FINANCIAL SERVICES LIBERALISATION FORUM (1-2 July 2013)
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FINANCIAL SERVICES LIBERALISATION FINANCIAL SERVICES LIBERALISATION FORUM (1-2 July 2013)FORUM (1-2 July 2013)
Financial Services as Trade Financial Services as Trade Infrastructure in Regional IntegrationInfrastructure in Regional Integration
By By M. B. MpofuM. B. MpofuChairperson, Chairperson,
SADC Working Group on Exchange Control Capacity BuildingSADC Working Group on Exchange Control Capacity Building
INTERVENTIONSINTERVENTIONS
1. Underlying Premises for Exchange Controls2. Exchange Control Developments in the
Region3. Impact of Exchange Controls and Liberalizing
Financial Services4. Potential Benefits of Liberalisation of
Financial Services5. Potential Costs of Liberalisation of Financial
Services6. Policy Recommendations7. Conclusions
2Apr 19, 2023Apr 19, 2023 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South AfricaFinancial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa
4. 4. Exchange Controls – Exchange Controls – Underlying PremisesUnderlying Premises
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• Exchange controls often persist owing to their existence and entrenched interests. Controls often persist long after their effectiveness has dissipated. The Exchange Control Department in central banks often has an interest in keeping them going.
• Exchange controls do not protect the level of official reserves. During the early years of African countries’ independence when their economies were relatively closed, there was a very high repressed demand for foreign exchange and foreign assets; and often a competition for scarce foreign exchange between the public and private sectors.
4. 4. Exchange Controls – Exchange Controls – Underlying PremisesUnderlying Premises
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• In order to protect foreign reserves for use by the State, exchange controls were then aimed at restricting outflows not desired by the State.
• Today, foreign reserves are viewed primarily a reflection of the efficacy of economic policies. Healthy foreign reserves reflect good economic policies, whereas declining reserves are a warning signal of underlying problems—not the cause.
• The costs of maintaining too high levels of foreign reserves in a developing nation need also be considered.
4. 4. Exchange Controls – Underlying PremisesExchange Controls – Underlying Premises
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• Exchange control should shift to financial surveillance. Today, there is a policy shift away from the traditional exchange control framework to regulations aimed at macro financial prudential management, anti-money laundering, and fighting the financing of terrorism. The more pressing concerns now for Central Banks are to manage financial stability, prevent financial contagions, and fight tax evasion.
• Member States must accept that there will be different costs and benefits from capital account liberalisation. The larger financial centres may initially benefit more from capital mobility, but there is a role for regional financial centres. Similarly, an open capital market makes it easier for poorer countries in the region to mobilize capital within the region and at more competitive rates.
4. 4. Exchange Controls – Underlying PremisesExchange Controls – Underlying Premises
6
• Illegal and fraudulent transactions will still exist regardless of exchange controls. Tax evasion, money laundering, and business fraud are traditional problems within the financial system, and cannot be eliminated by exchange controls, nor are they an excuse for maintaining exchange control. However, exchange controls do raise the cost of executing such illegal transactions and therefore partially discourage them.
• A parallel foreign exchange market (black market) is another sign of a distorted or disequilibrium official foreign exchange market. As such, the parallel market provides some indication of the amount of over/under-valuation of the exchange rate. Understanding the demand side of the parallel market provides insight on the reasons for its existence. Exchange controls do not eliminate parallel markets, but often create them.
4. 4. Exchange Controls – Underlying PremisesExchange Controls – Underlying Premises
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• A high level of dollarization is another indication of a problem or failure in exchange rate policy. Most countries that became highly dollarized had high levels of inflation, exchange rate misalignment, fiscal dominance, weak monetary policy, and high levels of exchange controls.
• More liberalised countries must be allowed to retain their capital market rules for their residents, even after joining a more restricted SADC capital market.
• A regional capital market may have repercussions on the movement of people.
