Philipp M Hildebrand: The role of central banks in fostering economic
development
Speech by Mr Philipp M Hildebrand, Vice-Chairman of the Governing Board of the Swiss
National Bank, at the Inaugural Meeting of the Africa Emerging Markets Forum, Gerzensee,
1 October 2007.
The speaker gratefully acknowledges the valuable assistance provided by Raphael Auer, Martin Brown and
Werner Hermann in preparing this speech.
* * *
1. Introduction
On behalf of my Governing Board colleagues, let me warmly welcome you to the SNB Study
Center Gerzensee! It is an honour and a privilege for the Swiss National Bank to host the
Inaugural Meeting of the Emerging Markets Forum for Africa.
I trust you are well rested this morning. By now, you will have noted that the Study Center
Gerzensee is not a five star hotel. Compared to other conference centres, the service
provided here is modest. We like to think that we emphasise substance rather than style. We
try to create an atmosphere conducive to learning. The Center serves multiple purposes. It is
here, for example, that we organise advanced courses for selected central bank
professionals from all over the world. According to the traditional policy of the Center, only
one participant per country is allowed in each Central Bankers Course. In the 25 years since
the creation of the Center, more than 300 participants from African central banks have
attended these courses. We therefore like to think that the Study Center Gerzensee make a
humble contribution to integrating African central banks into the global central banking
network.
The EMF has chosen to come to Gerzensee to address the challenges that emerging Africa
is facing. Undoubtedly, these challenges are enormous. In recognition of the importance of
this gathering, the SNB is proud to host your deliberations. The EMF and the Swiss National
Bank share the view that private investment is ultimately the driver of sustained economic
growth and poverty reduction. However - and I think that we would again agree - public
policy matters a great deal. It does so primarily by providing a sound macroeconomic
environment, by improving financial markets, and by strengthening property rights and
institutions.
Institutional weakness has, of course, received much attention in the recent past. Every year,
the World Bank's Doing Business Report points out the same three main obstacles to private
investment activity in Africa: a massive bureaucratic burden, widespread corruption, and the
resulting high cost of doing private business.
Other areas of public policy that aim to promote economic activity generally receive less
attention. The fight against red tape and corruption is unquestionably important. But progress
in macroeconomic and structural policy should not be overlooked. As a central banker, I
would like to take this opportunity to review progress in those areas which are related to the
activity of monetary authorities. I believe that the three following core activities of central
banks can have a substantial impact on the environment for doing business: maintaining
price stability, maintaining a safe and efficient payment system, and supporting the
development of the financial sector.
2. Price stability
Let us first consider price stability. Low and stable inflation rates allow the private sector to
plan for the future, lead to a lower need for costly price adjustments, prevent tax distortions
and thus create a stable business environment. On the other side, high and unstable inflation
creates random wealth transfers between creditors and debtors. Since their fiscal base is
weak, governments in Africa have often relied on seignorage to improve their income stream,
creating high inflation rates as a by product. How has inflation developed throughout the
continent in recent years?
Figure 1 depicts inflation in Africa from 1990 to 2005. It displays inflation in South Africa, as
well as the median inflation rates in 39 other sub-Saharan economies and in 5 North African
economies. I focus on the median inflation rate because this measure is not sensitive to large
outliers such as Zimbabwe. As you can see, inflation in Africa has trended downward over
the past 15 years, with the exception being the aftermath of the Tequila crisis in 94/95. In
South Africa and northern Africa inflation is now well below 5%, while sub-Saharan Africa
also displays single digit inflation rate.
Figure 1: Inflation in Africa (in %)
30
25
20
15
10
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
South Africa Northern Africa (median) Sub-Saharan w/o SA (median)
The figures displayed suggest that businesses and households in most African countries now
enjoy an environment of increasingly stable prices. Undoubtedly, the recent inflation record
has contributed to the increasingly robust growth environment. Figure 2 shows that per
capita growth has picked up in recent years in parts of Africa. This is particularly true where
disinflation was strongest.
Figure 2: GDP per capita in Africa (in constant 2000 USD)
4000
3500
3000
2500
2000
1500
1000
500
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
South Africa Northern Africa (median) Sub-Saharan w/o SA (median)
Governments no longer seem to rely on money printing as a revenue source. This is a sound
policy development which encourages private sector activity. Going forward, the challenge
for African central banks will be to maintain this recently acquired track record.
3. Payment systems
Next let's look at the payment system. The development of the payment system determines
how easy it is for firms and consumers to access and transfer money. Can businesses pay
their suppliers by writing a cheque or making an electronic transfer? Or do they have to
undergo the cumbersome and insecure process of sending cash physically? Can households
pay for consumer goods with debit cards, cheques or credit cards, or do they have to carry
significant amounts of cash with them? Can workers in urban areas transfer money to their
rural families by simply sending an SMS, or do they have to carry it with them on a
dangerous bus ride?
