintained Secondary market None been increasing. positive real rediscount rates *;«,-/* tko k^rrinr.ir.rr r^f i QQC: Interbank market Interbank market in Credit controls Bank of Mozambique (BOM) R eVVe sho™ani bank foreign exchange established in July maintains bank-by-bank credit controls in the reserve snortraiis ana Dank «» form of quarterly ceilings on the net domestic overdrafts are penalized at asset expansion of each commercial bankThe the rediscount rate plus Stock exchange. In preparation, money semiannual ceilings are enforced by penalties on 2 percentage points. market established in September 1997. excesses, as well as by reductions from subsequent ceilings. Reserve requirement As of May 15, 1998, the reserve requirements are 9 percent of total demand and savings deposits for both local and foreign currency, including the bank aid government deposits. Standing facilities. BOM maintains a rediscount facility, with the rediscount rate positive in real terms. Refinance facility. Allocation is administratively determined. Open market operations. Treasury bills and BOM bills were recently issued for the first time.

68 ©International Monetary Fund. Not for Redistribution Appendix I

Table A5 (continued)

Monetary Instruments and Interest Rate Determination Country Procedures of Operation (Management) Financial Market Development

Namibia Namibia is a member of the Common Monetary Interest rates are market Primary market. BON conducts Area (along with Lesotho, South Africa, and determined. Because of auctions of treasury bills since 1991. Swaziland), and thus monetary policy is heavily Namibia's membership in the Secondary market. There is no influenced by South Africa. The Bank of Namibia Common Monetary Area and secondary market for short-term (BON) was established in August 1990 as a central the national currency's peg to government securities, even though bank, and the national currency was introduced in the rand, interest rates are they are quoted on the stock 1993. Namibia has a currency board arrangement. strongly influenced by exchange. Although there are legal requirements for developments in South Africa. reserves and liquidity, the BON cannot use them However, differentials exist Interbank market. Limited. Most effectively for monetary purposes. Commercial between the two sets of rates, commercial banks and nonbank banks are largely autonomous, with limited formal in part because of different financial institutions maintain close linkages to the central bank. Both the Namibia reserve and liquidity links with their South African parent or dollar and the South African rand are legal tender requirements. affiliated companies. Local interbank and exchange at par. However, the rand has been lending is limited since local banks gradually withdrawn from circulation. frequently deal in the South African interbank market. Open market operations. BON conducts monthly auctions of treasury bills and notes and inland Stock exchange. Established in 1992, registered stocks. the Namibian Stock Exchange lists approximately 33 companies and also Reserve requirement. Yes, on domestic currency maintains a dual listing of firms with accounts: 5 percent of short-term deposits and the Johannesburg Stock Exchange. It 2 percent of medium-term deposits. is the second largest in sub-Saharan Liquidity asset requirement. There is a minimum Africa after the Johannesburg Stock requirement of 20 percent on short-term deposits, Exchange. 15 percent on medium-term deposits, and 5 percent on deposits over six months. Lending facility. BON maintains a discount facility, though it is seldom used because most banks have access to the South African market.

Rwanda Main monetary instruments are reserve Interest rates have been Primary market. No activity currently. requirements and rediscount window and liberalized. In recent years, the government and lending and borrowing operations through the central bank have not been able to interbank market. pay interest on public debt. Open market operations. Open market operations Secondary market. Secondary market were interrupted for a time by an inability to pay is not functioning. interest on the public debt. However, authorities Interbank market. Interbank market is are restructuring government debt held by rudimentary. Small number of banks commercial banks and plan to resume open inhibits development of financial market operations in 1998. market. The main instrument of Reserve requirement. Stock exchange. None. monetary policy in Rwanda, the requirement is set at 12 percent of deposits. Lending facilities. Central bank operates a rediscount window for government securities and prime quality private paper. The rediscount rate is set at 4 percentage points above the interbank money market rate. Refinance facility. A specialized refinance facility is operated for financing crops, with the refinance rate maintained at the discount rate.

69 ©International Monetary Fund. Not for Redistribution APPENDIX I

Table A5 (continued)

Monetary Instruments and Interest Rate Determination Country Procedures of Operation (Management) Financial Market Development

South Africa South Africa is a member of the Common Interest rates are free of Primary market. SARB conducts Monetary Area (along with Lesotho, Namibia, and controls. Real interest rates on weekly auctions of treasury bills, Swaziland) and plays a key role in determining government securities are other government securities, and monetary policy for the region. South African positive—approximately (occasionally) central bank bills. Reserve Bank (SARB) relies entirely on indirect 7 percent on long-term bonds Secondary market. It is active and instruments of monetary policy. in December 1997. highly developed. South Africa Open market operations. SARB's active open recently discontinued its system of market operations include transactions in primary dealers because it was government securities and in foreign exchange. considered no longer necessary. In March 1998, it introduced repo operations Interbank market. It is active and highly and is developing a master repurchase agreement developed. with participating banks. Also, foreign exchange swaps are frequently used to affect liquidity.

Reserve requirements. Every commercial bank Stock exchange. The Johannesburg must have a basic cash reserve of 1 percent of Stock Exchange is modern and has a total bank liabilities and a supplementary reserve relatively high volume of transactions. of 1 percent of short-term bank liabilities. Credit facilities. SARB actively uses a rediscount facility to affect interest rates and credit conditions. Also, overnight loans are extended at the bank rate (currently 17 percent) against quality collateral. Other. Government funds are sometimes shifted between commercial banks and SARB to affect liquidity.

Swaziland Swaziland is a member of the Common Monetary Swaziland's interest rates are Primary market. Treasury and CBS bills Area (with South Africa, Lesotho, and Namibia), broadly in line with South are auctioned periodically. which requires unrestricted transfers of funds Africa's. However, deposit rates Secondary market. The market for between member states and uniform exchange and the discount rate have treasury and central bank bills is very controls with the rest of the world. The lilangeni generally been somewhat illiquid. is pegged to the rand at par. Monetary below South Africa's, and instruments include reserve requirements, inflation somewhat higher. Interbankmarket .Littl e interbank liquidity requirements, and transactions with lending takes place, in part because treasury and Central Bank of Swaziland (CBS) bills. banks generally have excess liquidity. Stock exchange. It was started in 1990. Reserve requirement.A n unremunerated reserve However, only four companies are requirement of 6 percent is in effect (which is listed currently and activity is limited. higher than in South Africa). Liquid asset requirement CBS also has a liquid asset requirement of 17.5 percent of banks' deposits. Local asset requirement. This requirement was abolished in May 1996. Open market operations. Primary market operations are conducted. Credit facilities. A discount facility is maintained. Tanzania Since the early 1990s, Tanzania has made good Interest rates are fully Primary market.Regula r auctions of progress in liberalizing interest rates and liberalized; however, real treasury bills (182-364 days) are developing indirect monetary instruments. interest rates have at times conducted; 91 -day BOT bills are also been negative, particularly occasionally auctioned to mop up Open market operations. Bank of Tanzania (BOT) uses transactions in the primary market and the during periods of inflation. excess liquidity. These auctions foreign exchange market. Reverse repos function relatively well. (generally 7-14 days) are also used to absorb Secondary market. Secondary market liquidity. Repos and reverse repos are carried for government securities has not yet out informally (i.e., without a master repurchase developed. There is no book-entry agreement). system or primary dealer system in place. Reserve requirements. Currently, it is 10 percent on both domestic and foreign currency deposits. Interbank market. Yes, although the (Reserves on foreign currency deposits are held market is thin, and loans are mostly in domestic currency.) uncollateralized.

Liquid asset requirement. None.

70 ©International Monetary Fund. Not for Redistribution Appendix I

Table A5 (continued)

Monetary Instruments and Interest Rate Determination Country Procedures of Operation (Management) Financial Market Development

Tanzania Lendingf acilities. There is a rediscount facility for Stock exchange. The Dar es Salaam (concluded) government securities; the level of the rediscount Stock Exchange commenced rate is discretionary. operations in April 1998. Credit auctions. These auctions are collateralized.

Uganda Open market operations. These are carried out Interest rates are free of Primarymarket . Auctions of treasury primarily through the primary market for controls. bills are conducted on a regular basis, treasury bills. using the multiple-price method. In addition, since February 1997, there Reserve requirement Uganda has a reserve have been five issues of Bank of requirement of 9 percent of demand deposits, Uganda bills—all have been 8 percent of time and savings deposits, and undersubscribed. 20 percent of foreign currency deposits. Banks are allowed to average reserves over a two-week Secondary market.Secondar y transfer maintenance period. Penalties are imposed for of government securities is limited. noncompliance. Securities are based on physical form, and hand ledgers are maintained at Lending facilities. A rediscount facility is available to banks, with borrowing rate determined by a the central bank. To enhance margin (currently, 2 percentage points) over the transferability, some treasury bills are 4-week moving average yield on 91-day treasury in bearer form. In addition, there is a bills. Also, lender-of-last-resort facility is available plan to introduce a central depository up to 5 percent of required reserves (and possibly system in the near future. more) for a maximum period of two weeks. Interbankmarket .Interban k lending is relatively infrequent and long term (such as 30 or 60 days). Stock exchange. None.

Zambia Open market operations. These are carried out Interest rates are free of Primary market. BOZ conducts weekly in the primary market for treasury bills, in the controls. However, some key auctions of treasury bills, and also foreign exchange market, and in auctions of repo interest rates are negative in auctions repos and BOZ term agreements and Bank of Zambia (BOZ) term real terms. deposits. deposits. In July 1994, BOZ established a special Secondary market. A nascent, though sterilization account for treasury bills sold for relatively inactive, secondary market monetary policy purposes; balances in this account has emerged for government can be used at the government's discretion. BOZ securities. An automated book-entry also relies on auctions of foreign exchange to meet system was introduced in August 1997. its intermediate target for reserve money. Interbankmarket . There is an active, Reserve requirement. In 1996, the reserve functioning interbank market, in which requirement was increased in two steps from lending is mostly collateralized. 3 percent of deposits in July to 8 percent in December. Reserves on foreign currency deposits Stock exchange. The stock exchange are held in local currency. Averaging of reserves is began operations in 1994. not permitted, and reserves are not available for settlement purposes. Liquidity requirement In November 1997, the liquidity requirement was reduced to 38.5 percent of liabilities from 43.5 percent. Standing facilities. A rediscount facility for treasury bills is available to banks. Credit auction. Collateralized credit auctions are used.

Zimbabwe Since 1991, Zimbabwe has embarked on an Interest rates are free of Primary market. Primary market for ambitious economic and structural adjustment controls. Positive real interest treasury bills is relatively active. program, and the Reserve Bank of Zimbabwe rates have generally been Auctions are limited to discount (RBZ) has been relying increasingly on indirect maintained. houses, which function as instruments of monetary policy to bring intermediaries. RBZ also sells inflation down to relatively low levels. treasury bills on tap following auctions. Recently, RBZ deposits and Open market operations. These include primary and RBZ bills have been offered to banks secondary markets, with RBZ making outright at a rate related to the cost of funds. purchases and sales of treasury bills in the secondary market, but dealing only with discount houses.

71 ©International Monetary Fund. Not for Redistribution APPENDIX I

•••••• •:"...-..: •'•••• Table A5 (concluded)

Monetary Instruments and Interest Rate Determination Country Procedures of Operation (Management) Financial Market Development

Secondary market Zimbabwe Deposit/RBZ bill facility. RBZ recently began Secondary market. (concluded) offering a combination of deposit facility and for treasury bills is relatively active. At RBZ bills to banks. present, Zimbabwe is implementing a book-entry system.To some extent, Reserve requirement. A reserve requirement of the five discount houses operate as 20 percent is in effect on banks' domestic primary dealers. deposits. On foreign currency deposits, a reserve requirement of 17.5 percent, payable in local Interbank market. Interbank market is currency, is in effect. It is based on the size of relatively well developed and active. deposits measured twice a month, and the Stock exchange. Established in 1946, reserve must be maintained each day of the the stock exchange has approximately maintenance period. 80 companies listed. Standing facilities. RBZ maintains a rediscount facility and collateralized overnight facility, both available only to discount houses.

Table A6. Monetary Policy Instruments in Use in Selected Sub-Saharan African Countries, 1997

Monetary Instruments Indirect Di rect Res. requirements Transaction outright Discount Facilities Interest Credit/deposit Repo Credit rate Domestic Foreign auctions agreements Government Central bank Overnight Others

Angola Y Y Y N N N N N Y Y BCEAO N N Y N Y Y Y1 N N Y BEAC N N N N Y N Y1 Y N Y Botswana N N Y N N N N Y Y Y Ethiopia Y N Y N N N N N N Y Ghana N N Y Y N N Y Y N Y Kenya N N Y N N Y Y Y^ Y Y Lesotho Y Y Y N N N Y Y N Y Madagascar N N Y Y Y N Y N N Y Malawi N N Y Y N N Y N N Y Mauritius N N Y Y N N Y Y Y Y Mozambique Y N Y Y N N Y Y Y Y Namibia N N Y N N N N N N Y Rwanda N N Y Y N N N N N Y South Africa N N Y Y N Y Y N Y Y

Swaziland N N Y Y Y N Y N N Y Tanzania N N Y Y N Y Y N N Y Uganda N N Y Y N N Y Y Y N Zambia N N Y Y Y N Y N Y Y Zimbabwe N N Y Y N Y3 Y N Y Y

'This was a onetime outright sale of long-term bonds. 2Lombard and lender-of-last-resort. 3The system can be categorized as quasi-repo agreement (collateralized advances).

Table A7. Development of Securities Market in Selected Sub-Saharan African Countries, 1997

Government Securities Market Bidders Short-term Limited Government Open market Auctions Open participation financing operations Competitive Marginal Tap Long-term

Angola1 N N N N N N N N 2 BCEAO Y N N Central bank bills N Y N Y 2 BEAC Y N N Central bank bills N Y N Y Botswana N Y N BOB certificates Y, mini Y, main auctions Y N Ethiopia Y N Y N N Y N N Ghana N Y Y Y Y N N Y Kenya Y N Y Y Y N Y Y Lesotho Y N Y Y Y N Y Y Madagascar N Y Y N Y N Y Y Malawi Y N Y N Y N N Y Mauritius N Y Y Y Y N N Y Mozambique N N Y N Y N N N Namibia Y N Y N Y N N Y Rwanda N N Y N N N Y N South Africa Y N Y T-bill central bank bills Y N Y Y Swaziland Y N Y Y Y N N N Tanzania Y N Y Y Y N Y Y Uganda Y N N Y Y N N N Zambia N Y Y Y N Y N Y Zimbabwe Y Y Y Y Y N N Y

1No government securities market yet. 2Securitization by BCEAO and BEAC of government debt for bank restructuring.

