Barriers and Opportunities for Enhancing Capital Flows

In the COMCEC Member Countries

INTRODUCTION

Increasing international capital flows can support long-term income growth through a better

international allocation of savings and investments, allowing developing countries to run

current account deficits. At the same time, however, managing them can be challenging,

especially for small, open economies that are vulnerable to the negative effects that can arise

from financial or monetary shocks in investor countries.

The Standing Committee for Economic and Commercial Cooperation of the Organization of the

Islamic Cooperation (COMCEC) views strong and stable capital flows as a key contributor to

economic development, and aims to achieve enhanced access to capital at competitive rates,

diversified portfolios and increased investment opportunities amongst the Member States. As

part of its mandate on financial cooperation, COMCEC wishes to promote the removal of

institutional and regulatory barriers in order to further enhance capital flows both to the

COMCEC Member Countries and between them.

In order to better understand the challenges which COMCEC Member States face in enhancing

capital flows further, the COMCEC Coordination Office commissioned the Economist

Intelligence Unit (EIU) to conduct a review of capital flow trends in the COMCEC countries, the

barriers and opportunities affecting them in attracting financial capital flows in particular, and

alignment of the COMCEC Member Countries with international frameworks on capital account

liberalisation. The review includes conclusions and recommendations on the policies required

to enhance capital flows, with examples of key actions that the COMCEC Member Countries

have taken in this area.

DEFINITIONS

A capital flow arises through the transfer of ownership of a financial asset from one country to

another. These assets are typically equity and debt instruments. These flows are recorded as

inward or outward. Inward flows are non-residents investing in a country, for example a US

investor buying an Indonesian company. Outflows measure the purchases of foreign assets by

residents of the country.

Defining capital flows: not a straightforward task

Analysis of capital flows data is difficult when relying on different data sources, because

data is often analysed using a range of closely related, yet different concepts. The Institute of

International Finance (IIF) and the International Monetary Fund (IMF) are two of the best-

known data sources for capital flows, yet their definitions differ in certain cases:

-- IIF data on foreign direct investment (FDI) excludes intercompany loans, since the IIF

considers these to be debt rather than equity flows.