The surge in portfolio flows have had important macro-economic effects, Dr Samir Jahjah, Resident Representative of the International Monetary Fund (IMF), has disclosed.
Dr Jahjah noted that even though portfolio flows to sub-Saharan African Frontier Markets (SSAFMs) remained tiny compared to other emerging economies, their importance to a country's economic size was about equal.
According to Dr Jahjah, SSAFMs had, so far, used part of the flows to build reserves, with reserves in Nigeria jumping from 5 to 6.8 months, between 2011 and 2013 while the naira appreciated.
He said however, that the relatively-muted impact on other sub-Saharan African frontier markets might not be sustained if the financial turmoil affecting EMCs and developed courtiers persisted.
He was speaking on the theme: Managing Volatile Capital Flows: Experiences and Lessons for sub-Saharan African Frontier Markets (SSAFMs) in Accra.
Dr Jahjah noted that over the last decade, private capital flows to SSAFMs had grown considerably, adding that even though increased foreign inflows might supplement domestic financing of investment, they equally posed challenges.
For example, he said, capital flow volatility might overwhelm the relatively shallow financial markets of SSAFMs and test the capacity of macro-economic policies to adjust, hence the need to have in place or strengthen frameworks so as to manage vulnerabilities to sudden reversals, should the related risks materialise.
Dr Jahjah, therefore, called on SSAFMs to strengthen policy frameworks to ensure that access to capital markets was beneficial; improve data and ability to analyse the nature of capital flows; and enhance macro-economic and financial policies to mitigate the macro effects of capital flows surges and reversals.
Furthermore, he stressed the need to improve capacity to systemic risks; build up and use macro-prudential policies more timely; and exercise caution in the use of capital flow management measures by evaluating possible negative effects on financial sector deepening and investor relations.
Source: ISD (G.D. Zaney)