73 ©International Monetary Fund. Not for Redistribution APPENDIX I Operations Central Bank monitoring of credit limits imposed on commercial banks resulted in a substantial reduction in the spread between official and parallel exchange rates. rates have been raised to real terms and indexed to monetary financing of budgetary and quasi-fiscal imports with foreign have been banned. r has been adjusted wheneve market conditions have Strict limits on the outlays and the strict , list shortened. Moreover exchange not purchased s significant spread vis-a-vi n Since mid-1996, the foreig n exchange budget has bee e The official exchange rat f a caused the emergence o the official exchange rate. t the parallel market. Interes e tightened and the positiv from the banking system k e Regulatory Framewor Foreign Exchang t to 1. Foreign exchange budget. All imports are subjec y by 1. Foreign exchange accounts may be held domesticall d for the establishment of a 1 The IMF (MAE) has calle s Foreign exchange may be released to registered importer incurred during their stay in Angola only. n exchange licensing according to a positive list and the foreig s paid budget.The issuance of import licenses for transaction e subject to the availability of foreign exchange.Th r corresponding positive list assigns priority to particula of commerce. s against Foreign exchange accounts may be debited with sale n of may not be settled. Nonresidents may debit repatriatio Import payments: e residents and, with prior approval, by nonresidents.Thes n accounts issued against personal accounts; transfers betwee s are not 2. Domestic currency accounts held by nonresident s convertible and may be withdrawn to cover expense y BNA. transactions, which are periodically announced b s may payment orders, and interest accrued. Nonresident deposit proceeds from their activities in Angola. y not be domestic currency. For residents, checkbooks ma s are prohibited; and imports, invisibles, or capital payment all or part of the existing deposit. g system is with foreign exchange purchased from the bankin e ministry who file a pro forma invoice valid for 90 days to th t team. installation of a private managemen , accounts may be credited with retained export earnings diamond sectors. m approved by the national 2The new privatization progra recently, the national assembly commercial banks. More n of the banks, but the separately voted the privatizatio e management with the authorities hoped to improv n transfers from abroad, cash, traveler's checks, foreig and investment law: New banking, foreign exchange, s for a new foreign exchange law auctions.The IMF also call of the BNA and the petroleum and and the external auditing n of the state-owned assembly excludes privatizatio system to be initiated with foreign exchange market Accounts in foreign and domestic currencies: Article XIV status. e Market Structur e Foreign Exchang 1996, the exchange houses Reflecting the prospering but instead at rates set for informal sector funded mainly by illegal diamond sales, there has been a rapid growth in BNA at fixings have dwindled exchange houses. Since July 1, are no longer allowed to deal at market-determined rates, commercial banks. into insignificance since priority list exhausts the exchange directly from BNA. (primary official), and rate BNA adjusts the exchange parallel market. September I995.BNA'S amounts channeled through and high-level officials bypass (secondary official). significant spread vis-a-vis the exchange made available by the fixings. Some companies the fixing by obtaining foreign As a result, the system lacks transparency. place at the official exchange exchange is being sold to commercial banks apply a spread of 6.1 percent cause the emergence of a The amounts of foreign - Since July 1, 1996, all trans at rate determined by BNA n fixing sessions when foreig commercial banks. BNA t applies a spread of 1 percen s to its buying and selling rate take actions are mandated to whenever market conditions ©International Monetary Fund. Not for Redistribution e Arrangement s Exchange Rat d to 1. Foreign exchange pegge Export/import by travelers is by 30 percent in July 1997. prohibited. Outcome' national currency terms) during 6. Controls on domestic banknotes. devalued by 2,740 percent (in banks to license and execute Licensed foreign exchange banknotes and traveler's checks. 5. Official payments arrears.Yes. The adjusted kwanza (KZR) was the first half of 1997, and again houses to carry out transactions in the foreign exchange market. permitted invisible and capital dealers may deal only in BNA is the exchange authority. to Paris Club and multilateral. commercial banks and exchange . No Brazil, Portugal, and Spain law approved in early 1997, the Arrears on post-cutoff- date debt unitary official rate. . import/export transactions t 3. Payments. Bilateral settlemen h do (barter) arrangements, whic t not contain bilateral paymen Authority has been delegated to foreign exchange transactions. clearing arrangement. The BNA has authorized ; U.S. dollar since July 1, 1996 l Bank 2. Prescription.The Nationa s the of Angola (BNA) prescribe currencies to be used in According to the new exchange h features, are maintained wit 4. Administration of control. Angola Arrangements: y and Polic Country , 1997 n African Countries d Sub-Sahara e Area in Selecte n the Foreign Exchang . Development s i Table A8

74 Appendix I Open foreign exchange exposure: N.a. s of Foreign investment activities are subject to the provision m economic coordination). Foreign investment in petroleu s is production, diamond mining, and financial institution owed to sale of investsments, including gains and amounts y of them after payment of taxes due, but the ministr finance's prior approval is required. s must be surrendered within 30 days of receipt unles provider authorized to retain by BNA. y of control regulation. Implementation is the responsibilit s of the guaranteed the right to transfer abroad the proceed e earnings in resident company exceeds US$250,000. Servic Capital transactions: e the Foreign Investment Law (1994) and foreign exchang g and the Foreign Investment Bureau (ministry of plannin s are governed by separate legislations. Foreign investor retaining abroad. t dividends by foreign investors is granted if their investmen . All inward and outward capital transactions are controlled e basis, the BNA may permit local banks. On a case-by-cas Invisibles: e for all transportation. Prior contracting local insuranc , all exports of goods and Except for foreign oil companies y of finance for remittance of approval from the ministr required. to retain a certain portion of may authorize exporters , prior approval, and All payments require licensing t inspection by the with banks, preshipmen Domiciliation within 30 days of shipment through of proceeds are required s to be deposited in accounts with foreign exchange earning t equal to the l a foreign exchange amoun required to sel foreign exchange. requirements for releasing 3. Documentation Export proceeds: . Repatriation and surrender services are subject to licensing l bank of domiciliation.The BNA the BNA or the commercia r to shipment. to a commercial bank prio import value letters of credit are e de surveillance, and Societe general s are their own fund s using Importer requirements. 2. Financing Volatility.Vulnerability to t No forward exchange marke commodity (petroleum) prices. t shipments is estimated a some US$2.5 billion. this December 1997. During . percent from 34 percent or official coverage. fluctuations in world KZR 398,000 at end- n period, the spread betwee 2 exchange rates rose to 5 The amount of debt rate depreciated from r KZR 270,000 per U.S. dolla guaranteed by future oil n official rate restrictions o o at end-December 1996 t l the parallel and the officia illegal parallel However, an of the economy. dollarization s as a result of rate also exist , and the transactions t exchange The parallel marke e foreign exchang ©International Monetary Fund. Not for Redistribution 1997 . External financing: Dependency e debt). (including pre-cutoff-dat s at end-1996 months of import s fell from 1.5 Gross reserve s of external debt most categorie s of imports at end- to 0.9 month Gross reserves: d arrears on Angola has incurre

75 APPENDIX I s l Bank Operation Centra s in the French franc n Because of the fixed foreig France, the scope for t of its least 65 percen reserves in international international reserves d member countries is limite management. IMF or are preparing for reserves invested abroad by . Other Operations Account s comprise SDRs and bond security market. y exchange risks collectivel countries. h exchange arrangements wit national policies in the monetary policies are set on memuer countries. on behalf of WAEMU all under programs with the Gross official foreign assets of the individual countries 51*0 rloimc in ^^FA fi~cinr*c r\n maintains at The BCEAO l traded in the internationa n The BCEAO bears foreig The member countries are one. Program targets in di c v-ldllllo III v^ I/A lidlll-o \Jl 1 the common foreign t to fiscal and domestic credi the banking system. thp RCFACi r»n hphalf nf thp X.IIC DV^C/AW Oil Uclldll Ul Lllc government borrowing from k y Framewor Exchang e Regulator Foreign s domestically held n foreign currency.Account 1.Accounts i Advance payments for imports 1. Financing requirements. r must 1. Documentation. Exports of CFAF 500,000 and ove e foreign require authorization, and importers may not acquir repatriated and surrendered. e prior approval by the d nonresidents requir by residents an abroad by residents . Accounts held member governments , accounts in convertible banknotes held outside WAEMU t import transactions exceeding CFAF 500,000; preshipmen inspection is also required. be domiciled with an authorized bank. h the intermediary banks to the BCEAO via transfer throug e the indicative limits apply to payments for travel outsid s Capital movements among Operations Account countrie nonresident accounts: Resident and d the repurchase of its 2. Since the BCEAO has suspende y nonresidents may not be credited domestic currency held b banknotes. or debited with BCEAO e in the official foreign purchasing any foreign exchang s of funds between nonresident exchange market.Transfer Import payments: exchange. 2. Documentation requirements for releasing foreign Export proceeds: date. bank of issue not later than one month after due Invisibles: Capital transactions: r countries require prior authorization from membe Credit by residents to nonresidents is controlled and requires Open foreign exchange exposure is monitored and supervised by the BCEAO. , but transfers tending to develop are not explicitly prohibited be overdrawn without prior These accounts may not e freely debited for the purpose of authorization, but may b . accounts are not restricted . exchange until the contractual date of the payments , including 2. Repatriation and surrender. Proceeds from exports 0 days of countries, must normally be repatriated within 12 d arrival at destination and surrendered by the authorize r are free of restrictions. Capital transfers to all othe these countries are permitted freely. an "exchange authorization" to be delivered by the BCEAO. . these holdings are prohibited d for all Yes, domiciliation with authorized banks is require s Account those to WAEMU members and other Operation status (June 1996). s accepted ArticleVIII All member countrie a fide test; All payments are controlled on the basis of a bon t be franc zone. Proceeds from exports of goods mus s from governments and are restricted, but capital receipt t Structur e Marke n Exchang e Foreig n exchange reserves. Foreig In practice, banks may y France and overseas.The Most commercial bank liquid may be arranged for residents only for a duration No official coverage. Volatility: Vulnerability to y made banks are normall e maintain foreign exchang h positions abroad in line wit issued by the BCEAO, or public bonds guaranteed by maximum with prior commodity (mainly coffee, n are no local interbank foreig exchange market and no correspondent banks in cover requirements for documentary credits and other current external short-term bills directly Forward exchange cover for eligible imports and exports cocoa, and cotton) prices and climatic conditions. uses persuasion The BCEAO foreign to centralize y commercial transactions b their transact abroad through assets are held in CFA francs UJklV UJ Ul V- II \*» 1 *J III V—« I / \ II Ul I\«J of one to four months as a authorization by member re through the BCEAO. The . foreign exchange bureaus transactions. with the BCEAO in deposit, the BCEAO. governments. fluctuations in world ©International Monetary Fund. Not for Redistribution . . i 1 1 C _l 11 * 1 C\C\S s e Rate Arrangement Exchang BCEAO no longer repurchases Dependency—to be completed. its banknotes exported outside Liberia, Mauritania, Nigeria, and French francs, or the currency of e French and the CFA francs.Th n BCEAO levies no commissio s are BCEAO member countrie Outcome: 2.4 percent in nominal terms External financing: member governments. 5. Controls on domestic banknotes. 3. Payments. Clearing agreement; s may. but member government y linked to the French treasur Clearing House. delegated to the BCEAO by the Since August 3, 1993, the effected through correspondent banks in France. countries are made in CFA francs, l on transfers to or from al The CFA franc depreciated by against the U.S. dollar in 1996. Sierra Leone are normally made any other Operations Account country. Settlements with all other countries are usually current payments to or from The Gambia, Ghana, Guinea, settlements with France, Monaco, , countries outside theWAEMU e 2. Prescription. Because th WAEMU. through the West African 4. Administration of control. Part of the approval authority has been e the fixed rate between th through an Operations Account, and other Operations Account , at the a intervention currency Benin, Burkin j Niger, Senegal, , the £ French franc (BCEAO): £ |\ Faso, Cote s are derived from the Bissau, Mali, currencie of Arrangements: Central Bank exchange rates for other d'lvoire, Guinea- c is pegged unitary.The CFA fran States , |. Pegged West African s exchange market and T°g° the Pari and Policy y Countr r the currency at issuen rate fo One e of CFAF per f00i fjxed rat e and th Forejgn excnange 8 (continued) e A Tabl

76 Bank of Arrangements: The BEAC uses persuasion All member countries accepted ArticleVIII status (June 1996). The BEAC maintains at least Central to centralize foreign reserves 65 percent of its 1 .Foreign exchange. Pegged, Resident and nonresident accounts: African States and limit transfers abroad. international reserves in unitary.The CFA franc is pegged (BEAC): Foreign exchange 1. Accounts in foreign currency. Residents and nonresidents are French francs in the Cameroon, to the French franc, the transactions by commercial not permitted to maintain foreign exchange accounts Operations Account. Other Central African intervention currency, at the banks are normally made domestically. Residents are not allowed to maintain foreign international reserves are Republic, Chad, fixed rate of CFAF 1 per F 0.01. through the BEAC. exchange accounts abroad. mainly bonds traded in the The exchange rates for other Republic of currencies are derived from the There are no local interbank 2. Accounts in convertible domestic currency held by international security Congo, rate for the currency concerned foreign exchange market or nonresidents.The regulations pertaining to nonresident market. Equatorial in the Paris exchange market and foreign exchange bureaus. accounts are based on those applied in France. Because of the fixed foreign vjuinea, voauon the fixed rate between the Informal trade in BEAC bank- Since the BEAC has suspended the repurchase of its exchange arrangements with French and the CFA francs. For notes, particularly with banknotes circulating outside the CAEMC, banknotes France, the scope for certain transactions, a Nigeria, has grown received by the foreign correspondents of authorized banks national policies in the commission of 0.25 percent is significantly during recent and mailed to the BEAC agencies may not be credited to member countries is limited levied on transfers to countries years. foreign accounts in CFA francs. to fiscal and domestic credit outside the Central African management. Banks may also transact With prior approval, nonresidents are allowed to maintain bank Economic and Monetary abroad through their accounts in convertible francs in the CAEMC countries only. The member countries all Community (CAEMC). correspondent banks in have a program with the These accounts, held mainly by diplomatic missions, 2. Prescription. Because the France and overseas.They IMF or are preparing for international institutions, and their nonresident employees, CAEMC countries, whose maintain foreign exchange one. Program targets in may be credited only with (1) proceeds of spot or forward central bank is the BEAC, are all positions abroad in line with monetary policies are based sales of foreign exchange transferred from abroad by linked to the French treasury cover requirements for on net domestic credit by through an Operations Account, documentary credits and account owners; (2) transfers from other nonresident the central bank in each settlements with France, other current external convertible franc accounts; and (3) payments by residents in member country. Monaco, and other Operations transactions. accordance with exchange regulations. Gross official foreign assets Account countries are made in Most commercial bank liquid These accounts may be debited only for (1) purchases of of the individual countries CFA francs, French francs, or the assets are held in CFA francs foreign currencies; (2) transfers to other nonresident are claims in CFA francs on currency of any other with the BEAC in deposit or convertible accounts; and (3) payments to residents in the common foreign Operations Account country. short-term bills directly accordance with exchange regulations. reserves invested abroad by Settlements with all other issued by the BEAC. Import payments: the BEAC on behalf of the countries are usually effected CAEMC countries. through correspondent banks in Forward exchange cover 1. Financing requirements. None. France in any of the currencies requires the prior 2. Documentation requirements for releasing foreign exchange.Yes, of those countries or in French authorization of the domiciliation with authorized banks is required for all import francs through foreign accounts exchange control authorities. transactions exceeding CFAF 500,000 if the goods are not in French francs. It must be denominated in considered in transit; preshipment inspection is also required. the currency of settlement 3. Payments. Regional prescribed in the contract, Export proceeds: arrangement within the CAEMC, and the maturity period must 1. Documentation. Exports of CFAF 500,000 and over must be whose central bank is the BEAC. be between three and nine domiciled with an authorized bank; preshipment inspection is 4. Administration of control. Local months. Settlements must be required. governments. effected within eight days of 2. Repatriation and surrender. Proceeds from exports to all 5. Controls on domestic banknotes. the maturity date of the countries must be repatriated within 30 days of the payment Since August 3, 1993, the BEAC forward contract. date stipulated in the sales contract, and surrendered within no longer repurchases its There is no official coverage. one month of collection if received in currencies other than banknotes exported outside the those of France or an Operations Account country. Vu 1 nerabi 1 ity to fACMr Volatility: V.-MCI Iv^. fluctuations in crude Invisibles: Outcome: petroleum receipts, and Payments in excess of CFAF 500,000 to France, Monaco, and

world commodity prices for Appendi x I The CFA franc depreciated by the Operations Account countries require prior declaration 2.4 percent in nominal terms cocoa, coffee, cotton, rubber, and are subject to presentation of relevant invoices. against the U.S. dollar in 1996. and timber. Payments related to trade follow the same regime as basic trade transactions, as do transfers of income accruing to nonresidents in the form of profits, dividends, and royalties. All payments are controlled on the basis of a bona fide test; quantitative limits apply to payments for travel, medical costs, study abroad, and family maintenance. 7 Proceeds from exports of goods must be repatriated and surrendered. ©International Monetary Fund. Not for Redistribution APPENDIX I k Operations Central Ban 1997 recommended the monetary policy instruments erratic short-term in central bank certificates to establishment of a small of a complete array of inflation through bank liquidity. also recommended creation fluctuations and medium- term trend. g Because of the effective pe independent foreign exchange sterilize capital inflows and absorb excess liquidity. to formalize and monitor foreign exchange market. It to deal with cyclical and is limited scope for The mission in February foreign exchange committee of the pula to the rand, there and monetary policy. The BOB regularly proceeds with open market operations The BOB controls the growth of money supply and k e Regulatory Framewor Foreign Exchang d for 1. Financing requirements. Advance payments permitte t and Foreign currency earned or owned by permanen Proof of import for value exceeding P 10,000. e Residents and nonresidents may open foreign exchang legitimate commercial needs. exchange. 2. Documentation requirements for releasing foreign Export proceeds: . either for current account or for capital transactions Bill to be passed 1997/98; pending regulation on s abroad if residents may maintain foreign currency account Import payments: t in temporary residents, and nonresidents, may be kep y maintain proven commercial need. Nonresidents may freel d as foreign currency accounts to be explicitly designate s Units Stock Market Act passed 1995; Collective Investment establishment of foreign exhange bureaus. B approval, accounts with authorized dealers.With prior BO by the BEAC. New banking, foreign exchange, and investment law: . foreign, and convertible domestic, currency accounts e of exchange control. Outward France, and Monaco are fre t to registration and borrowing, which are subjec s requires prior exchange Credit by residents to nonresident control authorization. is monitored and supervised Open foreign exchange exposure Capital transactions: r countries require exchange capital transfers to all othe restricted. Inward transfers are free control approval and are r foreign direct investments and of restrictions, except fo (November 1995). Accepted Article VIII status g Operations Account countries, Capital movements amon authorization. Accounts in foreign, and convertible domestic, currency: e Market Structur e Foreign Exchang respect of the foreign Draft regulation authorizing banks and may be given in currency proceeds derived DP\D As\*>\r \»/i«-l~% •"Uk/"\ DUD deais witn tne prepared. Forward exchange cover is offered by the commercial exchange bureaus for small cash transactions is being from the exportation of imposed zero positions on commercial banks bilaterally and is not informed of the dealings among them. goods for up to six months. positions on customers' surrender foreign exchange the establishment of foreign dealers on the basis of open dealers are expected to exchange interbank market is developing among authorized accounts.AII authorized to BOB and are being their own accounts. A small informal foreign ©International Monetary Fund. Not for Redistribution and Policy e Arrangement s Exchange Rat 1 1. Foreign exchange rate. Pula reserves. Botswana (BOB) implements manages foreign exchange Development Community. control determined by commercial banks; invests and Union and Southern African administers foreign exchange 3. Bilateral. Operative bilateral 4. Administration of control. Bank of government; delegates powers to discontinued since 1990. 2. Payments. Unrestricted within Southern African Currency foreign exchange policy and Dual rate: multiple currency practice out of outstanding Southern African Currency Union. trade agreements. Participant in i*^n/H ic Hominont" In roront IdllU Ib UUI1 III Idl 11. 111 1 cLcllL obligations under foreign exchange risk-sharing scheme pegged to weighted currency ha^kpt in whirh ^onth African UdjKcLf II 1 W1 IIL.I 1 JUULI 1 r\\ 1 1 (.dl 1 to South African rand. years, pula pegged predominantly Arrangements: Botswana BEAC (concluded) Country A8 (continued) Table

