Barriers and Opportunities for Enhancing Capital Flows
In the COMCEC Member Countries
51
However, the IMF also warned about the risks to regulation and supervision in the transition
phase from the central bank to the OJK. It described the need for clarifications in the legislation
as to which of the two institutions would be responsible for a new macroprudential policy
framework. It is not yet clear whether the current challenges that Indonesia is facing – a
weakening currency, depreciating foreign-exchange reserves, a widening current-account
deficit and slowing growth in FDI inflows – could have been managed differently during the
transition from the central bank to the OJK. The IMF also noted that loose monetary policy had
amplified the effects of capital outflows in 2012.
The Fund continues to push for a deepening of financial markets as a solution to one of the
economy’s most pressing problems: providing funds for public and private investment.
Following the 1997-98 Asian financial crisis, local companies remain wary of taking on new
debt, meaning bank credit remains low and many firms finance expansion through retained
earnings. The IMF proposes the development of the government bond market and the pension
and mutual funds industries.
Following recent regulation imposing stricter limits on foreign investment in Indonesia’s
mining sector, the Fund restated its belief in the importance of an open trade and investment
regime. It argues that policy should be created to ensure that economic openness is maintained
in conjunction with industrial policy; and it suggests that the government’s oft-stated ambition
to move up the value chain could be achieved “naturally… with greater investment in human
capital, reduction in the costs of doing business, and deepening of financial markets.”54
Beyond this, the architecture of Indonesia’s capital account fares well in respect of the OECD’s
Code of Liberalisation of Capital Movements. Nevertheless, the recent moves by Indonesia to
limit foreign holdings in the mining sector are not fully aligned with Article 1 b i of the OECD
Code, given that Indonesia was not facing any of the clauses of derogation listed in Article 7
when the regulations were imposed.
Nigeria
Over the past decade, Nigeria’s regulatory and legal frameworks relating to capital flows have
been largely aligned with international standards on capital liberalisation, with the notable
exception of the global financial crisis in 2008-09, when temporary restrictions were enforced.
At present, the country is mostly in line with international frameworks on capital
liberalisation, including the OECD Code of Liberalisation of Capital Movements.
Significantly, though, the central bank has shown that it will curtail the movement of capital if
it considers it necessary to defend the naira and maintain monetary stability. For example, in
May 2012 the regulator stopped Nigerian banks from recapitalising their foreign subsidiaries,
stating that capital demands by regulators in host countries were putting enormous pressure
on the capital base of parent banks.
In recent years, the number of Nigerian banks with foreign subsidiaries has grown as domestic
lenders have gained confidence and developed international ambitions. Currently, at least six
54 2012 IMF Article IV report: