Barriers and Opportunities for Enhancing Capital Flows

In the COMCEC Member Countries



Perception of high risk among investors

Governance and transparency remain areas

for improvement in a number of countries in the lower-income group, while some also

suffer from security and fragility issues and are “idiosyncratic in nature.

” Together,

these factors may make them less attractive targets for portfolio capital investment. At

the same time, countries that are performing well relative to their peers, such as

Mozambique, continue to suffer from misperceptions among investors.



Rule of law, transparency and uncertainty.

Additional barriers are the rule of law,

transparency and uncertainty, factors that are largely related to political stability. In

Bangladesh, for example, the volatile political environment occasionally leads to the

rescinding of contracts and reversal of policies, creating an element of uncertainty for

investors. Among some countries within this group, legal frameworks and consistency

of application of the law remain areas with potential for improvement.

Barriers relating to financial stability and institutional capacity



Lack of a forward market.

A major barrier to portfolio capital flows in some low-

income countries is government regulation on securities that does not allow hedging

of foreign currency positions. This in turn leaves fund investors fully exposed to

currency risk, acting as a potential disincentive to direct investors to commit funds.



Underdeveloped capital markets.

Among some countries in the low-income group,

further capital market development is desirable. In Mozambique, for example, three

companies are listed on the stock exchange, which was established in 1999. Trading

activity remains focussed on government debt securities, limiting the scope for

foreigners to invest.



Weak enforcement of regulations and lack of capacity.

Few of the low-income

countries have set up a central securities depository, which would facilitate the

transfer of stocks, and financial supervision remains an area with scope for

improvement.

Few companies have properly audited accounts, and financial literacy

is often extremely weak.



Non-membership of economic blocs:

Mozambique has attracted relatively less

investment relative than smaller economies such as Benin, Burkina Faso, Mali and

Niger. One reason is that Mozambique is not part of the West African Economic and

Monetary Union (known by its French acronym UEMOA) or the CFA franc zone, which

facilitate regional cross-border investment among members.

Opportunities

While specific barriers to enhancing capital flows are evident among numerous countries

within the lower-income group, opportunities to enhance capital flows tend to be specific to

Interview with official from MENA Division, IMF, September 9th 2013