78 5. Official payments arrears. No. Volatility: Highly seasonal and Invisibles: The net cost of the BOB 6. Control on domestic banknotes. substantial inflows of Payments controlled. For payments in excess of P 10,000 a °Pen market operations is diamond r ce are Residents may export up to f '^ u transaction, authorized dealers must require documentary expected to disappear with P 5,000 a trip. No limit on associated mainly with tax evidence of legitimate purpose and current account ,^rt e,r Pro§ress In imports. payments by the mining transaction. Proceeds: same as exports. liberalizing capital company, Debswana. transactions. 7. Control on foreign banknotes. Capital transactions: by residents limited to up Export There is a small stock market with Botswana acting as sole to equivalent of P 5,000; import: intermediary or stockbroker. No domestic bond financing no limit. and market. Market for BOB certificates traded by BOB and Outcome: 12 primary dealers being developed as beginning of money and capital market. The pula depreciated by 16.6 percent in nominal terms against 1. Inward investment is controlled. the U.S. dollar in 1996. a. Portfolio holdings by nonresidents may not exceed 49 Gross reserves were stable at 27.5 percent of "free stock" of local company. months of imports in 1996. b. Nonresidents may not buy BOB monetary instruments. c. Authorized dealers are permitted to receive loan funds from nonresidents for resident customers of up to P 100,000 (individuals) and P 1 million (companies) without any prior reference to BOB. Interest on these loans is restricted to 1 percent above the relevant London interbank offered rate. 2. Control over outward investment. a. Quantitative limit of up to P 100,000 and P 1 million for resident individuals and companies, respectively, in offshore securities, money market instruments, direct investment, and purchases of real estate. b. Credit by resident credit institutions to nonresident- controlled entities up to 4:1 debt-to-equity ratio after initial tranche of P 1 million without reference to BOB. c. Institutional investors are permitted to invest up to 70 percent of portfolio externally. Open foreign exchange exposure: The limit is 10 percent of core capital of a bank on account of customers only. Banks are strictly prohibited from taking any position on their own account Appendi x I 7 9

©International Monetary Fund. Not for Redistribution APPENDIX I k Operations Central Ban n in the NBE interventio Reduction in the s international reserve target l money, which is a nomina n NBE maintains flexibility i consistent with broad private sector while aimed at achieving r anchor, as projected unde achieving the broad money is foreign exchange market target. . the current ESAF program . the official exchange rate s government debt vis-a-vi d the banking system allowe the for increases in credit to k e Regulatory Framewor Foreign Exchang s require 1. Financing requirements. Most financing method s are 1. Residents. Exporters and recipients of remittance Ethiopia. NBE approval. n investment/participation in revised so as to allow foreig y and legal impediments to Further removal of regulator y investment, is called for by private sector activity, particularl e investment code needs to be independent of the banks.Th , and the pace of privati- more sectors (including banking) y may be credited with 10 percent retained on proceeds.The , or any may not be debited to acquire shares, stocks, bonds permitted to open foreign exchange accounts. e nonresidents and diplomats with prior NBE approval.Thes Import payments: and investment law: New banking, foreign exchange, s until 1999. current account restriction prior NBE approval. e opened 2. Nonresidents. Foreign exchange acounts may b t debited for transfers abroad; transfers between nonresiden retain Blocked accounts of nonresidents are maintained to s of Importer and exchange licenses must be obtained. Import in a phased elimination of remaining The authorities engaged s and nonresidents under domestically held by resident certain conditions: e accounts allowed to open foreign exchange accounts.Thes without other security denominated in foreign exchange, s are accounts do not require prior approval. Joint venture . accounts may be debited for payment of local expenses s in funds in excess of Br 20,000 arising from disinvestment transport and communications. e bureaus should be made the IMF. The foreign exchang e should be accelerated. zation and government divestitur , accounts in foreign currency may be With prior NBE approval e credited with NBE prior approval.These accounts must b e freely with deposits in foreign exchange. Balances may b y of vehicles require prior authorization from the ministr d by Accounts in convertible domestic currency may be opene Article XIV status. e Market Structur e Foreign Exchang No forward exchange market Volatility: Vulnerability to percent by mid-1996, hovered in the range of 5-6 percent in now close to 0 percent. is the marginal rate (i.e., lowest successful bid) buying at auctions was reduced from 100 percent to or official coverage. commodity (coffee) prices determined by the NBE. d domestic private banks, an . participate in the auctions e bureaus operate within th banking system and conduct Commercial banks and may bid on their own clients. Cover required in 25 percent in July 1995 and exchange market. However, and climatic conditions. s determined in weekly auction r commercial banks, the fou account in foreign exchange auctions to fulfill demands for the second half of 1997, and is fluctuations in world e rate of The official exchang r the birr against the U.S. dolla of for announced quantities foreign exchange, as The two state-owned s the foreign exchange bureau The foreign exchange transactions in invisibles only within approved limits. was eliminated in July 1996. There is a parallel foreign the premium in this market went down to about 18 foreign exchange bureaus ©International Monetary Fund. Not for Redistribution e Arrangement s Exchange Rat t 1. Foreign exchange. Independen Export/import by travelers between the two governments. limited to Br 10. rescheduling of debts and 7. Controls on domestic banknotes. NBE control, all foreign licenses for all exports and Br 2,000) barter trade, which , all Effective December 1997 i /MRC\- M-ifi/->r»-»l Ronl/ r\( P^Ki^ni a ^INDLJ, iNationai oanK OT ctmopi 6. Official payments arrears. More arrears is now under negotiation 5. Administration of control. Under dealers.The NBE Exchange Controller issues exchange payments abroad, and permits 3. Clearing. No. s to the percent on selling accrue owed to Russia, and the exchange transactions must be h the made in hard currency wit exception of small (up to can be conducted in either birr 5 percent on buying, and 0.7 r own percent on selling for thei 2. Prescription and payments. trade policy. than 50 percent of the debt is carried out through authorized are settlements with Eritrea or nakfa (the Eritrean currency). y authorized dealers may lev 5 service charges of up to 0.2 account. and 1.5 of 0.5 percent on buying for all shipments.The ministry of trade formulates the external 4. Bilateral. No. n floating, unitary. A commissio Ethiopia Arrangements: y and Polic Country A8 (continued) Table

80 Outcome: 2. Documentation requirements for releasing foreign exchange. Exchange licenses may be obtained when a valid importer's The Ethiopian birr depreciated license is presented together with final invoices, by 1.7 percent in nominal terms nonnegotiable bill of lading, and evidence that adequate against the U.S. dollar in 1996 insurance has been arranged. (end of period) and by 6.6 percent in 1997 (end of period). Export proceeds:

Gross reserves rose from 6.6 All exports are licensed through the exchange controller, months of imports of goods in and all shipments require permits from that office. 1994/95 to 7.9 months in Repatriation and surrender of 90 percent of the net proceeds 1995/96 and then declined to 5.1 are required: 50 percent to be surrendered to NBE on months of imports of goods (or receipt, and 40 percent to commercial banks and foreign 4.3 months of goods and exchange bureaus within 21 days. Retention of 10 percent. nonfactor services) in 1996/97 (July/June). Invisibles:

External financing: Payments for invisibles require foreign exchange licenses. Invisibles connected with trade transactions are treated in a Dependency. similar way without quantitative limits. Profits and dividends may be freely remitted by foreign companies after paying local taxes.Travel, medical, family maintenance, study expenses abroad, and workers' remittances are subject to prior approval and quantitative limits. Ninety percent of proceeds from invisibles must be surrendered within 21 days.

Capital transactions:

Inward, foreign borrowing, and outward transfers are controlled. Banks may place their funds abroad freely except on fixed- term deposits. Banks need prior NBE approval on all security investment and borrowing abroad. Inward direct investment is controlled by the investment office. Investment licensing is required for real estate purchases. Liquidation of investment and repatriation of capital must be authorized by the exchange controller.

Open foreign exchange exposure: Banks need prior NBE approval to overdraw their accounts with foreign correspondents, borrow funds abroad, or accept deposits in foreign exchange. Appendi x I 8 1

©International Monetary Fund. Not for Redistribution APPENDIX I s l Bank Operation Centra s reserve BOG control l anchor money as a nomina in BOG intervention policy is airectea at smootning In the event of strong unanticipated foreign However, in 1996, BOG e criterion in a performanc short-term fluctuations, F subject to meeting the ESA program target for net market intervention by g BOG is conducted to brin inflation and as for reducing exchange inflows, open h money supply in line wit demand. proceeded with large unprogrammed foreign exchange rates. F program. the current ESA exchange sales to support t the foreign exchange marke foreign assets. k y Framewor n Exchang e Regulator Foreig . 1. Financing requirements. None l or 1. Outward capital transfers require prior BOG approva G approval, qualifying nonresidents residents.With prior BO e and convertible domestic may hold foreign exchang law: None foreign exchange, and investment New banking, currently. o other foreign accounts, and for payments, for transfers t . purchases of external currencies Blocked accounts: s may be deposited and Certain types of capital proceed . Repatriation is required within 60 days of shipment y retained Proceeds from nontraditional exports may be full required for all receipts from invisibles. are 3. Inward direct investment and real estate purchases required case by case, and real estate purchases abroad are accounts may be credited with currency accounts.These , with transfers from other authorized outward payments y may be debited for inward convertible currency.The s only. debited for authorized payment Import payments: exchange. 2. Documentation requirements for releasing foreign portfolio externally without limit. normally not granted foreign exchange. . status (February 1994) Accepted ArticleVIII h the proceeds from sales of foreign accounts, and wit Export proceeds: r in or sold in foreign exchange bureaus. Partial surrende Invisibles: . Quantitative limits applied on payments for travel d dealers Repatriation and surrender through sale to authorize Capital transactions: e 2. Inward investment is controlled. Restrictions includ portfolio investment. l by subject to investment code provisions and prior approva n and companies need prior BOG approval on local loa Yes, preshipment inspection. d to invest are not allowed. Institutional investors are permitte l of, quantitative limits on, and/or BOG prior approva overdraft facilities. y y held domestically b currency may be freel Accounts in foreign . various proportions required for traditional exports . Trade-related payments must be properly documented d the Ghana Investment Center. Resident foreign-owne l is 4. For outward direct investment, prior BOG approva t Structur e Marke n Exchang e Foreig t s are often Exchange rate k market, exchange interban negotiated bilaterally e between the banks and th No forward exchange market Volatility: Wide variation of In 1996, there was a shortfall n the foreign determined i G and their customers. BO r exchange rate is used fo by but is not always applied inflows associated with in donor financing related to e rate is The exchang developed. which is not only. s official valuation purpose . or with their customers or official coverage. exports. poor program performance. , foreign exchange bureaus transacts (usually selling) s foreign exchange with bank The average market r authorized banks in thei r transactions with each othe traditional cocoa and mining ©International Monetary Fund. Not for Redistribution s e Rate Arrangement Exchang Independent 1. Foreign exchange. are Nigeria, and Sierra Leone Foreign Transactions , BCEAO countries,The Gambia 3. Bilateral.Yes, various inoperative. e Bank Examinations Office of th reference to the BOG Export/import by travelers limited to equivalent of e West normally made through th exchange for official payments by authorized banks without 5. Official payments arrears. No. i i f ft- i~ r\f\f\ US$5,000. Gross reserves declined from Clearing agreement; 2. Payments. m the current payments to or fro , Guinea, Liberia, Mauritania External financing: Dependency. and of Ghana (BOG) records s confirms foreign capital inflow and administers foreign sector are approved and effected 6. Controls on domestic banknotes. Outcome: percent in nominal terms against . floating, unitary 4. Administration of control.The African Clearing House. and travel. All foreign exchange 4.6 months of imports in 1995 to j.t montns in i 770. transactions by the private The cedi depreciated by 17.4 the U.S. dollar by end-1996. Arrangements: Ghana and Policy y Countr 8 (continued) e A Tabl

82 5. Credit by residents to nonresidents is not controlled, but credit by nonresidents to residents requires prior BOG approval.

Open foreign exchange exposure is limited on the basis of the volume of foreign exchange transactions of dealer banks, which is subject to periodic review. All authorized foreign exchange dealers are subject to daily limits on their net foreign exchange open positions. Excess holdings must be sold to other dealers or the BOG.

Kenya Arrangements: The exchange rate is Accepted Article VIII status (June 1994). Monetary and foreign determined in the foreign exchange policies primarily 1. Foreign exchange. Independent New banking, foreign exchange, and investment law: aim at containing inflation to floating, with occasional exchange interbank market. The Central Bank of Kenya Act was approved by parliament, a single digit. Intervention in elements of managed floating, Foreign exchange bureaus are authorized to deal in cash and the legislation to establish an anticorruption authority foreign exchange market unitary; official exchange rate is and foreign traveler's checks. was put in place. focuses on maintaining set at previous day's averaged market rate. The official exchange rate Accounts in foreign, and convertible domestic, currency may be orderly conditions. applies only to government freely held and credited/debited by, and between, residents In the event that the 2. Payments. Clearing agreement imports and external debt- and nonresidents. weakening sentiment within Common Market for service payments, for which toward the Kenya shilling Eastern and Southern Africa Import payments: (former Preferential Trade Area there are specific budget cannot be straightened out 1. Financing requirements. None. for Eastern and Southern African allocations. through fiscal and interest States).The Kenya shilling is Commercial banks are 2. Documentation requirements for releasing foreign exchange. rate measures and/or that freely convertible in Tanzania and authorized to enter into Yes, preshipment inspection, other customs documentation. short-term capital inflows exceed the demand for Uganda shillings since July 1, forward exchange contracts with Export proceeds: 1996. After clearing, excess their customers at market- money, the exchange rate is holdings are credited in U.S. determined exchange rates in No repatriation or surrender requirements. allowed to vary more widely dollars to the respective central currencies of their choice. Invisibles: so as to maintain reserve banks every two months. There are no limits on the money growth around the No limits, prior approval, or other controls in effect. amount or period of cover. desired path in (an ESAF or 3. Bilateral. None. staff-monitored) program. Was due, mainly, to Capital transactions: 4.The IMF granted temporary Volatility: large short-term private No control on outward investment and foreign transfers by approval of the retention of the capital inflows in 1996, which residents. No control on investment and transfers by multiple currency practice inward were projected to moderate nonresidents except for quantitative limits on purchases of (outstanding commitments under in 1997. Inflows reflected: shares in primary and secondary issues, and the prior the ESAF abolished in 1994). approval by the Capital Market Authority required for the 1 • inrrpa^p1 1 CCljCHU HpmanVJd 1 Idl HII I foIUr I 5. Administration of control. The \\m\ issuance of securities by nonresidents. No control on direct foreign currency credit and Central Bank of Kenya (CBK) investment, outward or inward, but government approval is reductio1 ^U ULLI nII inIII domestiVJ | | 1 ^ «j Lci V_ holds regulatory power by \-/ \J required for real estate purchases by nonresidents. No c\ i rrpnrv Hohf' Central Bank Act. LUI 1 cl ILY U t-U L, control on foreign credit. No provisions specific to 2. reduction in commercial institutional investors. 6. Official payments arrears.Yes, banks' net foreign assets rescheduled or under continuing defined as net foreign assets because of lower demand for Open foreign exchange exposure, negotiation. in the balance sheet, is limited to a maximum of 20 percent forward cover by importers; of paid-up capital (assigned). 7. Controls on domestic banknotes. 3. higher investment by non- None. No reserve requirements on foreign exchange deposits. residents, including

