One Size Does Not Fit All for Central Banks' Role in Financing Development

6 April 2015
press release

"What is needed to make the most of central banks' potential in financing Africa's development in the post-2015 era?

Mr. Carlos Lopes, the Executive Secretary of the Economic Commission of Africa posed the question to a group of central bank governors and development financing experts during the Caucus of Governors session at the Joint Annual Meetings of the African Union Specialized Technical Committee on Finance, Monetary Affairs, Economic Planning and Integration and the ECA Conference of African Ministers of Finance, Planning and Economic Development currently taking place in Addis Ababa.

Mr Lopes explained that "the pertinence of this question stems from the fact that US$ 1 trillion of capital has not been put to work to finance Africa's transformation. US$ 1 trillion dormant in the coffers of pension funds, central banks, commercial banks and other holders of remittances in Africa".

Experts and policy makers agree Africa's development must be financed from local sources. Therefore, Mr. Lopes posited, "controlling the finance is the key to fulfilling our aspirations."

Mr. Joseph Enyimu, member of the Intergovernmental Committee of Experts on Sustainable Development Financing, confirmed that savings are on the rise on the continent but the challenge was channeling those savings into meaningful investments. Mr. Lopes put the ball in the court of the governors by telling them, "it is primarily you who can put this money to work."

During the first meeting of the Caucus of Governors in Abuja in 2014, the participants acknowledged the narrow mandate of central banks but agreed on the need for the banks to promote economic transformation.

Different countries, different methods

However, the question of the manner of involvement and expansion of central banks' traditional mandate of price and financial system stability is invariably produces different answers.

The discussions soon showed that different countries have taken different approaches to development financing, with many participants citing the examples of Ghana and Nigeria in co-financing big infrastructure projects and Kenya and Uganda's bond schemes as good practices.

On the question of conservative versus activist central banks, Mr. Louis A. Kasekende, one of the co-chairs of the meeting and the current Deputy Governor of the Bank of Uganda, pointed out that some central banks have begun to undertake innovative schemes where they work together with commercial banks to improve the loans and bond conditions for business, especially for small and medium enterprises.

Despite the general consensus that business cannot continue as usual for central banks and that there is room for significant contribution, Mr Jean-Baptiste Compaore, the Deputy Governor of Central Bank of West African states, warned "a central bank shouldn't overstretch itself."

Increasing the maturity structure of bonds and offering different bond market schemes were given as examples of positive involvement as evidenced by some central banks issuing infrastructure bonds or designing new bond schemes as done by the Kenyan central bank.

The ECA recommends central banks to "include critical developmental roles with effective support to the fiscal authorities, within a macroeconomic policy framework that focuses on structural transformation and that controlling the finance is the key to fulfilling our aspirations," Mr. Lopes stated.

For this to happen, it is crucial for Africa to pull on all its resources such as savings, remittances and pensions; stamp illicit financial flows; institute innovative tax laws and improve the business environment.

Mr. Jacob Oduor, Principal Research Economist from the African Development Bank reminded participants that " Africa can finance its development and that the private sector is key to development with partnering between private and public sectors" as one of the drivers of development and transformation.

Jointly issued by the ECA and the AUC

AllAfrica publishes around 500 reports a day from more than 100 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.