For instance, in 2007 total foreign reserves held by African countries amounted to $ billion translating into an average of 9.2 months of import cover for each country. In the same year the African Development Bank (AfDB) raised funding from international capital markets amounting to UA724 million $ million) at a weighted average cost of 6-month US Dollar LIBOR minus 32 basis points. 2 The amount raised by the AfDB accounted for a mere 0.3% of the total reserves for African countries as at 2007. Hence, an allocation of some of African countries’ foreign reserves to fund African development institutions in which most of the countries are members would greatly enhance  2  2  African Development Bank Annual Report, 2007. BIS Review 126/2009  the capacity of these institutions in the provision of development finance, thereby assist the continent’s development programmes and poverty reduction efforts. In summary, it is important for African countries to consider alternative ways of making use of foreign reserves in the financing of development using resources that are already available, including the direct use of foreign reserves in financing development and making available part of the reserves to African multilateral development institutions to augment the resources available in the financing of African development. (b)  Pension funds  African countries need stable sources of development finance and as long-term investment vehicles, pension funds seem intuitively to be one potentially good source of domestically generated financial resources.

It is noteworthy that the majority of the foreign reserves, which are held outside the African continent, entail an opportunity cost for developing countries as these resources are not used to finance development. In addition, the global crisis has brought to the fore the inherent risks in the placement of reserves with international fund managers with the collapse or near collapse of some of the worlds’ leading asset managers such as Lehmann Brothers, Bear Stearns and Fortis, threatening the safety of the continent’s international reserves. Further, with the reduction in interest rates in developed economies where most of the foreign reserves are held, the returns on these investments have declined drastically, thereby increasing the opportunity cost of these reserves. These developments present an opportunity for African countries to consider foreign exchange reserves as a possible source of development finance for the continent. Such a strategy could make a significant amount of additional resources available for investment in infrastructure development and the provision of trade finance to stimulate expansion and diversification of African economies. In addition, African countries could consider investing part of their reserves in African multilateral financial institutions like the African Development Bank, the PTA bank, AFREXIM Bank as well as local development banks, which play an important role in the provision of development finance in Africa. The investment of part of Africa’s foreign reserves in credible financial institutions can augment the resources available to these institutions, thereby enabling them to provide more financial resources for the development of the African continent.