Outcome: institutional investors, in Appendi x I The Kenya shilling depreciated treasury bill market and by 4 percent in nominal effective deposits with banking system. terms at end-1997. Domestic public debt was equivalent to 20 percent of Gross reserves rose from 1.8 months of imports in 1995 to GDP in 1996. 3.6 months in 1996. 8 3

©International Monetary Fund. Not for Redistribution APPENDIX I s l Bank Operation Centra 1 lit. v^DL LUI lUULLo (JL/v2l I market. rand. h market operations throug t of its foreign diversifies par s into hard exchange reserve r than the currencies othe auctions of treasury bills and CBL certificates in a y The CBL prudentl n growing but still very thi k y Framewor n Exchang e Regulator Foreig d by 1. Direct investment and real estate purchases abroa y grant 1. Trade-related payments. Authorized dealers ma Prior CBL approval required for 1. Financing requirements. s to 3. Prior approval required on financial credit by resident ryi /"\n t" kl C 11 \\jl 1 LI 15. Open foreign exchange exposure is limited to 15 percent of t within Inward investment unrestricted. Outward investmen residents are prohibited; s by 2. Prior approval required for sales or issues of securitie s nonresidents; borrowing abroad by residents require six nonresidents, but not on commercial credit up to qualifying capital plus reserve. d capital Common Monetary Area allowed. Other outwar x months Repatriation and surrender are required within si r travel, 3. Other. Quantitative limits apply to payments fo Capital transactions: approval for debt-monitoring purpose; s apply 2. Interest/profit/dividend payments. Authorized dealer remittance bona fide test if royalty agreement approved and does not involve excessive use of local credit. n excess of study, and family maintenance abroad.Allowance i Proof of import. Invisibles: . approval on basis of documentary evidence or declaration above limit must be approved by CBL. transfers are controlled. Not allowed. imports. for releasing foreign exchange. 2. Documentation requirements Export proceeds: of shipment. h South African e transactions throug Foreign exchang control regulations in t to foreign exchange markets subjec 0 a family unit a year. income is limited to M 300,00 Import payments: d dealers are permitted to advance payments, but authorize up to one-third for capital good effect advance payments Blocked accounts: n Monetary Area by emigrants Cash assets held in the Commo e restrictions. Free transfer of are subject to various exchang . South Africa Article VIII status. domestic, currency: Accounts in foreign, and convertible t Structur e Marke n Exchang e Foreig Volatility: Foreign exchange receipts depend largely on . not common in Lesotho permitted to conduct d banks abroad at rates quote by the latter. Forward , is exchange cover, however South Africa. exchange Most foreign e by CBL for foreign exchang reserve management. markets. South African s give out Commercial bank South Africa are largely deposited in passbook savings. workers' remittances from t through their corresponden m Workers' remittances fro Authorized dealers are s forward exchange operation d in transactions performe e on request foreign exchang ©International Monetary Fund. Not for Redistribution s e Rate Arrangement Exchang Reserves grew steadily to six months of imports in 1996. Export by residents prohibited; Unitary rate 1. Foreign exchange. Export prohibited. unspent portion. percent in nominal terms against Gross reserves: nonresidents may reexport Outcome: 5. Official payments orreors.There 6. Controls on domestic banknotes. 7. Controls on foreign banknotes. The loti depreciated by 15.6 the U.S. dollar in 1996. membership, and is responsible exchange reserves. It administers foreign exchange control commercial banks. are none. Development Community. policy in compliance with Common Monetary Area and delegates powers to Central Bank of Lesotho (CBL) determines foreign exchange t in 3. Bilateral. None. Participan Union, and Southern African t rand to/from a nonresiden Common Monetary Area, Southern African Currency h markets in accordance wit for the management of foreign 4. Administration of control. The legal tender. s unrestricted. All countrie . account in any foreign currency h African rand. At pegged to Sout .The rand is also par M1 = R1 n the 2. Payments. Payments withi are Common Monetary Area y outside Common Monetar o have area. Residents of Lesoth n access to the South Africa e in those markets and may settl t Area constitute the nonresiden d in terms and conditions applie Lesotho Arrangements: and Policy y Countr 8 (continued) e A Tabl

84 Madagascar Arrangements: The exchange rate is Accepted ArtideVIII status (September 1996). While fighting inflation, CBM determined freely in the operations focused on 1. Foreign exchange. Independent New banking, foreign exchange, and investment law: raising interest rates to floating, unitary.The Central official foreign exchange The law on privatization, allowing divestiture from the two Ror»ly r\f Mod-xrocr-or /rRM\ interbank market.The French positive real levels and canK OT i laoagascar ^DI \) franc is the only currency state-owned commercial banks, currently under manage- mopping up excess bank issues the Malagasy franc (FMG). quoted in this market, and ment by conservators, was passed in August 1996. Action liquidity through auctions 2. Payments. No regional or the exchange rates of other plans for actual divestiture, the opening of new banks by and high reserve ratios.This clearing arrangements. currencies are determined internationally reputable institutions, and the establishment policy resulted in a credit on the basis of cross-rate of foreign exchange bureaus are being devised. 3. Bilateral. Mauritius. crunch in 1995-96 and the relationships of the real and nominal Accounts in foreign, and convertible domestic, currency:' 4. Administration of control. This is currencies concerned in the appreciation of the FMG, in handled by the Exchange Paris exchange market. 1 .The opening of foreign exchange accounts is granted to spite of CBM parallel Operations Monitoring Unit of residents and nonresidents: only transfers from abroad or intervention in the foreign the General Directorate of the There are no foreign from another foreign currency account, as well as deposits of exchange market. Treasury, which also supervises exchange bureaus. foreign banknotes or traveler's and bank checks may be borrowing and lending abroad by There are limited credited in these accounts without justification.These residents, and the issue, sale, or arrangements for forward accounts may be debited either for conversion into FMG introduction of foreign securities cover against exchange risk. through a sale in the interbank market or by transfer to a in Madagascar. Approval foreign account in Madagascar or abroad. Conversion in authority has been delegated to Volatility: There is a foreign banknotes is allowed only within the limits stipulated authorized inter-mediaries, and vulnerability to fluctuations in under the applicable foreign exchange control regulation. all exchange transactions relating world commodity (vanilla) 2. Nonresident prices and climatic domestic currency accounts are not convertible. to Toreign countries must ue conditions. Transactions between enterprises in the free trade zone and effected through them, except residents are conducted through the enterprises' foreign for capital operations. accounts in FMG. 5. Official payments arrears.There Import payments: are arrears, but they are being regularized. 1. Financing requirements. None.

6. Controls on domestic banknotes. 2. Documentation requirements for releasing foreign exchange for Export/import by travelers imports. Domiciliation of all imports and preshipment limited to FMG 25,000. inspection are required.

Outcome: Export proceeds: The FMG depreciated by 20.9 Domiciliation of all exports is required above FMG 1 million. percent in nominal terms against Repatriation is required within 90 days of shipment date. the U.S. dollar by end-1996. Invisibles: Gross reserves rose from 1.4 months of imports in 1995 to Transfers of interest payments, profits and dividends, foreign about 2.2 months in 1996. workers' wages, and pensions must be effected through licensed intermediaries and have, since September 1996, External financing: been subject to a simple declaration to them. In January Dependency—to be completed. 1997, the payment of airfares in FMG was authorized. Payments for invisibles related to authorized imports are not restricted. On payments, no quantitative limits or prior approval required. Proceeds must be repatriated within 30 days and surrendered through sales in the interbank market.

Capital transactions: Appendi x I Capital movements between Madagascar and foreign countries, and between residents and nonresidents, are subject to prior authorization from the ministry of finance. There are no capital market regulations due to the absence of a capital market. Enterprises in the free trade zone are permitted to contract and service loans freely, and interest and amortization

8 5 payments on foreign loans contracted directly by these companies are not restricted. ©International Monetary Fund. Not for Redistribution APPENDIX I s l Bank Operation Centra In view of reducing RBM intervened more policy of strengthening r international reserves unde market conditions. regain economic a shocks, the RBM pursues program.With the determination of the longer takes on the role of a market maker, but lets the exchange rate reflect monetary stance has helped under significant pressure at heavily than usual while higher discount of has been managed in a continued liberalization of and the market-based exchange rate, the RBM no smooth out changes due to contain pressures in the easing bank liquidity with securities.The exchange rate competitiveness. vulnerability to external trade and payments systems, the beginning of 1997, the the current ESAF The RBM intervenes in the foreign exchange market to temporary factors. A tight foreign exchange market. As the Malawi kwacha came flexible manner so as to k y Framewor n Exchang e Regulator Foreig e made by overseas s in Madagascar and thos resident person located in the country, s of companies branches or subsidiarie n of foreign investment may be Proceeds from the liquidatio y of finance's prior authorization. repatriated with the ministr 1. Financing requirements. Prepayments not allowed. , including those made investment by nationals Outward direct is limited to a maximum of Open foreign exchange exposure l for any given foreign currency and 25 percent of core capita the ministry of prior authorization from are subject to indirectly controlled by n companies directly or through foreig t may be freely conducted. finance. Inward direct investmen l for all currencies combined. 40 percent of core capita residing in Malawi. residence. Import liberalization was initiated in 1991, and all current e June 1997, Import/export licenses have not been required sinc received from exports immediately upon receipt, using the ruling buying exchange rate.The remainder may be credited on y residents regularly receiving foreign may be held domestically b n into kwachas.Transfers between import payments or conversio . hold foreign, and convertible domestic, currency accounts s country of balances may be transferred to the account holder' and investment law: N.a. New banking, foreign exchange, e accounts may be debited for exchange from abroad.Thes Blocked accounts: require prior Credits to, and debits from, these accounts do not security, and environmental policy. Import payments: 2. Documentation requirements for releasing foreign exchange. e necessary. Customs and other relevant import documents ar Export proceeds: r banks Repatriation is required upon receipt.Authorized deale , foreign currency denominated accounts With RBM prior approval r of an account holders are not allowed, and overseas transfe . account balance may be done only with RBM approval payments operations of the account holder; and debited with y accounts, and payments to account holders temporaril r balances authorization, and authorization is normally given fo 1995. account restrictions have been removed since December , except for a small number of products relating to health are required to convert 60 percent of foreign exchange (December 1995). Accepted ArticleVIII status d to Also with prior RBM approval, nonresidents are allowe the Malawi These accounts may be credited wih proceeds from t to residents for any purpose, transfers to other nonresiden foreign exchange accounts. d on to be invested in an approved manner; interest earne t Structur e Marke n Exchang e Foreig 1992-93). Volatility: Vulnerability to rates, and the spread between buying and selling maximum of 2 percent. led to the opening of the (suspension of foreign nonhumanitarian balance of payments assistance in d determined since authorize d sell dealer banks may buy an e determined market exchang prices is maintained at a public on the basis of market or official coverage. commodity (tobacco) prices, climatic conditions, and Foreign exchange bureaus are authorized to conduct spot exchange rates negotiated or new guidelines for the OT LNG DUlcdUS dilQ LIlG DallKS formal interbank foreign exchange market in September 1996. changes in aid flows t The exchange rate is marke y foreign currencies at freel with their clients. The introduction of revised There is no forward exchange fluctuations in world transactions with the general foreign exchange operations ©International Monetary Fund. Not for Redistribution y and Polic s e Rate Arrangement Exchang 1. Foreign exchange. 1997 under pressure in the , Independent/managed floating Reserve Bank of Malawi (RBM) Export/import by travelers Further depreciation occurred in unitary. under the ministry of finance's limited to MK 200. percent in nominal terms against market and the authorities' months of imports in 1995 to 2. Payments. No. 3. Bilateral. No. 5. Official payments arrears. No. Outcome: policy of regaining competitiveness. Gross reserves rose from 2.1 authority. 6. Controls on domestic banknotes. the U.S. dollar at end-1996. 4.3 months in 1996. The Malawi kwacha was stable and depreciated by only 0.2 4. Administration of control. Arrangements: Malawi Madagascar (concluded) y Countr 8 (continued) e A Tabl

86 Invisibles: Commercial banks are authorized to provide foreign exchange on a bona fide test for all current invisible payments. External payments on account of private and business travel, medical costs, and foreign workers' wages are subject to quantitative limits, which may be exceeded upon proof of need.Travel limits per trip are US$3,000 for tourists and US$5,000 for business. Proceeds from invisibles may be retained in full.

Capital transactions: Inward transfers of non-debt-creating capital are not restricted, while borrowing abroad requires prior exchange control approval. All outward transfers of capital by residents require prior RBM approval. Repatriation of investment is permitted if the original investment was made with funds brought into the country. Open foreign exchange exposure is formally limited to 35 percent of tier 1 capital.

Mauritius Arrangements: The rupee-U.S. dollar Accepted ArticleVIII status (September 1993). Monetary policy is based on exchange rate is determined achieving reserve money 1. Foreign exchange. Managed New banking, foreign exchange, and investment law: by the foreign exchange targets, while exchange and floating, unitary. A revised anti-money-laundering bill is envisaged.The capital interbank market. Following interest rates are 2. Payments. Partner in Common the revision of the Foreign adequacy ratio is to be raised to 10 percent for all banks in determined by the market. Market for Eastern and Southern Exchange Act of 1995 to 1997. A formal limit on open foreign exchange exposure was introduced in l997.The establishment of a financial The BOM intervenes only Africa (former Preferential Trade permit the establishment of service authority is being contemplated to strengthen the to smooth out short-term Area for Eastern and Southern nonbank foreign exchange regulatory and supervisory framework for offshore fluctuations in the rate. African States) clearing dealers, no new entry of companies in the nonbank financial sector and the stock agreement. dealers in the market has The foreign exchange exchange.The BOM Act and other banking legislations are been registered, partly market was broadened with 3. Bilateral. Madagascar. expected to be amended in 1998. because of the prescribed the direct release of sugar 4. Administration of contro/.The high initial capital Accounts in foreign, and convertible domestic, currency: export proceeds to the Bank of Mauritius (BOM) issues requirement and annual fee. There is no distinction between resident and nonresident interbank market. foreign exchange dealing licenses accounts in Mauritius. The rapid growth of the to commercial banks, which act as authorized dealers and money offshore banking and financial Import payments: changer licensees. sector has been based on the Importers must be licensed. Short negative import list. relatively easy-to-set-up 1. Financing requirements. None. 5. Official payments arrears. No. "international status." 2. 6. Controls on domestic banknotes. Commercial banks are free Documentation requirements for releasing foreign exchange. None. to provide forward exchange None. Outcome: cover to their customers. Export proceeds: Repatriation is required. The MAU rupee depreciated by Volatility: Vulnerability to 1.7 percent in nominal terms fluctuations in world Invisibles: against the U.S. dollar at end- commodity (sugar) prices No limits, prior approval, or other controls are in effect. 1996. and to climatic conditions. Capital transactions: Gross reserves increased from 4.1 No control. Purchase of real estate locally by nonresidents is

