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VII F. Attract Capital Flows and Encourage Foreign Participation: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA

Written by: International Monetary Fund

Article Overview: Private capitals flows—foreign direct investment, remittances and portfolio investment and are an important for stock market development.

VII F. Attract Capital Flows and Encourage Foreign Participation: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA

Private capitals flows—foreign direct investment, remittances and portfolio investment and
are an important for stock market development. Even though capital flows to Africa have
been increasing recently, they are still at very low levels. In particular, portfolio investment
accounts for a minor share of capital flows to Africa with a meager share of 0.15 percent of
the total capital flows to Africa in 2003 (excluding South Africa). On the other hand,
portfolio flows dominate the total capital flows to South Africa increasing liquidity on the
JSE.
African countries need to do more to attract capital flows especially portfolio flows.
Sustained economic growth, quality public institutions and infrastructure, trade liberalization,
and efficient capital markets are important for attracting capital flows (Asiedu, 2006). An enabling business climate with low costs of doing business, property rights, effective
regulations and legal institutions, and some capital account liberalization are important.
Capital account restrictions still hold in a number of African countries. Such restrictions also
limit the capabilities of exchanges to explore cross-border investments. There is the fear that
capital account liberalization for these countries could also expose such economies to
potential huge capital flights and financial crises. However, it has been argued that such
problems depend on the nature of capital that comes in (Henry, 2000). Debt based capital
flows could cause crises if there is bad news and creditors rush in to obtain their funds.
Equity or bond based capital flows however have the risk shared, with high payouts during
good times and little or nothing during bad times. Therefore, lifting capital account
restrictions to attract portfolio investment would benefit African stock markets tremendously.
Off course capital account liberalization should be preceded by trade liberalization and
domestic financial liberalization to minimize financial market risks.
The problem with portfolio capital is that they are normally targeted at large and growing
markets. This makes further argument for de-fragmentation of African. Attracting portfolio
capital flows into stock markets goes hand in hand with opening up markets for foreign
investor participation. Apart from the injection of fresh capital, opening up markets to
foreign participants help to increase trading and liquidity of markets. Increasingly African
markets are opening up to foreign participation with little or no ceilings on foreign ownership
of shares. A few markets still have some foreign participation restrictions. For instance,
foreign ownership of shares cannot exceed 40% in stock markets in Kenya and Zimbabwe
and 74% in the Ghana.

IMF Working Paper
African Department
Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges
Prepared by Charles Amo Yartey and Charles Komla Adjasi
August 2007

Related Articles
  Introduction: Stock Market Development in Sub-Saharan Africa
  VI. A. Macroeconomic Stability: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?
  VI. B. Banking Sector Development: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?
  III. STOCK MARKET DEVELOPMENT IN SUB SAHARAN AFRICA:TRENDS AND CHARACTERISTICS
  Introduction: Human Capital and Economic Development

Article Tags: account restrictions, african countries, attracting capital, business climate, business property, capital account liberalization, capital flows, capital markets, financial crises, financial liberalization, foreign direct investment, investment accounts, legal institutions, portfolio investment, public institutions, quality public, remittances, stock market development, stock markets, trade liberalization



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