Particularly in Africa, where distances are vast and security is often a concern, the availability
of non-cash payment instruments can increase the returns to economic activity for
businesses and households. Figure 3 shows that today, most economies in Africa are still
strongly cash based. Both in sub-Saharan and northern Africa, more than one-third of funds
available for immediate payments are in cash form. The notable exception is South Africa
where the level of non-cash money is above 80%, and thus similar to that of Switzerland.
Developments over the past 15 years show a promising picture for other countries on the
continent as well. Since 1995, the share of non-cash money has increased from 50 to 60
percent in sub-Saharan Africa, and 55 to 65 percent in North Africa. This mirrors the
increased availability of electronic payment instruments available to businesses, but also to
households.
Figure 3: Share of Non-Cash Money in Africa (in%)
100
90
80
70
60
50
40
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
South Africa Northern Africa (median) Sub-Saharan w/o SA (median)
How can central banks foster the further development of safe and efficient payment
instruments in Africa? First and foremost, central banks must take a leading role in the
development, operation and oversight of necessary infrastructure, such as interbank and
retail payment systems. In doing so, it would seem natural to take advantage of international
knowledge and expertise. As financial sector regulators, central banks can further create a
market environment which encourages the entry of new service providers, as well as the
development of innovative payment instruments, such as SMS-banking and mobile-banking.
As an oversight authority, it is then the task of the central bank to ensure that new payment
services adhere to the security requirement desired by businesses, households and financial
institutions.
4. Financial sector development
Third, let's take a brief look at financial sector development. An efficient and deep financial
sector provides enterprises with debt and equity to finance their growth, thus spurring
economic activity. At the same time a deep financial sector can provide households with
savings and credit products to smooth their consumption patterns, again increasing their
return from economic activity, and reducing poverty.
To what extent have financial sectors grown and become more efficient in Africa in recent
years? Figure 4 displays the volume of private credit, as a percentage of GDP, for South
Africa, other sub-Saharan countries and for Northern Africa. With credit exceeding GDP, the
financial sector in South Africa boasts a similar size to that of many North American and
European countries. By contrast, the financial sector is very shallow in the rest of
subSaharan Africa, with credit volumes at less than 20% of GDP. Even more worrying is that the
financial sector has hardly deepened over the past 15 years.
Figure 4: Private Credit / GDP in Africa (in%)
160%
140%
120%
100%
80%
60%
40%
20%
0%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
South Africa Northern Africa (median) Sub-Saharan w/o SA (median)
Continuing this undoubtedly bleak picture, we see that the financial sector in sub-Saharan
Africa has become neither more efficient, nor more competitive in recent years. Figure 5
displays the nominal rates at which banks lend money, as well as the rate they pay for
deposits. Lending rates have stayed more or less constant from 1993 to 2005. Since inflation
has decreased substantially over this time, the real interest rate that banks charge has
actually increased. By contrast, the nominal deposit rate has decreased, so that the real
deposit rate has been constant. Together this implies that the interest rate spread charged
and earned by banks has increased substantially in the last 15 years.
Figure 5: Lending and Deposit Rates in Sub-Saharan Africa (w/o SA)
25
20
15
10
5
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Deposit Rate (median) Lending Rate (median)
What can African central banks do to foster deeper and more efficient financial sectors? In
most African countries, central banks are responsible for regulating and supervising banks.
Here central banks should ensure that regulatory requirements are not prohibitive for new
market entrants, particularly foreign financial institutions who may bring cheaper capital and
new technology to the sector. Moreover, central banks can foster the development of
sustainable microfinance and rural financial institutions to cater to the vast agricultural and
microenterprise sector. They can do so by adopting regulatory requirements which suit the
limited sphere of activity of these institutions.
5. Conclusion
Ladies and gentlemen, let me conclude these brief introductory remarks. How can we assess
the contribution of central banks to improving the business environment in Africa? Most
African central banks have been successful in reducing inflation. This enables the private
sector to plan ahead and engage in contracts without worrying excessively that their
proceeds may be eroded by rapidly rising inflation.
Central banks have also fostered improvements in the payment system, which have reduced
the costs of accessing and transferring money for businesses and households. The cash
intensity of most African economies suggests, however, that there is still room for
improvement in this area. A greater challenge for central banks lies in fostering growth and
efficiency in the financial sector. The banking sector in many countries of the continent
remains small and sadly displays a low level of efficiency and competition.
I sincerely hope that this Forum will contribute to finding solutions to these and other
challenges to emerging Africa. Let me close by wishing you a successful EMF here at the
Study Center Gerzensee.