months of imports in 1994/95 to subject to permission to be obtained from the minister of Appendi x I 5.4 months in 1995/96. internal affairs.The purchase must be financed by funds transferred from abroad through banks. External financing: African Development Bank, Offshore banks may lend in foreign currencies to both European Union,World Bank. residents and nonresidents. Open foreign exchange exposure: Effective April 1997, domestic and offshore commercial banks are subject to a daily monitored 15 percent exposure 8 7 limit on their open foreign exchange positions in relation to tier 1 capital. ©International Monetary Fund. Not for Redistribution APPENDIX I k Operations Central Ban BM intervention in the reserve targets of the (ESAF) program. liquidity in the banking is being used to ensure directed mainly to l observing the internationa policy with foreign intervention to avoid r system. A monetary ancho coordinates monetary exchange market excessive buildup of is foreign exchange market financial discipline, while The BM closely k e Regulatory Framewor Foreign Exchang f goods' 1. Financing requirements. Documentary proof o may be freely opened 1. Foreign currency accounts Domiciliation required; preshipment inspection required for imports in excess of US$2,500 to ensure proper valuation. banks. exchange. 2. Documentation requirements for releasing foreign import ensures that donors' requirements are metTied l support funds are allocated by the BM to the commercia g arrival within 90 days of payment is required for allowin advance payment. s residents. Domestic currency accounts held by nonresident permitted. Import payments: n specifying, among other things, the place of embarkatio y of payment, and the source of financing are routinel s are of US$500 without an import license if the good , and structural barriers to remaining legal, institutional d by 2. Convertible domestic currency accounts may be hel d currency and disembarkation of the goods, the amount an s and financed with their own foreign exchange resource tied-aid funds are not involved. by donors' A negative product list exists for imports financed t Programs funds.The Office for the Coordination of Impor l code is being revised. private investment.The commercia and nonresidents without prior domestically by residents s from are not convertible and must be opened with fund d are not assistance contracts; transfers of such funds abroa e subject All imports exceeding the equivalent of US$500 ar s to registration by the ministry of commerce. License t granted. Individuals may import goods up to the equivalen e transactions outside the fixing interbank foreign exchang d foreign currency deposits approval. Residents may hol l only. abroad with prior approva l the conversion of foreign currency or approved technica and investment law: New banking, foreign exchange, being devised to remove sessions.Action plans are p procedures that will permit Authorities are setting u domestic, currency: Accounts in foreign, and convertible Article XIV status. e Market Structur e Foreign Exchang 1999 completion date. Initiative for Heavily Indebted Poor Countries burden, access to the has been granted, with June Volatility: There is in world commodity (agricultural) prices and to external debt-service Mozambique, and the fact climatic conditions. Because of the unsustainability of the s Interbank market operate Interdealer transactions are limited because of the small number of dealers, the m requirements on minimu in twice-daily telephone predominant market share source of foreign exchange supply. market or official coverage. vulnerability to fluctuations t in the market provided tha sessions at the BM. of the Banco Comercial de There is no forward exchange e exchange bureaus, and larg e enterprises may participat that official funds deposited with the BM are the main determined in the interbank n established in July 1996. I n commercial banks, foreig foreign exchange market addition to the BM.the they are able to meet . transactions and reporting The exchange rate is ©International Monetary Fund. Not for Redistribution e Arrangement s Exchange Rat 1996. 1. Foreign exchange. External financing: Dependency. months of imports in 1995 to responsible for foreign percent in nominal terms Gross reserves rose from 2.7 *} D ,"/-.+ « ~— / K|. j. bilateral. No. ) is Bank of Mozambique (BM No. 5. Official payments arrears. 6. Controls on domestic Outcome: against the U.S. dollar at end- 4.4 months in 1996. . Independent floating, unitary exchange policy and banknotes. Export/import by The metical depreciated by 4.3 administers its control. travelers limited to Mt 500,000. 2. Payments. No. The 4. Administration of control. Mozambique Arrangements: y and Polic Country (continued) Table A8

88 Export proceeds: All exports are subject to registration.

Repatriation is required through the commercial banks; surrender was eliminated January 1, 1997; companies that export more than 85 percent of their production qualify for the status of free trade zone.

Invisibles: Commercial banks and exchange bureaus are authorized to sell foreign exchange up to US$5,000 to pay expenses associated with travel, study, or medical treatment abroad. BM approval is required for most other operations.

Remittances of profits and dividends from foreign direct investment may be made with prior approval if in accordance with the specific project authorization.

Foreign experts working in Mozambique may remit abroad all or part of their salaries, depending on the terms of their employment contracts. Mozambican nationals working as miners in South Africa are obliged to remit 60 percent of their earnings through the BM and to convert them into meticais.

Capital transactions: BM approval is required for purchases or sales abroad by residents of capital, money market instruments, and derivatives in excess of US$5,000.

Inward operations are also controlled by BM largely through prior approval on borrowing abroad, monitoring foreign investors' guaranteed right to repatriate their initial capital and get access to domestic credit, and controlling real estate sales to foreigners. Foreign portfolio investment by institutional investors is subject to quantitative limits.

Open foreign exchange exposure: Commercial banks and other financial institutions may have a limited amount of foreign exchange exposure. Appendi x I 8 9 ©International Monetary Fund. Not for Redistribution APPENDIX I r a because of the Namibi Central Bank Operations k e Regulatory Framewor Foreign Exchang 1 y that is also preparing an Unlisted Securities Market Authorit g on the meet the stringent requirements for full board listin (JUdll 1 y II Ic LdLH Ldl LJIUo 1 CJCI VC. Capital transactions: t of Open foreign exchange exposure is limited to 15 percen nualifvinp ranital nlu^ rp^prvp cim^ o"v^KîntTO i"ocî"ir"fi/^r4c ^c orv*\m~nntc Î*Q ciiKi^^t +r\ +Y\& in South Africa. Similar to South Africa. l Similar to South Africa.While encouraging additiona k Exchange companies to list their stocks, the Namibian Stoc t do not companies that wish to have a market for them, bu on August 19, 1996. processing zones created Blocked accounts: I illllvJil 1 l\J\ ICLdl y #\l Cd UV V^dol 1 djoCLo 1 1 clU III Ll 1C ^*U trie Sdme excridiige reaLriLLiorio db ciTiigi diitb are buujccu x.o Import payments: Similar to South Africa. Export proceeds: Similar to South Africa. Invisibles: . r nonresidents in export African rand exchange accounts; free fo s of will organize a separate trading system for share in the The BON is passive r 1996). status (Septembe Accepted ArticleVIII h s peg to the Sout d offshore foreign dollar' , residents may hol With prior approval Johannesburg Stock Exchange. t foreign exchange marke currency: and convertible domestic, Accounts in foreign, e Market Structur e Foreign Exchang ©International Monetary Fund. Not for Redistribution >i L.I It I I I d I >^'l * LydJtvJ \~/ l I ul I /C ^.L A £ * J\ 1 1 C IIILfc-icoL 1 d.Lc U 1111:1 t-1 1 LIdl Volatility: Private capital flows. (South African rand)-U.S. inf<^t*£*ct i^fo Hiffot"c*nfiî 1 between the two currencies. rates in U.S. dollars only to import financing. Such cover is provided for maturities not dollar swap transactions with houses may sell forward LJt^L-U 1 IId 1 Ldl y CVIUCIILC Ul t.ALtt-U 11 1 i: 1 L. MlvJIILlio III Lilt; developed as an Namibia has interbank market. Five . residents and nonresidents Horumpntarv pviHpncp of ovrDoHino 1 *) mnnthc in tho th© margin based on an h Africa. Local market in Sout interbank transactions y limited as banks frequentl deal in the South African permitted to conduct d Gold mining companies an anticipated receipts of their forward cover at preferential autnonzea dealers against form of Namibia dollars the exchange extension of commercial banks are authorized dealers. , Subject to certain limitations authorized dealers are d operations, including forwar cover for transactions by future gold sales. The BON provides special e market in The exchang forward exchange e Arrangement s Exchange Rat Unitary rate 1. Foreign exchange. limit on import; nonresidents may reexport unspent portion. by 15.6 percent in nominal terms imports. Residents: export requires prior Outcome: The Namibia dollar depreciated against the U.S. dollar in 1996. Gross reserves: bank administers foreign powers to commercial banks. 5. Official payments arrears. No. export/import up to N$500. 7. Control on foreign banknotes. Bank of Namibia (BON) approval of the BON but no As of end-1996, 1.4 months of exchange reserves.The central exchange control and delegates 6. Control on domestic banknotes. Development Community. membership in the Common Monetary Area and is responsible Union, and Southern African determines foreign exchange policy in compliance with l 3. Bilateral.There are no bilatera participant in Common Monetary t rand to/from a nonresiden Any individual may s unrestricted. All countrie h markets in accordance wit for the management of foreign arrangements. Namibia is a h African rand at pegged to Sout l = R 1. The rand is par, with N$ are Common Monetary Area 4. Administration of control. The Area, Southern African Currency . account in any foreign currency n the 2. Payments. Payments withi y outside Common Monetar a have area. Residents of Namibi n access to the South Africa d in terms and conditions applie e in those markets and may settl also legal tender. t Area constitute the nonresiden Namibia Arrangements: y and Polic Country e A8 (continued) Tabl

90 Rwanda Arrangements: The exchange rate is Article XIV status. NBR intervention in the determined freely in the foreign exchange market is 1. Foreign exchange. Independent New banking, foreign exchange, and investment law: exchange commercial aimed at achieving floating, unitary. foreign banks, and foreign exchange Establishes an action plan based on audits to rehabilitate international reserve targets 2. Payments.The National Bank of bureaus operate. Banks may banking soundness. in accordance with the staff- Rwanda (NBR) maintains apply a variable commission monitored program while Foreign exchange accounts may be freely held domestically by agreements with the central to transactions.The NBR residents and nonresidents.These accounts may be freely letting the exchange rate banks of the Economic does not announce official credited/debited between residents and nonresidents. reflect market conditions. Community of the Great Lakes exchange rates, but calculates Foreign exchange accounts to be held abroad by residents Countries, Burundi, and the and publishes daily the require prior NBR approval. Democratic Republic of the average market exchange Congo, according to which rate for reference purposes. Import payments: settlements are made through Residents are free to acquire Open general import licenses, which are also used as foreign reciprocal accounts in con- foreign exchange through exchange licenses, are required.There is a negative import vertible domestic currency. commercial banks and list for health and security purposes. Payments to and from other foreign exchange bureaus, 1. None. Common Market for Eastern Financing requirements. and make payments abroad and Southern African countries 2. Documentation requirements for releasing foreign exchange. for all current international are made through the Common transactions. Nonresidents Preshipment inspection by international agency required for Market for Eastern and Southern are free to transfer abroad all imports with value exceeding US$10,000. Africa (former Preferential Trade the proceeds of such Area for Eastern and Southern Export proceeds: Africa) clearinghouse. transactions. Export licenses are required and subject to prior declaration There is a strong preference to the authorized bank. Proceeds must be within 3. Bilateral. Inoperative barter repatriated agreement. for foreign exchange in U.S. seven days of payment. dollar-denominated 4. Administration of control.Vested banknotes, which are used Invisibles: in the NBR, which has delegated not only for transactions in Quantitative limits apply to payments of foreign exchange authority to authorized banks to invisibles but also for import allowances for travel, medical, study, and family expenses. carry out some of the controls. operations. Payments on interest are permitted on loans previously declared to NBR, and on profits and dividends with prior 5. Official payments arrears. The lack of an operational NBR approval. Foreign workers' remittances are subject to a Arrears are in the process of interbank market causes bona fide test and to prior NBR authorization for transfers being regularized. rigidities among the banks exceeding US$20,000 a year. Proceeds must be repatriated and also the foreign exchange 6. Controls on domestic banknotes. but not surrendered. Export/import by travelers bureaus. exceeding the equivalent of Open foreign exchange exposure: No forward exchange market US$100 requires declaration. or official coverage. Prudential limit of 20 percent of the bank's own funds is applied. Outcome: Volatility: There is vulnerability The Rwanda franc depreciated to fluctuations in world by 1.4 percent in nominal terms commodity (coffee and tea) against the U.S. dollar at end- prices, climatic conditions, 1996. and the return to political normalcy. Gross reserves declined from four months of imports in 1995 to about three months in 1996.

External financing: Dependency. Appendi x I 9 1 ©International Monetary Fund. Not for Redistribution APPENDIX I k Operations Central Ban n rapid monetary expansio monetary stance and rate. d The SARB allows the ran n occasional intervention i in SARB intervened heavily exchange markets to on counteract the pressure expected strengthening of to float freely with t the foreign exchange marke to stabilize temporary - and ^nprulafivp ranital out L dl IU gUCLUIdtlYC UctLMLcll UU seeks a reduction of commitments in the net oversold forward position maintain lowest intermediation costs and fluctuations. In 1996, the the spot and forward t the rand as a result of pas and bond markets to encourage foreign investors. discovery, and transparency. flows.With tighter the rand in 1997, the SARB while maintaining stability in the real effective exchange The SARB participates in the creation of formal bill The central bank promotes trade reporting, price k e Regulatory Framewor Foreign Exchang , but 1. Financing requirements. Advance payment allowed , payments can be freely made Monetary Area countries n exchange for current residents may purchase foreig R 200,000. e 1983, foreign exchange control exchange operations. Sinc 7 1 \— J 1 U\»l 1 LJ TT U. J 1 Cl 1 JÛ t. W V«/ 1 1 II W W lil Ul Ul W 1 J Cl \J 1 \-y Ci^J LS d Nonresident accounts may be credited with all authorize n abolished Amonp Common on nonresidents has bee I 1 uUUIIol ICU. r\l 1 IvJI Ic VÛI 1 II 1 IUI 1 Ul 1 1 IUI II COIUCI IIJ 1 Idj UCC y for capital transactions with control approval, and similarl bv residents was raised to on free transfers abroad d individuals may retain foreign exchange abroad earne s of foreign payments by residents, with the proceeds of sale (September 1973). Accepted Article VIII status s and conditions of foreign The SARB fixes parameter n banking institutions. activities of South Africa r any payments to Common Monetary Area residents fo s purpose (other than loans)—for payments to nonresident . holders residing in South Africa for short periods limited to one-third for capital goods imports. 3. Negative list. e control interference. South African without foreign exchang n limits without foreign exchange transactions within certai l approval. On July 1, 1997, the limit foreign exchange contro n department monitoring foreign The SARB has a supervisio s from currency to authorized dealers, and with payment for other nonresident accounts.They may be debited account of purchase of any currency; and for payments to Blocked accounts: by Cash assets held in the Common Monetary Area . emigrants are subject to various exchange restrictions Import payments: exchange. 2. Documentation requirements for releasing foreign y open With prior approval, residents and nonresidents ma t private foreign currency accounts domestically, and residen through income/dividends/services. r the cost for any purpose, by transfer to a local account fo . Transport, consignment, and other proof of import Accounts in foreign, and convertible domestic, currency: e Market Structur e Foreign Exchang 1 ooo CADD intprvpnpc in cnnf 1 7O7. O/Ar\D IIILcl Vcllca 111 bpUL d banking institutions appointe minister of finance.Two m Bank's s?old Durchases fro determined in foreign exchange s mines are paid in U.S. dollar The exchange rate is market consisting of 21 the as authorized dealers by operating.There are no i ~i t--y~ l-\ C r\ r^ t- r\ rv\ K r\ t~ 1 QQC -\ r-\ A FV n oeptemuer i 7OJ ana i larc permitted to conduct forward Forward exchange contracts n after an interruption betwee and forward swap operations. Subject to certain limitations, exchange operations in any currency, including forward nonresidents. may cover the entire period receipts of their future gold s foreign exchange broker . foreign exchange bureaus e The South African Reserv authorized dealers are cover for trade and nontrade of the outstanding commitments and accruals. Gold mining companies may provided for maturities not transactions by residents and sell forward anticipated sales. dollars to authorized dealers evidence of foreign financing dealers. Such cover is The SARB provides official forward cover only against U.S. and only against documentary transactions to authorized ©International Monetary Fund. Not for Redistribution e Arrangement s Exchange Rat t 1. Foreign exchange. Independen Alt rr\\ inf"i*ioc îifciHo (~*r\tv\tY\t*\ir\ not maintain marpins . Lesotho, Namibia, and Swaziland r Banknotes issued in latte d is into rand at par. The ran d legal tender in Lesotho an . Namibia, but not in Swaziland 1 IWL 1 1 Idll 1 LCI II 1 II Idl J^ll 1 J> Monetary Area constitute residents with nonresident area unrestricted. t in 2. Prescription. Participan with Common Monetary Area 3 RilotBrol None South Africa is nonresident area. Settlements by/to Common Monetary Area may be made in rand to/from nonresident accounts and in any e countries are freely convertibl e Currencies of these thre r in countries are not legal tende South Africa. Payments within Minister of finance bears s do float, unitary; the authoritie Currency Union and Southern Community. powers to authorized dealers. ultimate responsibility for currencies of Lesotho, Namibia, /\\\ LCJUMLl It-b CJULolUc VM*VJI 1111 \\Jt 1 the Common Monetary Area are exchange control policy. a participant in Southern African exchange control. Treasury has delegated authority to the South and Swaziland. African Development 4. Administration of foreign foreign currency, except the foreign exchange and foreign African Reserve Bank (SARB), which, in turn, has delegated South Africa Arrangements: y and Polic Country Table A8 (continued)