Forms of Exchange Control Forms of Exchange Control Barriers to Trade in Financial Services Barriers to Trade in Financial Services
Financial Services Areas that are affected by Exchange Financial Services Areas that are affected by Exchange Controls or Foreign Exchange Regulations Controls or Foreign Exchange Regulations
• equity participation; – maximum equity participation permitted in an
existing domestic bank. For example, ownership to a maximum of 49 per cent of a bank
• joint ventures (foreign banks only);– Bank entry is only through a joint venture with a
domestic bank– no entry is allowed through a joint venture with a
domestic bank8Apr 19, 2023 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South AfricaFinancial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa
88
Forms of Exchange Control Forms of Exchange Control Barriers to Trade in Financial Services Barriers to Trade in Financial Services
Financial Services Areas that are affected by Exchange Financial Services Areas that are affected by Exchange Controls or Foreign Exchange Regulations Controls or Foreign Exchange Regulations
• raising of funds by banks;– Banks restricted from raising funds from domestic
capital markets• lending of funds by banks;
– Banks not permitted to lend to foreign clients
9Apr 19, 2023 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South AfricaFinancial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa99
Forms of Exchange Control Forms of Exchange Control Barriers to Trade in Financial Services Barriers to Trade in Financial Services
• Barriers to international trade in services are erected at a point in the transaction where the government can exercise some control over the transaction.
• Exchange Control Authorities can limit;– (a) the purchase of foreign exchange needed to pay for imported services;
– (b) the movement of all people, information, goods, and money across the border;
– (c) the sale of services inside the country by a foreign business; – (d) the employment of foreign service workers in the importing country; or – (e) the consumption of services required to meet regulatory requirements.
10Apr 19, 2023 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South AfricaFinancial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa1010
Forms of Exchange Control Forms of Exchange Control Barriers to Trade in Financial Services Barriers to Trade in Financial Services
• Comprehensive foreign exchange control systems on international flows of information, people, money, and goods are likely to be insufficient and ineffective as long as they are not totalitarian.
• Hence most barriers to trade take the form of regulatory measures limiting the right of foreign companies to sell services in the local market or handicapping their sales effort.
• Controls on sales in the importing country can cover most potential trade in services since the close interaction required between the buyer and the seller of services makes it difficult to buy such services at a distance.
11Apr 19, 2023 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South AfricaFinancial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa1111
ObservationsObservations
• BankingNeed for a sectoral agreement that might be negotiated on international trade in banking services.
To provide (a) freedom to establish branches, agencies, subsidiaries, or other facilities,
(b) regulatory symmetry with respect to domestic and foreign competitors, which would include the right to manage local currency issues, (c) freedom to import critical resources, including travel and resettlement of professional staff, and the ability to process data locally or abroad, (d) symmetry with respect to the application of foreign exchange controls, and (e) equality of access to domestic client groups.
12Apr 19, 2023 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South AfricaFinancial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa1212
WHAT HAPPENS IF A COUNTRY LIBERALIZES ITS EXCHANGE CONTROL?
Would the country benefit from the liberalization process or end in financial crisis or currency crises?
Analysis is not clear because: aggregate data hides important heterogeneities. indicators of capital account liberalization are
sometimes crude, binary and ignore variations in the degree of C/A restrictiveness.
Costs and benefits are difficult to isolate because liberalization often goes in line with other macroeconomic reforms.
13
GENERAL ARGUMENTS AGAINST GENERAL ARGUMENTS AGAINST LIBERALIZATION OF CURRENT LIBERALIZATION OF CURRENT
ACCOUNTS ACCOUNTS Restrictions are difficult to justify in market-based economies
Controls usually justified as tools to: conserve FOREX reserves protect domestic industries against
competition prevent capital flight improve BoP statistics. curb illegal transactions such as tax evasion
Controls are largely ineffective as they: create economic distortions with tangible costs result in black market exchange rates, parallel
markets, overvalued exchange rates etc.14
ARGUMENTS FOR LIBERALIZATION OF ARGUMENTS FOR LIBERALIZATION OF CURRENT ACCOUNTSCURRENT ACCOUNTS
Justification for liberalization: create proper prices and efficient resource
allocation. eliminate bureaucratic burden associated with
administering ExCon. Some SADC MS have accepted IMF Article VIII
builds investor confidence encourages capital flows (ceteries paribus)
Private sector bear all costs.
15
COSTS AND BENEFITS OF COSTS AND BENEFITS OF LIBERALIZATION LIBERALIZATION
OF CAPITAL ACCOUNTS OF CAPITAL ACCOUNTS
Capital Account Liberalization remains a challenge:
Is like “automobile for growth” since it improves productivity & ability of capital to get from one place to another.
Creates possibility for “crashes”.Benefits outweigh costs.
