Barriers and Opportunities for Enhancing Capital Flows

In the COMCEC Member Countries

Investors have more choice in this regard, and will be more driven by the degree to which the

host country has infrastructure, skills, a regulatory framework and a robust investment

strategy in place.

4.3.

THE IMPORTANCE OF SEQUENCING

Furthermore, sequencing of policies and reforms is an important consideration for recipient

countries. Much literature has supported this theory, suggesting that countries that are

deemed to have followed a proper sequencing of reforms – eliminating macroeconomic

imbalances and, in some cases, achieving a high degree of trade openness – may benefit all the

more from capital account liberalisation, and in turn also attract capital flows that are that

much stronger.

For low-income countries and certain lower-middle income countries, tackling fundamental

issues such as corruption or poor governance may be a higher priority than “discussing

achieving macroeconomic stability”.

Having a fully open capital account may achieve little if

institutional development remains at an early stage, as is the case in Djibouti.

For its part, the IMF calls for a threshold approach that requires certain financial and

institutional development thresholds to be reached before moving ahead with further

measures to liberalise capital flows.

In this context, attracting long-term, stable FDI flows

before attracting short-term, volatile portfolio capital flows may be a favoured option among

countries that have not fully achieved strong financial and institutional capacity.

The types of policies required to draw foreign portfolio investment (FPI) and the types of

policies required to draw FDI are often different, though complementary. In a research paper

cited at an OECD forum in 2002,

the author writes that stable macroeconomic policies, rule of

law, good governance, financial disclosure and transparency are key to attracting both FPI and

FDI. However, where good infrastructure, education and health levels may be sufficient to

attract FDI, policies governing more advanced factors may be required to attract FPI. These

factors include the following:



Strong and well regulated markets able to withstand volatility



Institutions that can identify, monitor and manage business risks effectively



Adequate capital to safeguard against losses



Sound competition in the financial sector

Interview with an official in the MENA division, IMF, September 9

2013

Ibid.

“The liberalisation and management of capital flows: an institutional view”, IMF, 2012

K. Evans, “Foreign portfolio and direct investment – complementarity, differences and integration”, OECD Global Forum on

international investment, 2002