92 The SARB is coresponsible for exceeding 12 months in the Export proceeds: foreign exchange policy form of rand-U.S. dollar swap Repatriation and surrender required within six months of formulation, and administers transactions with the margin shipment or seven days of accrual date. foreign exchange control. based on an interest rate differential between the U.S. Invisibles: 5. No. Official payments arrears. dollar and the rand. Payments are controlled on the basis of a bona fide test. A friKitml /in fif\m&^tir hifinifnntfrc O. v—Uf tilUl Ufl CJUi f (CJL/C UUI ir\f /UlCo. Volatility: There are private and Proceeds are to be surrendered within 30 days of accrual No limitation on export/import speculative capital flows with date, unless an exemption is granted. to and from Common Monetary Area countries.Travelers to and fluctuations in the world gold 1. Trade-related payments. Authorized dealers may grant from countries outside the market. approval on basis of documentary evidence or declaration. Common Monetary Area: 2. Interest/profit/dividend payments. Authorized dealers apply export/import limited to bona fide test if royalty agreement approved and remittance R 2,000 (not part of basic travel does not involve excessive use of local credit. allowance). 3. Other. Quantitative limits apply to payments for travel, Limitations do not apply to study, and family maintenance abroad.An allowance in excess migrant workers returning to of the above limit should be approved by the SARB. neighboring countries. Capital transactions: 7. Control on foreign banknotes. Export by residents allowed Inward investment unrestricted. Outward investment within within travel allowance; by non- Common Monetary Area allowed. Other requests for residents within amount brought outward investment larger than R 200,000 are considered by in. Import: no limits. the SARB on their merits.Transfers of capital assets of emigrants (blocked accounts) are controlled. Outcome' 1. Prior approval is required for asset swaps by institutions, The rand depreciated by 15 direct investment and real estate purchases abroad by percent in nominal terms against residents, and sales or issues of securities by nonresidents.

thVI 1e^ \SU • *J,S VdollaJ \*S I IUI r IIiI n 1 199w f \0 6U l an1VJ Wd J bt y 7 percent in 1997. 2. Prior approval is required for sales or issues of securities, money market instruments, derivatives, and all borrowing Gross reserves declined from abroad by residents for debt-monitoring purpose. two months of imports in 1995 to one month in 1996. The net 3. Prior approval is required on financial credit by residents oversold forward position was to nonresidents, but not on commercial credit up to six about US$22 billion, or 17 months. percent of GDP, at end-1996, but Open foreign exchange exposure is limited to 15 percent of was reduced to US$ 16 billion by qualifying capital plus reserve. end-1997. Appendi x I 93 ©International Monetary Fund. Not for Redistribution APPENDIX I Operations Central Bank intervene in the foreign . low external debt exposure s exchange marketThere i k does not The central ban k e Regulatory Framewor Foreign Exchang derivatives, 1. Direct investment and purchases of securities, d dealers 1. For trade-related and interest payments, authorize Prior CBS approval is required for 1. Financing requirements. e Inward investment requires prior approval and appropriat d interest, dividends, profits, and other income. Outwar . investment within Common Monetary Area is allowed l and 2. Prior CBS approval is required for commercia Open foreign exchange exposure is limited to 15 percent of qualifying capital plus reserve. required. r travel, 3. Other. Quantitative limits apply to payments fo Other outward capital transfers are controlled. . may grant approval on the basis of bona fide test Capital transactions: n of documentation to facilitate subsequent repatriatio approval, and real estate abroad by residents require prior y financial credit operations outside the Common Monetar Area. Resident borrowing in foreign exchange is not allowed without prior approval. . Import licenses may be used as exchange licenses x months Repatriation and surrender are required within si l is 2. For profit and dividend payments, prior CBS approva in excess study, and family maintenance abroad. Allowance of above limit must be approved by CBS. which may be granted on their own merits. Invisibles: d and rarely granted to residents. Prior approval is require in South Africa. exchange. 2. Documentation requirements for releasing foreign Export proceeds: of shipment or 30 days of accrual. s through South African markets Foreign exchange transaction Import payments: Blocked accounts: n Monetary Area by Cash assets held in the Commo e same exchange restrictions as emigrants are subject to th advance payments. e control regulations in that country. subject to foreign exchang r 1989). VIII status (Decembe Accepted Article domestic, currency: Accounts in foreign, and convertible e Market Structur e Foreign Exchang Volatility: N.a. exchange Most foreign permitted to conduct determined. e Commercial banks operat , Subject to certain limitations operations.The forward t exchange rates are marke Qrf^i ifki Afrir-riri morl/otc ODULI1 /All ICdll Midi IxcLo. authorized dealers are forward exchange n transactions performed i . fairly freely under the CBS ©International Monetary Fund. Not for Redistribution e Arrangement s Exchange Rat y rate 1. Foreign exchange. Unitar residents Export within travel entitlement; import uncontrolled. percent in nominal terms against up to E 500; no control on 7. Controls on foreign banknotes. Outcome: Gross reserves: N.a. reserves, administers foreign powers to commercial banks. 5. Official payments arrears. No. Common Monetary Area the U.S. dollar in 1996. responsible for the foreign exchange policy in consultation with the ministry of finance and is also the custodian of foreign exchange exchange control, and delegates 6. Controls on domestic banknotes. The lilangeni depreciated by 15.1 Development Community. Central Bank of Swaziland (CBS) is Any individual may export/import 3. Bilateral. None. Participant in Union, and Southern African Common Monetary Area, n rand markets and may settle i e Residents of Swaziland hav Southern African Currency h terms markets in accordance wit s outside unrestricted. All countrie 4. Administration of control.The any foreign currency. those and conditions applied in t area. constitute the nonresiden d at pegged to South African ran 1. par at the rate of E 1 = R n the 2. Payments. Payments withi are Common Monetary Area t in to/from a nonresident accoun n access to the South Africa a the Common Monetary Are Swaziland Arrangements: y and Polic Country A8 (continued) Table

94 Tanzania Arrangements: The exchange rate is Accepted ArticleVIII status (July 1996). The BOT intervenes in the determined in the foreign interbank market to smooth 1. Foreign exchange. Independent New banking, foreign exchange, and investment law: in out changes due to floating, unitary. Official exchange exchange interbank market which the BOT intervenes. New legislation on banking privatization has been prepared temporary factors, including rate is set within 2 percent of Foreign exchange bureaus that for discussion by parliament. A draft investment act is being seasonal ity of exports and tne current aays marKet rate. did not develop into nonbank revised before submission to parliament. their financing, and achieve 2. Payments. Clearing agreement financial institutions have foreign reserve targets Accounts in foreign, and convertible domestic, currency may be within Common Market for been prohibited from held domestically by residents and nonresidents, but under the current ESAF Eastern and Southern Africa participating in the interbank nonresidents need prior BOT approval. program. (former Preferential Trade Area market since July 1996.The During the first half of 1997, for Eastern and Southern African opening of new foreign All transfers of foreign exchange funds from residents to States).The Tanzania shilling may exchange bureaus has been nonresidents or to foreign-controlled resident bodies, tne o\j i intervened tnrougn be freely convertible to Kenya limited by the new capital require specific BOT approval. Similarly, transfers of funds from open market operations to and Uganda shillings since July 1, requirement. nonresidents to residents require BOT approval. Residents sterilize inflows resulting 1996. After clearing, excess are not allowed to hold foreign exchange accounts abroad. from good export holdings are credited in U.S. Authorized dealers may Nonresidents may transfer nonconvertible account balances performance.The BOT dollars to the respective central enter into forward exchange abroad with BOT approval. allowed the trend of real banks every two months. contracts for purchases and appreciation to be reversed. sales of foreign currencies Import payments: 3. Bilateral: Mozambique with their customers in Negative import list for health and security purposes. (inoperative). export/import transactions. BOT does not offer forward 1. Financing requirements. None. 4. Administration of control. The ministry of finance has delegated cover. 2. Documentation requirements for releasing foreign exchange. authority to customs and the Volatility: Private capital flows. Yes, for imports above US$5,000 (preshipment inspection, Bank of Tanzania (BOT); the other customs documentation). authority to make payments Export proceeds: abroad is delegated to licensed Repatriation is required within two months, including export banks. proceeds from Zanzibar, but no surrender required. 5. Official payments arrears. Yes. Exchange restrictions on Invisibles: external arrears have been Payments on income transfer by nonresidents are permitted granted temporary IMF approval. provided that all tax obligations have been metThere are indicative limits on foreign payments for travel and medical 6. Controls on domestic banknotes. Export by travelers limited to costs, and quantitative limits on foreigners' wage repatriation. the equivalent of US$ 100; Capital transactions: import limited to T Sh 1,000. All outward capital transfers are subject to approval by Outcome: commercial banks, and all foreign investment by residents is The Tanzania shilling depreciated subject to BOT approval. Various controls apply to inward by 7.6 percent in nominal terms transfers. Prior BOT approval is required for nonresidents' against the U.S. dollar at end- purchase of securities, derivatives, and real estate and all 1996. credit operations between residents and nonresidents. All foreign direct investment must be approved by the Gross reserves rose from 2.0 Investment Promotion Center. months of imports in 1995/96 to 3.7 months in 1996/97. Open foreign exchange exposure is limited to a maximum of 20 percent of core capital. External financing: Dependency. Appendi x I 9 5 ©International Monetary Fund. Not for Redistribution APPENDIX I k Operations Central Ban BOU intervention in the e rate, subject to meeting th e interbank foreign exchang market is limited to t international reserve targe y smoothing out temporar of the ESAF program. e fluctuations in the exchang k e Regulatory Framewor Foreign Exchang 1. Financing requirements. None. s by the Most imports require six month renewable license list. the Exports require six month renewable licenses by not required. No prior approval or other controls in effect. percent of core capital. Paper period. s without exchange held by residents and nonresident s apply to ministry of commerce and trade. License certificate exchange for 2. Documentation requirements for releasing foreign d surrender ministry of commerce and trade. Repatriation an Invisibles: Capital transactions: required to prohibited to residents. Inward direct investment . money market instruments are prohibited to nonresidents m of 20 Open foreign exchange exposure is limited to a maximu g agenda for external parliamentThere is an outstandin e accounts may be freely control prior approval.Thes n residents and nonresidents. credited/debited betwee Import payments: Export proceeds: e ministry Prior individual exchange control approval from th n most countries. Prior approval from BOU is required o d are outward direct investment. Portfolio investment abroa s in obtain "approval status" from BOU. Most transaction New foreign exchange law: d early in Policy Framework sector reforms to be complete the negative a broad range of goods that are not included on licensed imports.Yes (request form). s to all of finance is required for outward capital transfer . There are no controls on foreign credit operations l estate, and foreign transactions in securities, derivatives, rea (April 1994). Accepted ArticleVIII status e and legislation with respect A new foreign exchange statut e been prepared for discussion in to money laundering hav domestic, currency may be Accounts in foreign, and convertible e Market Structur e Foreign Exchang ©International Monetary Fund. Not for Redistribution Licensed foreign exchange y Volatility:There is vulnerabilit negotiated rates. in certain convertible t underlying import/expor determined in the foreign currencies, provided an . contract has been approved exports due to world prices exchange interbank market. n bureaus may effect certai and climatic conditions. The exchange rate is transactions at freely the forward exchange market to external shocks associated with variations in coffee l in Authorized banks may dea and Policy e Arrangement s Exchange Rat 1996. s 1996. After clearing, exces 1 QQ£ 1 77O. t 1. Foreign exchange. Independen Dependency—to be completed. Bank of Uganda (BOU) 5. Official payments arrears. All nonreschedulable arrears have been cleared. For reschedulable None. by 2 percent in nominal terms months of imports in 1995 and a Eastern and Southern Afric e Area (former Preferential Trad . holdings are credited in U.S banks every two months. 3. Bilateral. Inoperative with a few External financing: on behalf of the ministry of comparable Paris Club on external arrears have been Outcome' Gross reserves averaged two t 2. Payments. Clearing agreemen central dollars to the respective g is otates^. i ne uganaa smilin administers exchange controls arrears, the authorities have asked for, but not yet obtained, 6. Controls on domestic banknotes. against the U.S. dollar by end- y 1, Tanzania shillings since Jul African and Asian countries. 4. Administration of control. The finance. treatment. Exchange restrictions granted temporary IMF approval. The Uganda shilling depreciated for within Common Market African for Eastern and Southern a and freely convertible into Keny floating, unitary. Arrangements: Uganda Country (continued) Table A8

96 Zambia Arrangements: The official exchange rate is Article XIV status. The BOZ intervenes market determined, and the through the dealing window 1. Foreign exchange. Independent Foreign exchange law: spread between the BOZ's to smooth out changes due floating. Multiple: there are four buying and selling rates is Requires the publication of major regulations. to temporary factors and to exchange rates: (a) the official fixed at 1.6 percent. On the achieve foreign reserve rate, which is applied to all Accounts in foreign, and convertible domestic, currency may be government transactions, and basis of daily bids and offers freely held domestically by residents and nonresidents. These targets under the current the purchase of proceeds from received, as well as other accounts may be freely credited/debited between residents ESAF, or staff-monitored, external borrowing and donor budgetary considerations and nonresidents. programs. assistance by the Bank of Zambia (such as government and Import payments: (BOZ); (b) the commercial BOZ requirements, donor banks' corporate rate; (c) the assistance funds, and export Import licenses, also used as exchange licenses, are granted commercial banks' retail rate; earnings), the BOZ automatically by commercial agents for statistical purposes. determines the amount of and (d) the interbank rate. 1. Financing requirements. None. foreign exchange to be sold 2. Payments. None. to, or purchased from, the 2. Documentation requirements for releasing foreign exchange. market through the dealing 3. Bilateral. None. Yes, preshipment inspection for imports above US$10,000. window. The exchange rates Export proceeds: 4. Administration of control. All prevailing in the emerging exchange controls have been interbank market follow Export licenses are required for most goods, although they abolished except that prior BOZ closely those established at are administered routinely by commercial banks under approval must be obtained for the BOZ's dealing window. authority delegated by the ministry of commerce, trade, and servicing private debt incurred There are foreign exchange industry. Exports of ivory are prohibited. before January 28, l984.The bureaus. required. ministry of commerce, trade, and No repatriation or surrender No market industry is responsible for trade forward exchange Invisibles: control. or official coverage. All payments for invisibles, except external debt-service There is vulnerability 5. Official payments arrears. Yes. Volatility: payments, may be effected through banks and foreign Exchange restrictions on to fluctuations in world exchange bureaus without limits or prior BOZ approval, external arrears have been commodity (copper and subject to the requirement that no taxes are due. No granted temporary IMF approval. cobalt) prices. Donors' surrender required on proceeds from remittances. assistance over governance 6. Controls on domestic banknotes. issues was suspended in Capital transactions: None. 1996. Outward transfers are free of controls. No restrictions apply Outcome: to the sale of assets between nonresidents and between The Zambian kwacha depre- residents and nonresidents. ciated by 22 percent in nominal All borrowings must be registered with the BOZ for terms against the U.S. dollar in statistical purposes. 1996 (end of period). Open foreign exchange exposure is limited to 25 percent of Gross reserves were stable at 1.7 regulatory capital. months of imports during 1996. External financing: Dependency. Appendi x I 9 7 ©International Monetary Fund. Not for Redistribution APPENDIX I k Operations Central Ban d as a nominal Money is use money supply and international reserve e anchor for pric Exchange rates stabilization. t allowed to adjust to mee . smooth out fluctuations and interest rates are o targets. RBZ intervenes t k e Regulatory Framewor Foreign Exchang Authorized dealers approve 1. Financing requirements. e accounts may be required for nonresidents.Thes from Repatriation is required, but surrender is required Act in preparation. Draft Banking nonresidents, but prior approval is opened by residents and Blocked accounts: e by emigrants are subject to Cash assets held in Zimbabw y accounts marketing boards only. Corporate foreign currenc s of bona Interest payments are approved by banks on basi residents and nonresidents. credited/debited between Import payments: for releasing foreign exchange for 2. Documentation requirements Export proceeds: \.U 1 1 V^l 1 v- J \- 1 1 JIJ. d on basis limits, beyond which prior RBZ approval is require n business. US$5,000 a year on holiday, and US$600 a day o n to required for foreign credit exceeding US$5 millio residents. . status (February 1995) Accepted ArticleVIII . advance payments up to US$50,000 s documents are required. licensed imports. Custom currency crisis Invisibles: certain Control is delegated to commercial banks within Capital transactions: ' purchases Outward transfers are controlled. Nonresidents e purchases of money market instruments are not.Th : Subject Open foreign exchange position of credit institutions . various exchange restrictions g the were asked to be liquidated in November 1997 followin s related of bona fide test. Quantitative limits apply to payment d but of securities and direct investments are controlle e is family maintenance. For travel, the basic allowanc fide test. e is approval of the External Loans Coordinating Committe to overnight net exposure limits. domestic, currency may be Accounts in foreign, and convertible , and to trade, profits and dividends, travel, medical costs e Market Structur e Foreign Exchang s Foreign exchange bureau by commercial banks and became members of the e interbank foreign exchang . market in November 1997 n the interbank determined i y Corporate foreign currenc permitted for trade Volatility: Exists mainly in broad money (M3). e rate is The exchang market held foreign exchange . accounts were off-loaded are Forward exchange contracts . duration of one year at least export prices. Foreign exchange inflows, primarily . foreign exchange bureaus transactions only, for a from export earnings, affect ©International Monetary Fund. Not for Redistribution e Arrangement s Exchange Rat Independent 1. Foreign exchange. ) applies Bank of Zimbabwe (RBZ buying and selling rates; a Eastern and Southern Afric 3. Bilateral. Arrangement is multiple currency practice on e an exchange bureaus may charg Area (former Preferential Trade Export (as part of travel been granted temporary IMF Powers delegated by the n a spread of 0.8 percent betwee n authorized dealers and foreig n either additional 0.25 percent o . side of the quoted rates t 2. Payments. A clearing agreemen t for exists within Common Marke nominal terms against the U.S. months of imports in 1995 to 6. Official payments arrears. None. 7. Controls on domestic banknotes. empowered to approve certain States). operative with Malaysia. outstanding obligations have 5. Administration of control. ministry of finance to RBZ. Outcome: dollar by end-1997. 2.9 months in 1996, and further e Reserve floating, unitary.Th 4. Exchange restrictions and approval. allowance) and import by depreciated by 41.8 percent in Gross reserves declined from 3.2 African for Eastern and Southern travelers are limited to Z$250. The Zimbabwe dollar to 0.8 months at end-1997. foreign exchange transactions. Authorized dealers are Zimbabwe Arrangements: y and Polic Country e A8 (concluded) Tabl

98 Appendix I

Table A9. Framework for Monetary Policy Formulation and Implementation in Selected Sub-Saharan African Countries, 1997

Country Medium-Term Framework Short-Term Framework

Angola Angola does not have a program with the IMF; however, The levels of net domestic assets, net international the government adopted a December-to-December reserves, and banking sector credit are closely inflation target of 30 percent for 1997. It planned to achieve monitored on a quarterly basis. The multiple exchange the target by setting new net credit to the government at rates were unified in 1995. The central bank sets both zero and by limiting the expansion of commercial banks' the official price and the quantity of foreign exchange credit. Although the credit limits were not strictly enforced, purchased from or sold to commercial banks. There is the hyperinflationary pressures evident in 1994-96 were also an important parallel market for foreign exchange. contained, and inflation was reduced to 64 percent in 1997. The proposed medium-term program intends to reduce inflation to 15 percent by the year 2000.