16
COSTS AND BENEFITS OF COSTS AND BENEFITS OF LIBERALIZATION OF CAPITAL ACCOUNTLIBERALIZATION OF CAPITAL ACCOUNT
Vulnerability to crisis.Asset bubbles and
misallocation of resources .
Reduced freedom to use monetary policy.
Currency appreciation or depreciation with implications for exchange rate competitiveness.
Increased capital inflows Promotes global
allocation of resources.Risk diversification.Deepens domestic
capital markets. Disciplines domestic
policy.Raises productivity and
growth.
Costs Benefits
17
COSTS AND BENEFITS OF CAPITAL COSTS AND BENEFITS OF CAPITAL ACCOUNT LIBERALIZATION- EMPIRICSACCOUNT LIBERALIZATION- EMPIRICS
Empirics point towards conditions necessary to reap benefits of Capital Account liberalization. The level of financial development Fiscal discipline confidence in markets
Evidence further show that Capital account liberalization enhances stock market liquidity with positive effects on growth.
Improves access to well functioning capital markets.
18
SADC VIEWS ON COSTS AND BENEFITS SADC VIEWS ON COSTS AND BENEFITS OF CAPITAL ACCOUNT LIBERALIZATIONOF CAPITAL ACCOUNT LIBERALIZATION
Private Sector views positive move towards greater integration.
liberalization has reduced waiting time for AD approvals.
serves as stimulus for FDI.
repatriation increases costs.
costs raised through documentations compliance (F178).
19
PROGRESS IN LIBERALISATION OF EXCHANGE CONTROLS IN SADC
• On overall, the Composition of exchange
controls index shows that the current
account is not yet completely liberalized
across SADC member states and a number of
countries have restrictions above average.
• It is also noted from this decomposition
that only fully liberalized countries have
completely liberalized exchange
controls on services transactions
20
PROGRESS IN LIBERALISATION OF EXCHANGE CONTROLS IN SADC
• Since end-2010, a major current
account liberalisation has occurred in
Mozambique (May 2011) and a
significant relaxation of controls and
floating of the Kwacha occurred in
Malawi (May 2012).
21
All SADC MS had made recognizable progress in liberalization of ExCon on current accounts.
Seychelles fully liberalized in 2008, Zimbabwe and Mozambique made substantial initiative & Malawi floated its currency in May 2012.
Liberalization characterized by delegation of ExCon regulations to Authorized Dealers.
MS have largely liberalized goods and services transactions
22
HIGHLIGHTS OF PROGRESS ON EXCON LIBERALIZATION
14. 14. Exchange Control Exchange Control Developments in the RegionDevelopments in the Region
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• In order to compare progress in liberalisation of exchange controls across SADC member states, an Index of Exchange Control Restrictiveness was computed. This index was computed from the IMF AREAR data set for all SADC member states for the years 2000, 2005, 2011 and 2012.
• A high index score depicts a high level of Exchange Control Restrictions.
• Study conducted by Mark Ellyne and Emmanuel Letete Consultants engaged by the SADC Secretariat.
PROGRESS IN LIBERALIZATION OF PROGRESS IN LIBERALIZATION OF EXCONEXCON
24
REMAINING EXCON RESTRICTIONS IN SADC IN 2011
• Commendable progress on goods restrictions
• Service restrictions remain high in non-fully liberalized MS (Angola, Malawi & CMA)
• Capital Accounts remain closed across all non-fully liberalized MS
• Restrictions in liberalized MS for prudential regulations and monitoring
25
STATUS OF REMAINING EXCON STATUS OF REMAINING EXCON ACROSS SADCACROSS SADC
Status of ExCon 2007
MS with ExCon 2007
Progress 2007-2012 MS with ExCon in place
7. Dividends to Non-residents
Moz, Zim, Les, Ang Liberalized in all MS None
8. Directors fees to Non-residents
Zim Liberalized None
9. Other Incomes to non-residents
Zim,Ang Liberalized in Zim Ang
10. Interest payment to non-residents
Moz, Ang, Les Liberalized in Moz & Les
Ang
26
Components of Exchange Components of Exchange Controls In SADC CountriesControls In SADC Countries
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14. 14. Exchange Control Exchange Control Developments in the RegionDevelopments in the Region
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Country Score-2012 Current Account Capital AccountSeychelles 8.4 Liberalised LiberalisedZambia 10.5 Liberalised LiberalisedMauritius 17.0 Liberalised LiberalisedBotswana 18.1 Liberalised LiberalisedZimbabwe 28.1 Liberalised RestrictedMadagascar 32.3 Liberalised RestrictedTanzania 35.7 Liberalised RestrictedDRC 35.7 Liberalised RestrictedSouth Africa 38.9 Liberalised RestrictedMozambique 39.3 Liberalised RestrictedLesotho 42.2 Liberalised RestrictedNamibia 44.7 Partially Liberalised RestrictedMalawi 44.9 Restricted RestrictedSwaziland 47.3 Restricted RestrictedAngola 57.1 Restricted Restricted
Liberalisation of Exchange Liberalisation of Exchange Controls in ZimbabweControls in Zimbabwe
29Apr 19, 2023 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South AfricaFinancial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa2929
PRIVATE SECTOR QUOTESPRIVATE SECTOR QUOTES
“Since the liberalization took place we have invested almost $300 million of FDI in this country in sugar industry and this has doubled our production capacity. By contrast, our parent company was also supposed to increase the capacity of the Malawi facility, but declined to do so because of unstable economic policies and exchange controls” (Zambia)
“Capital account liberalization was the most important reform the country had made and it did not only benefit us (banks) but the whole country at large.” (Mauritius)
30
Liberalisation of Exchange Liberalisation of Exchange Controls in ZimbabweControls in Zimbabwe
• Zimbabwe is more liberalized than the average level of SADC countries.
• Particularly for goods and services (current account)• Capital restrictions remain for prevention of capital
flight.
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Liberalisation of Exchange Liberalisation of Exchange Controls in ZimbabweControls in Zimbabwe
• No restrictions or prohibition on remittance of dividends, profits (income) or royalties.
• No ceilings on direct foreign investment outflows. • No Ceilings on overseas portfolio investments. • No restrictions on payments for imports• No surrender of hard-currency export receipts to the
central bank. • No limitations on prepayments for imports. • No restrictions on holding of FCAs by individuals with
local financial institutions.• No retrictions on amount of forex that can be imported.
32Apr 19, 2023 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South AfricaFinancial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa3232
11. 11. Impact of Liberalizing Impact of Liberalizing Financial ServicesFinancial Services
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Increased Increased CompetitionCompetition
Entry of Foreign Entry of Foreign FirmsFirms
Entry of domestic Entry of domestic firmsfirms
LiberalisationLiberalisationExternal External
Liberalisation: Liberalisation: Trade Trade
Liberalisation Liberalisation
Internal Liberalisation: Internal Liberalisation: Benefits of Benefits of
Competition policyCompetition policy
Barriers to Barriers to Cross-Border Cross-Border SupplySupply
Barriers to Barriers to Commercial Commercial presencepresence
B
Barriers to Barriers to Domestic Domestic
FirmsFirms
Higher Higher GrowthGrowth
Greater Greater EfficiencyEfficiency
More More ChoiceChoice
Less Less PovertyPoverty
Indicators of Financial Sector Indicators of Financial Sector Development in SADCDevelopment in SADC
34
Source: World Development Indicators, 2011 and Authorities across SADC countries, IMF, African Department database, April 2012 and Regional Economic Outlook, Sub-Saharan Africa, Sustaining growth amid global uncertainty. Notes: Asterick * indicates that information was collected from World Bank Development Indicators and access and use of financial infrastructure was collected from FinMark Trust survey quoted in Schoombee (2011). Mkt Cap = market capitalization ratio to GDP.
12. 12. Potential Benefits of Potential Benefits of Liberalisation of Financial ServicesLiberalisation of Financial Services
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• Comparative impact on domestic firms and potential for productivity;
• Access to new financial instruments reducing costs and risks for business;
• Access to international saving;• Reduction in overhead expenses and profit-taking by
domestic banks due to increased competition by foreign banks;
• Increased efficiency and diversity of financial services;
12. 12. Potential Benefits of Potential Benefits of Liberalisation of Financial ServicesLiberalisation of Financial Services
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• Spill-over effects of foreign bank entry, such as the introduction of new financial services and of modern and more efficient banking techniques, and the improvement of domestic bank management;
• Improvement in bank regulation and supervision due to the entry of new financial service providers and new financial services;
• Less interference by Governments in the financial sector, to cover up bad practices;
• Training by foreign banks, resulting in more experienced personnel in the financial sector of a country;
12. 12. Potential Benefits of Potential Benefits of Liberalisation of Financial ServicesLiberalisation of Financial Services
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• The presence of foreign banks stimulates domestic investment in the host countries;
• Foreign banks may attract (other) foreign direct investments and enhance a country’s access to international capital;
• Well capitalized foreign banks may be able and willing to keep lending to domestic firms during adverse economic conditions, while domestic banks would probably reduce the credit supply;
• Foreign bank entry leads to better lending terms (lower interest rates, lower fees, longer maturities) for all but larger firms.
