Capital Inflows and Macroeconomic Policy in Sub-Saharan Africa

Abstract

Little has been written about capital flows to sub-Saharan Africa (SSA), largely because of the flows' small size and data limitations. In this working paper, Louis Kasekende, executive director for policy and research at the Bank of Uganda; Damoni Kitabire, commissioner for the Macroeconomic Policy Department for the Ministry of Finance and Economic Planning in Kampala; and Matthew Martin, director of external finance for Africa, explore these inflows, noting that although they are small compared to those into other countries, they are in proportion to the size of the recipient economies. The authors examine the scale and composition of capital inflows, their causes and sustainability, their effect on macroeconomic stability, and their responsiveness to policy measures for six SSA nations: Kenya, South Africa, Tanzania, Uganda, Zambia, and Zimbabwe. Exhibit 5 shows the change in the composition of private capital flows to SSA nations. Most of the changes are in the same direction as in other developing regions, but the magnitude of the changes in other regions is generally greater than in SSA countries. The absolute size of these changes are, however, still small. For example, portfolio investment was no more than U.S.$120 million per year and foreign direct investment was around U.S.$1.6 billion during the period 1990 to 1993, with foreign direct investment lower in real terms than in the early 1980s. Overall, SSA inflow trends were similar to those in other small countries, with short-term bank loans and foreign direct investment playing a greater role than medium- to long-term loans and portfolio inflows. Kasekende, Kitabire, and Martin identify a number of determinants of recent capital inflows, which they classify as push (external) or pull (internal) factors.