Botswana Botswana does not have a program supported by the IMF; Given the recent partial liberalization of capital account discussions are conducted within the context of the IMF's controls and the effective peg of the pula to the South Article IV consultations. The Bank of Botswana (BOB) uses African rand, there is no room for an independent projections agreed upon with the IMF as a basis for monetary policy. In the short term, therefore, policies setting liquidity targets to be implemented through BOB are merely adapted to changing regional circumstances, certificates. particularly those in South Africa. This is done largely through open market operations in BOB certificates. Botswana intends to abolish multiple currency practices.

Burkina Faso Burkina Faso has a program supported by the IMF. The Short-term liquidity monitoring is undertaken through program targets net domestic assets of the banking system, quarterly targets on net domestic assets of the central net bank credit to government, net reduction in domestic bank and bank credit to the government under the IMF payment arrears, and external public or publicly guaranteed program. borrowing on nonconcessional terms.

Cote d'lvoire Cote d'lvoire had a program with the IMF supported by Quarterly monitoring of the financial operations of the the third annual ESAF arrangement, which expired in June government, their accounting, and their impact or net 1997. A successor ESAF program was approved in March credit to the government. The regional central bank, 1998. The program sets benchmarks and performance BCEAO, also monitors the liquidity position of the criteria on primary balance of the government, net bank commercial banks. However, banks have had some credit to the central government, net domestic assets of difficulties in complying with the reporting requirements the central bank, and external borrowing. In addition, there of the new accounting framework that became is an attempt to pursue a prudent regional monetary mandatory in January 1996. The difficulties are being policy stance consistent with the goal of improving the net addressed, although with limited success thus far. foreign asset position.

Ethiopia Ethiopia has a three-year ESAF program with the IMF. Banking sector liquidity, together with benchmarks of Financial performance criteria and benchmarks were set performance, is monitored on a quarterly basis. A cap under the first annual arrangement for net domestic assets is imposed on the expansion of domestic liquidity in of the banking system, net bank credit to the government, line with nominal GDP growth. external payment arrears, new nonconcessional external borrowing contracted or guaranteed by the public sector, and minimum net international reserves of the banking system. However, the first annual arrangement was allowed to lapse on October 10, 1997 because the mid-term review was not completed.

Ghana Ghana has a program with the IMF; monetary performance To curb the growth of liquidity, reserve money is criteria/benchmarks are set for reserve money, and net continuously targeted. Also, the exchange rate is domestic financing of the government budget and of the assigned the role of meeting overall balance of Bank of Ghana, which are monitored quarterly. payments objectives and is therefore allowed to respond to demand and supply in the foreign exchange market; Bank of Ghana could, however, intervene to avert undue appreciation of the cedi.

Kenya Kenya had the first annual arrangement under a three-year N.a. ESAF program with the IMF approved on April 26, 1996. The first annual arrangement expired on July 31, 1997 without completion of the review because of failure to address outstanding governance issues.

Table A9 (continued)

Country Medium-Term Framework Short-Term Framework

Lesotho Currently, Lesotho has no arrangements with the IMF. In the short term, the authorities have tended to target Owing to its membership in the Common Monetary Area, and monitor the growth of bank credit to the private the pegging of the loti to the South African rand, and the sector and the rather high interest rates attached to free circulation of the rand as legal currency within such flows. Lesotho, there is little scope for independent monetary policy in Lesotho. Interest rates and inflation move broadly in concert with rates in South Africa, even with restrictions on capital mobility.

Madagascar Madagascar has a three-year ESAF program with the IMF Liquidity is closely monitored through central bank under which the following quantitative benchmarks were auctions and through the development of a secondary established: a ceiling on external payment arrears, a flow market. on net foreign assets of the central bank, a ceiling on net claims on government by the banking sector, and a ceiling on the net domestic assets of the centralbank .Thes e targets are monitored quarterly.

Malawi Malawi has a three-year ESAF program with the IMF. The Short-term liquidity management is undertaken within program sets targets on net domestic assets by the the context of the authorities' need to maintain tight banking system, net credit to the government by the monetary policy. Reductions in the discount rate will banking system, net international reserves, and the overall take place only if inflation remains low and the fiscal budget deficit. These targets are monitored quarterly. program is on track. Interventions into the foreign exchange market are only to build up gross international reserves guided by the reserve money target.

Mali Although Mali has a program with the IMF, monetary policy Short-term liquidity monitoring is undertaken monthly is conducted at the regional level by the regional bank, the for all targets specified under the program, except BCEAO. Nevertheless, the program specifies targets for exchange rates, where monitoring is daily. net credit to the central government, net domestic assets of the BCEAO, and changes in government arrears. These targets are monitored quarterly.

Mauritius Mauritius does not have a program with the IMF. The basic The Bank of Mauritius has set up a monetary policy thrust of monetary policy in Mauritius is directed toward committee to monitor short-term developments in the achievement of price stability and a stable exchange the financial sector. As part of the new monetary rate of the rupee while assigning a greater role to market framework, the central bank has established a reserve forces in the determination of interest rates and exchange money program and a liquidity forecasting framework rates. to be used effectively in daily operations. Intervention in the money market and foreign exchange market is integrated within this framework.

Mozambique Mozambique has a program with the IMF that sets a Since 1995, there has been monthly monitoring of target on the net domestic assets of the banking system, commercial banks to ensure compliance with credit net bank credit to the government, and net foreign assets ceilings and reserve requirements. There has also been of the banking system. stricter enforcement of the penalty for overdrafts and reserve shortfalls. Since September 1997, a committee of the Bank of Mozambique meets weekly to analyze and coordinate operations on the interbank foreign exchange and money markets.

Namibia Namibia does not have a program with the IMF. Also, given The authorities monitor basic liquidity indicators, its participation in the Common Monetary Area and its mostly on a monthly basis. currency board arrangements with South Africa, the Namibian authorities cannot independently set monetary, trade, and exchange policies. Medium-term liquidity monitoring follows that of South Africa.

Rwanda Rwanda does not have a program with the IMF. However, The monetary policy management committee of the in seeking the use of IMF resources under an ESAF- NBR follows financial and economic developments supported program, the authorities have developed a closely and intervenes in the money and foreign medium-term framework of economic policies. Monetary exchange market as necessary to achieve the objectives benchmarks are net foreign assets of the National Bank of the monetary program. of Rwanda (NBR), net credit to the government by the banking system, net domestic credit of the NBR, and reserve money. The targets will be monitored quarterly.

Table A9 (concluded)

Country Medium-Term Framework Short-Term Framework

Senegal Although Senegal has a program with the IMF, monetary Short-term operating targets are set in line with the policy continues to be defined in the context of the West monetary program agreed upon with the IMF. African Monetary Union, of which it is a member. This is done by BCEAO. Nevertheless, the program sets performance criteria and benchmarks as follows: a ceiling on net domestic assets of the BCEAO, a ceiling on net bank credit to the central government, and zero ceilings on short-term and nonconcessional debt. South Africa South Africa does not have a program with the IMF. For many years, the South African Reserve Bank Monetary programming is done within the context of announced guidelines for broad money as part of its "The Growth, Employment, and Redistribution (GEAR) apparatus for executing monetary policy. These Strategy." Indicative quantitative guidelines are set and guidelines were supplemented in 1995 by bank-to-bank monitored for broad money. guidelines on the growth of credits to the private sector. Swaziland Swaziland does not have a program with the IMF. In Short-term liquidity monitoring is undertaken within addition, given Swaziland's membership in the Common the context of commercial banks' liquidity requirements. Monetary Area and the pegging of the lilangeni to the Since May 1, 1996, banks have had to comply with the South African rand, and the free circulation of the rand in liquidity ratio on a weekly average basis. Swaziland, there is limited scope for monetary policy. Most monetary aggregates move in tandem with those of South Africa.

Tanzania Monetary performance criteria under the ESAF program Since May 1996, the BOT has used reserve money as supported by the IMF include net credit to the government the main instrument of money management. It closely by the Bank of Tanzania (BOT), net domestic financing of monitors reserve money as well as the actions of the the government budget deficit, net domestic assets of the commercial banks in achieving compliance with foreign banking system, and net international reserves of the Bank exchange exposure limits to ensure that the liquidity of Tanzania. These aggregates are monitored quarterly. impact of foreign exchange transfers is consistent with overall monetary objectives.

Uganda Uganda has a program with the IMF. The program sets Short-term operating targets are set in line with the targets for net domestic assets of the banking system, net monetary program agreed upon with the IMF. claims on the government by the banking system, and Furthermore, the Bank of Uganda has created its own minimum increase in net international reserves. These are security of a short-term duration, solely for liquidity monitored quarterly. absorption purposes. Consequently, this instrument will be offered only to commercial banks.

Zambia Monetary performance criteria under an ESAF program The Bank of Zambia monitors its balance sheet and supported by the IMF are set for net domestic assets of those of the commercial banks on a monthly basis. the Bank of Zambia, net claims on government, domestic arrears of government, and net international reserves. These are monitored quarterly.

Zimbabwe Zimbabwe has a stand-by arrangement, which was approved The Reserve Bank of Zimbabwe (RBZ) seeks to control on June 1, 1998 with the IMF. Under this arrangement, reserve money, rather than net domestic assets, in its a framework of monetary management had been agreed effort to reduce inflation. As a result, the RBZ monitors upon with the IMF, which is monitored within the context money demand and inflation very closely. The RBZ also of Article IV consultations. intervenes in the foreign exchange market to stabilize the exchange rate.

101 ©International Monetary Fund. Not for Redistribution Appendix II MAE Technical Assistance to Sub-Saharan African Countries

trengthening the international monetary system management and research activities, the emphasis Sthrough global implementation of appropriate gradually moved toward other central bank activi- monetary policies has been one of the main objec- ties. The composition of MAE assistance to these tives of the IMF since its inception. However, imple- countries has evolved considerably over the last 20 menting appropriate monetary policies requires ade- years: technical assistance in management and re- quate financial infrastructure and administration, search has gradually diminished, and emphasis has which are not consistently present in member coun- shifted to monetary operations and bank supervision tries, particularly developing economies. To address (see Figure A1). This trend is a reflection of the evo- this need, the IMF created a special unit to provide lution of central banking in sub-Saharan Africa from technical assistance to its members. Even though the the initial establishment phase in the newly indepen- IMF began offering technical assistance and advice dent countries to one in which the financial system is to member countries soon after it commenced opera- market-based, indirect instruments of monetary pol- tions, a major turning point in its technical assistance icy implementation have become the main tools for program occurred in the early 1960s when many interest rate determination, and the soundness of the countries, mostly African, became independent and financial sector is the major concern for emerging joined the organization. economies. To meet the new requirements, in 1963, the IMF In fiscal year 1997 (ended June), strengthening established the Central Banking Service (CBS), banking supervision and implementing open market which became the Central Banking Department operations accounted for 63 percent of the total (CBD) and was later renamed the Monetary and Ex- technical assistance provided by MAE to sub- change Affairs (MAE) Department. Saharan African countries, while management activities, together with payments system development, accounted for only 3 percent. Despite the initial em- Assistance Provided, 1964/97 phasis on research and management, cumulatively, over the last 20 years, supervision has accounted for Initially, MAE concentrated on setting up central 21 percent of total assistance, compared with 18 per- banks in the newly independent nations of sub- cent for research activities and 12 percent for Saharan Africa. Most of the assistance was provided management. in the form of long-term resident experts in the areas The mode of delivery of MAE technical assis- of management and research activities. Additionally, tance has also gradually, but not drastically, advisory assistance was provided from headquarters, changed over the last 20 years. In fiscal year 1997, in cooperation with the Legal Department, in the long-term assistance by MAE—that is, assignment form of comments on draft central and general bank- of advisors for at least six months—has slowly de- ing legislation for the newly independent countries. creased to 76 percent of the total assistance, com- In 1964, the first year of MAE activity in Africa, ap- pared with 91 percent during 1978/97. Short-term proximately three staff years of assistance were pro- assistance in the form of ad hoc advisors for limited vided to three countries—Burundi, Rwanda, and periods of time instead increased to 17 percent of Sierra Leone—in the form of two governors and a total assistance as of October 1997. This trend re- director-general. By 1974, MAE was providing al- flects the near completion of one phase—that of most 30 staff years of long-term assistance to building capacity in research, accounting, and man- African countries. This represented about 45 percent agement activities, requiring long-term advisors— of total MAE assistance in that year (see Box A1 and and the move to the next phase of fine-tuned assis- Table A10). tance on well-focused topics strictly related to By the 1970s, MAE assistance to sub-Saharan structural measures envisaged under IMF-supported African countries had become more intensive. From programs.

statistics are explained by the expansion of MAE ac- Table A10. Schedule of Past Intensive tivities to all key operational functions of central Technical Assistance Provided by MAE to banking in recognition of the increasing need for a Sub-Saharan African Countries, 1964/97 simultaneous and comprehensive modernization of all central banking activities in sub-Saharan African countries. This expansion has also resulted from the Technical Assistance Period integration of MAE activities into structural mea- Central Bank in Staff-Years Covered sures envisaged under IMF-supported programs. In BCEAO (8 countries) 74 1975-97 this latter context, the major turning point occurred BEAC (6 countries) 51 1976-97 in 1987. The transition was facilitated by the need Botswana 38 1975-90 for closer interaction among member countries, area Comoros 8 1976-97 departments, and MAE to further enhance collabora- Gambia, The 39 1967-97 Guinea 39 1967-97 tion between the African Department and MAE. En- Kenya 41 1965-82 hanced collaboration would also facilitate the Lesotho 29 1974-90 African Department's inputs into MAE's technical Liberia 36 1973-88 assistance program and work plan for the future. Madagascar 9 1973-76 1988-97 Although past MAE technical assistance was Malawi 18 1966-90 largely driven by the authorities' decisions to inno- Mauritius 20 1970-88 Mozambique 10 1986-90 vate and make changes, in recent years it has become Rwanda 52 1964-97 an integral part of structural reforms in developing Sao Tome and Principe 5 1977-97 countries, mostly under SAF and ESAF programs. Seychelles 18 1978-89 MAE has been increasingly requested to assist mem- Sierra Leone 32 1964-86 ber countries in building the needed capacity to im- Tanzania 35 1964-87 Uganda 35 1965-89 plement actions envisaged under IMF-supported pro- Zaire (former) 60 1966-91 grams, such as open market operations and floating Zambia 33 1968-87 exchange regimes, or to strengthen the supervision capabilities of the central bank to safeguard the soundness of the financial sector. Some of these actions are structural benchmarks under ESAF. MAE has so far provided little assistance to the The share of MAE advisory missions has also in- sub-Saharan African countries in the area of mod- creased gradually and accounted for about 6 percent ernizing payments systems. This is largely explained of total MAE assistance in fiscal year 1997. These by the lack of emphasis and importance that central