12. 12. Potential Benefits of Potential Benefits of Liberalisation of Financial ServicesLiberalisation of Financial Services
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• Some of the greatest advantages of market liberalisation in services, come from transfers of soft elements, such as information, know-how and technology;
• In addition, the entry of foreign financial institutions brings potential improvements in general management, accounting, database processing, and corporate governance. These would all be beneficial to the consumer;
• Foreign firms, subject to supervision and regulation in their home countries can raise the standards of supervision;
13. Potential Costs of Liberalisation 13. Potential Costs of Liberalisation of Financial Servicesof Financial Services
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• Failure of domestic firms and risk of contagion;• Market segmentation and reduction in services to SMEs;• Promotion of destabilizing capital flows;• Foreign firms cut and run; • Domestic banks are not able to cope with increased
competition, and may stop operating, which can cause disruptions and political concerns about increased foreign control of the financial market;
• Foreign banks will not provide additional credit during an economic downturn in a host country;
13. Potential Costs of Liberalisation 13. Potential Costs of Liberalisation of Financial Servicesof Financial Services
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• Domestic banks are not able to cope with increased competition, and may stop operating, which can cause disruptions and political concerns about increased foreign control of the financial market;
• Trying to cope with increased competition from the foreign banks and implementing new techniques may raise costs for local banks in the short term, which they would then finance by raising their profit margins, in turn leading to price increases for consumers;
• Foreign banks' entry into the market of loans to corporations does not decrease the margins and profits in the personal loan market;
15. Policy Recommendations 15. Policy Recommendations
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• Bind unilateral reforms, where politically feasible, in WTO – the gains to a country from an efficient financial system far outweigh any potential gains from keeping an inefficient and restricted system in place.
• It was for this reason that most SADC countries embarked on liberalization in the first place.
• As such, it makes little sense to go ahead with liberalization, regardless of the GATS process; and
• Consider extending GATS commitments to insurance in those countries where no commitments have been made.
15. Policy Recommendations 15. Policy Recommendations
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• As exchange controls are reduced, there is a need to increase the functions and oversight capacity of other regulators, including the financial intelligence unit and banking supervision.
• Member States need to standardise prudential regulations and supervision of financial institutions—both banks and nonbanks. Many SADC countries lack regulations and regulators for nonbank financial institutions.
• Member States need to determine what other regional institutions are needed to promote and supervise financial and capital market reforms and development.
15. Conclusions 15. Conclusions
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• While international trade theory literature often suggests that multilateral liberalization maximizes economic benefits, research has shown that regional cooperation among developing countries has the potential to support national development strategies.
• It is also important to take into account the positive political economy aspects of regionalism, which can include the provision of regional public goods, a reconfiguration of policy space, preferential rule-making and special financing facilities.
15. Conclusions 15. Conclusions
4426-Jun-1326-Jun-13 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South AfricaFinancial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa
• When compared to other regions, SADC has a relatively small weight of intraregional trade (due mainly key impediments to trade such as poor infrastructure – both soft and physical – which increases transport costs substantially, in turn reducing the competitiveness of the traded goods).
• In the case of trade in financial services, specific infrastructure such as telecommunications, finance, logistics or professional services but also adequate investments policies and trade-supportive regulations are needed for the development of intraregional trade
15. Conclusions 15. Conclusions
45Apr 19, 2023Apr 19, 2023 Financial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South AfricaFinancial Services Liberalisation Forum: 1-2 July 2013, Johannesburg, South Africa
• For the integration process to produce the desired results and to be viable, legitimacy and trust are crucial.
• Common regional policies and institutions may be needed to ensure that greater income divergence does not occur, thereby triggering some negative reactions on the part of disadvantaged members.
Thank YouThank You