Figure AI. MAE Technical Assistance to Sub-Saharan Africa in Selected Years (Staff years)

10 • Fiscal year 1980 • Fiscal year 1990 8 Hi Fiscal year 1997

0 \ccounting Bank Monetary Foreign Monetary Payments Research and Other Supervision Operations Exchange Management Systems Policy

Box A1. MAE Technical Assistance in Central Banking and Related Matters Main areas of MAE assistance Short-term experts. Following initial diagnostic and • monetary operations and money market develop- multitopic missions, short-term MAE and expert visits ment, have helped develop the knowledge of the recipient • foreign exchange operations and markets, country's officials. The visits have focused on problem • banking supervision and regulations, solving and cover areas where there is a well-defined • central bank accounting systems and internal audit, actual plan to monitor. These visits give officials the • payment clearing and settlement systems, opportunity to work directly with experienced staff on • monetary analysis and research, practical issues and to learn how to address problems. • public debt management and government securi- Long-term experts. Long-term experts have helped ties market, and recipient central banks develop skills and expertise. This • legislation (in conjunction with the IMF's Legal MAE strategy has always envisaged capacity biulding Department). and the development and transmission of expertise from the long-term expert to the local counterparts. Since the Main instruments of assistance main role of the long-term expert is to carry out the im- Multitopic and diagnostic missions. Multitopic and plementation of reforms, such as banking supervision, diagnostic missions have proved particularly useful to or to provide day-to-day advice on operational and pol- sensitize the authorities about their technical assistance icy issues (monetary operations, foreign exchange, ac- needs in the main areas of central banking and to de- counting, general management), the officials greatly sign, together with MAE missions and other officials, benefit because the continued presence of experts helps an action plan that sets out an integrated program of re- them develop their own expertise. Typically, at the end form. MAE missions have been instrumental in high- of the assignment, the long-term expert is replaced by lighting the need for developing human resources and local counterparts, and ad hoc short-term visits provide working together toward modernization. MAE recom- follow-up support during the transition period. mendations have proved useful in prioritizing the need Seminars and workshops. MAE has organized or for specific training in departments of the central bank, participated in a number of other training activities, in- where skilled labor is scarce or nonexistent. cluding seminars and workshops.

banks in these countries have placed on the subject. start made by sub-Saharan African countries in mov- Indeed, in many central bank laws in sub-Saharan ing toward a market economy. It is also a function of African countries, jurisdiction over the payments the lack of organized regional centers through which systems and the role of the central bank in promot- assistance over common issues and experiences can ing sound payments systems were not fully recog- be provided to a large number of participants. The nized. However, in view of recent trends that show effectiveness of workshops hinges on the existence that these countries are introducing indirect instru- of a sizable number of countries that are at a similar ments and developing interbank markets, the exis- stage of development of their financial sectors and tence of efficient and sound payments systems has that are seeking solutions to common problems. become essential and is assuming growing impor- Therefore, collecting experiences from different tance. Further to the Southern African Development countries on similar subjects and sharing informa- Community initiative, which plans to introduce tion are crucial for the organization of such activi- common, safe standards in the payments systems of ties. This form of technical assistance, which has all countries in the region, MAE has provided a resi- proved quite successful, was first introduced in Rus- dent expert in the region to assist the initiative and to sia, the Baltics, and the other countries of the former work as the region's peripatetic expert. Soviet Union, which were making the move to a The relatively small number of MAE workshops market economy at virtually the same time as the in the region is largely a reflection of the uneven countries of sub-Saharan Africa.

Alexander, William, Tomas Balino, and Charles Enoch, Bank Technical Paper No. 276, Africa Technical De- eds., 1995, The Adoption of Indirect Instruments of partment Series (Washington: World Bank). Monetary Policy, IMF Occasional Paper No. 126 1996, Education and Training of Accountants in (Washington: International Monetary Fund). Sub-Saharan Anglophone Africa, World Bank Tech- Bank for International Settlements (BIS), 1990, Report of nical Paper No. 305 (Washington: World Bank). the Committee on Interbank Netting Schemes of the Leone, Alfredo, 1991, "Effectiveness and Implications of Central Banks of the Group of Ten Countries (Basle). Limits on Central Bank Credit to the Government," in Briault, B. Clive, Andrew G. Haldane, and Mervyn A. The Evolving Role of Central Banks, ed. by Patrick King, 1996, "Independence and Accountability," Downes and Reza Vaez-Zadeh (Washington: Interna- Working Paper Series No. 49 (London: Bank of tional Monetary Fund). England). , 1993, "Institutional and Operational Aspects of Clement, Jean A.P., and others, 1996, Aftermath of the Central Bank Losses," Paper on Policy Analysis and CFA Franc Devaluation, IMF Occasional Paper No. Assessment 93/14 (Washington: International Mone- 138 (Washington: International Monetary Fund). tary Fund). Cottarelli, Carlo, 1993, Limiting Central Bank Credit to Mackenzie, George A., and Peter Stella, 1996, Quasi- the Government: Theory and Practice, IMF Occa- Fiscal Operations of Public Financial Institutions, sional Paper No. 110 (Washington: International IMF Occasional Paper No. 142 (Washington: Interna- Monetary Fund). tional Monetary Fund). Cukierman, Alex, 1992, Central Bank Strategy, Credibil- Popiel, Paul A., 1994, Financial Systems in Sub-Saharan ity, and Independence: Theory and Evidence (Cam- Africa: A Comparative Study, World Bank Discussion bridge, Massachusetts: MIT Press). Papers, Africa Technical Department Series, No. 260 Eijffinger, Sylvester C.W., and Jakob de Haan, 1996, "The (Washington: World Bank). Political Economy of Central-Bank Independence," Sharer, Robert L., Hema R. De Zoysa, and Calvin A. Mc- Special Papers in International Economics, No. 19 Donald, 1995, Uganda: Adjustment with Growth, (Princeton, New Jersey: Princeton University). 1987-94, IMF Occasional Paper No. 121 (Washing- Fischer, Stanley, Ernesto Hernandez-Cata, and Mohsin ton: International Monetary Fund). Khan, 1998, Africa: Is This the Turning Point? IMF Tenconi, Roland, 1992, "The African Banking Systems in Paper on Policy Analysis and Assessment No. 98/6 the 1980s and early 1990s" (unpublished; Washing- (Washington: International Monetary Fund). ton: International Monetary Fund). Goodhart, Charles A.E., and Dirk Schoenmaker, 1995, Tuya, Jose, and Lorena Zamalloa, 1994, "Issues on Plac- "Institutional Separation between Supervisory and ing Banking Supervision in the Central Bank," in Monetary Agencies," in The Central Bank and the Fi- Frameworks for Monetary Stability, ed. by Tomas J.T. nancial System, ed. by C.A.E. Goodhart (Cambridge, Balino and Carlo Cottarelli (Washington: Interna- Massachusetts: MIT Press). tional Monetary Fund). Government of the Republic of South Africa, 1997, The Ugolini, Piero, 1996, National Bank of Poland: The Road Constitution of the Republic of South Africa, 1996 to Indirect Instruments, IMF Occasional Paper No. (Pretoria). 144 (Washington: International Monetary Fund). Grilli, Vittorio, Donato Masciandaro, and Guido Tabellini, United Nations, Centre on Transnational Corporations, 1991, "Political and Monetary Institutions and Public 1991, Accountancy Development in Africa—Chal- Financial Policies in the Industrial Countries," Eco- lenge of the 1990s (New York). nomic Policy: A European Forum, Vol. 6 (October), United Nations, Department of Technical Cooperation for pp. 342-92. Development, 1991, Government Financial Manage- International Monetary Fund, International Financial Sta- ment in Least Developed Countries (New York). tistics (IFS) (Washington, various issues). Young, John E., 1986, "The Rise and Fall of Federal Re- Johnson, Sonia R., 1994, Quality Review Schemes for Au- serve Float," Economic Review, Federal Reserve ditors: Their Potential for Sub-Saharan Africa, World Bank of Kansas City, Vol. 71 (February), pp. 28-38.

Recent Occasional Papers of the International Monetary Fund

169. Financial Sector Development in Sub-Saharan African Countries, by Hassanali Mehran, Piero Ugolini, Jean Philippe Briffaux, George Iden, Tonny Lybek, Stephen Swaray, and Peter Hayward. 1998. 168. Exit Strategies: Policy Options for Countries Seeking Greater Exchange Rate Flexibility, by a staff team led by Barry Eichengreen and Paul Masson with Hugh Bredenkamp, Barry Johnston, Javier Hamann, Esteban Jadresic, and Inci Otker. 1998. 167. Exchange Rate Assessment: Extensions of the Macroeconomic Balance Approach, edited by Peter Isard and Hamid Faruqee. 1998 166. Hedge Funds and Financial Market Dynamics, by a staff team led by Barry Eichengreen and Donald Mathieson with Bankim Chadha, Anne Jansen, Laura Kodres, and Sunil Sharma. 1998. 165. Algeria: Stabilization and Transition to the Market, by Karim Nashashibi, Patricia Alonso-Gamo, Stefania Bazzoni, Alain Feler, Nicole Laframboise, and Sebastian Paris Horvitz. 1998. 164. MULTIMOD Mark III: The Core Dynamic and Steady-State Model, by Douglas Laxton, Peter Isard, Hamid Faruqee, Eswar Prasad, and Bart Turtelboom. 1998. 163. Egypt: Beyond Stabilization, Toward a Dynamic Market Economy, by a staff team led by Howard Handy. 1998. 162. Fiscal Policy Rules, by George Kopits and Steven Symansky. 1998. 161. The Nordic Banking Crises: Pitfalls in Financial Liberalization? by Burkhard Dress and Ceyla Pazarbasioglu. 1998. 160. Fiscal Reform in Low-Income Countries: Experience Under IMF-Supported Programs, by a staff team led by George T. Abed and comprising Liam Ebrill, Sanjeev Gupta, Benedict Clements, Ronald Mc- Morran, Anthony Pellechio, Jerald Schiff, and Marijn Verhoeven. 1998. 159. Hungary: Economic Policies for Sustainable Growth, Carlo Cottarelli, Thomas Krueger, Reza Moghadam, Perry Perone, Edgardo Ruggiero, and Rachel van Elkan. 1998. 158. Transparency in Government Operations, by George Kopits and Jon Craig. 1998. 157. Central Bank Reforms in the Baltics, Russia, and the Other Countries of the Former Soviet Union, by a staff team led by Malcolm Knight and comprising Susana Almuina, John Dalton, Inci Otker, Ceyla Pazarbasioglu, Arne B. Petersen, Peter Quirk, Nicholas M. Roberts, Gabriel Sensenbrenner, and Jan Willem van der Vossen. 1997. 156. The ESAF at Ten Years: Economic Adjustment and Reform in Low-Income Countries, by the staff of the International Monetary Fund. 1997. 155. Fiscal Policy Issues During the Transition in Russia, by Augusto Lopez-Claros and Sergei V. Alexas- henko. 1998. 154. Credibility Without Rules? Monetary Frameworks in the Post-Bretton Woods Era, by Carlo Cottarelli and Curzio Giannini. 1997. 153. Pension Regimes and Saving, by G.A. Mackenzie, Philip Gerson, and Alfredo Cuevas. 1997. 152. Hong Kong, China: Growth, Structural Change, and Economic Stability During the Transition, by John Dodsworth and Dubravko Mihaljek. 1997. 151. Currency Board Arrangements: Issues and Experiences, by a staff team led by Tomas J.T. Balino and Charles Enoch. 1997. 150. Kuwait: From Reconstruction to Accumulation for Future Generations, by Nigel Andrew Chalk, Mo- hamed A. El-Erian, Susan J. Fennell, Alexei P. Kireyev, and John F. Wilson. 1997. 149. The Composition of Fiscal Adjustment and Growth: Lessons from Fiscal Reforms in Eight Economies, by G.A. Mackenzie, David W.H. Orsmond, and Philip R. Gerson. 1997. 148. Nigeria: Experience with Structural Adjustment, by Gary Moser, Scott Rogers, and Reinold van Til, with Robin Kibuka and Inutu Lukonga. 1997. 147. Aging Populations and Public Pension Schemes, by Sheetal K. Chand and Albert Jaeger. 1996.

146. Thailand: The Road to Sustained Growth, by Kalpana Kochhar, Louis Dicks-Mireaux, Balazs Horvath, Mauro Mecagni, Erik Offerdal, and Jianping Zhou. 1996. 145. Exchange Rate Movements and Their Impact on Trade and Investment in the APEC Region, by Takatoshi Ito, Peter Isard, Steven Symansky, and Tamim Bayoumi. 1996. 144. National Bank of Poland: The Road to Indirect Instruments, by Piero Ugolini. 1996. 143. Adjustment for Growth: The African Experience, by Michael T. Hadjimichael, Michael Nowak, Robert Sharer, and Amor Tahari. 1996. 142. Quasi-Fiscal Operations of Public Financial Institutions, by G.A. Mackenzie and Peter Stella. 1996. 141. Monetary and Exchange System Reforms in China: An Experiment in Gradualism, by Hassanali Mehran, Marc Quintyn, Tom Nordman, and Bernard Laurens. 1996. 140. Government Reform in New Zealand, by Graham C. Scott. 1996. 139. Reinvigorating Growth in Developing Countries: Lessons from Adjustment Policies in Eight Economies, by David Goldsbrough, Sharmini Coorey, Louis Dicks-Mireaux, Balazs Horvath, Kalpana Kochhar, Mauro Mecagni, Erik Offerdal, and Jianping Zhou. 1996. 138. Aftermath of the CFA Franc Devaluation, by Jean A.R Clement, with Johannes Mueller, Stephane Cosse, and Jean Le Dem. 1996. 137. The Lao People's Democratic Republic: Systemic Transformation and Adjustment, edited by Ichiro Otani and Chi Do Pham. 1996. 136. Jordan: Strategy for Adjustment and Growth, edited by Edouard Maciejewski and Ahsan Mansur. 1996. 135. Vietnam: Transition to a Market Economy, by John R. Dodsworth, Erich Spitaller, Michael Braulke, Keon Hyok Lee, Kenneth Miranda, Christian Mulder, Hisanobu Shishido, and Krishna Srinivasan. 1996. 134. India: Economic Reform and Growth, by Ajai Chopra, Charles Collyns, Richard Hemming, and Karen Parker with Woosik Chu and Oliver Fratzscher. 1995. 133. Policy Experiences and Issues in the Baltics, Russia, and Other Countries of the Former Soviet Union, edited by Daniel A. Citrin and Ashok K. Lahiri. 1995. 132. Financial Fragilities in Latin America: The 1980s and 1990s, by Liliana Rojas-Suarez and Steven R. Weisbrod. 1995. 131. Capital Account Convertibility: Review of Experience and Implications for IMF Policies, by staff teams headed by Peter J. Quirk and Owen Evans. 1995. 130. Challenges to the Swedish Welfare State, by Desmond Lachman, Adam Bennett, John H. Green, Robert Hagemann, and Ramana Ramaswamy. 1995. 129. IMF Conditionality: Experience Under Stand-By and Extended Arrangements. Part II: Background Pa- pers. Susan Schadler, Editor, with Adam Bennett, Maria Carkovic, Louis Dicks-Mireaux, Mauro Mecagni, James H.J. Morsink, and Miguel A. Savastano. 1995. 128. IMF Conditionality: Experience Under Stand-By and Extended Arrangements. Part I: Key Issues and Findings, by Susan Schadler, Adam Bennett, Maria Carkovic, Louis Dicks-Mireaux, Mauro Mecagni, James H.J. Morsink, and Miguel A. Savastano. 1995. 127. Road Maps of the Transition: The Baltics, the Czech Republic, Hungary, and Russia, by Biswajit Banerjee, Vincent Koen, Thomas Krueger, Mark S. Lutz, Michael Marrese, and Tapio O. Saavalainen. 1995. 126. The Adoption of Indirect Instruments of Monetary Policy, by a staff team headed by William E. Alexan- der, Tomas J.T. Balino, and Charles Enoch. 1995. 125. United Germany: The First Five Years—Performance and Policy Issues, by Robert Corker, Robert A. Feldman, Karl Habermeier, Hari Vittas, and Tessa van der Willigen. 1995. 124. Saving Behavior and the Asset Price "Bubble" in Japan: Analytical Studies, edited by Ulrich Baumgartner and Guy Meredith. 1995.

Note: For information on the title and availability of Occasional Papers not listed, please consult the IMF Publications Catalog or contact IMF Publication Services.

107