Little progress has been made in either real or financial integration across the North African region and indeed some countries are being pulled towards further integration with extra-regional partners.Egypt is moving towards the COMESA Customs Union, whereas the other countries are drawn to the AMU Free Trade Area. Regional financial integration is particularly challenging in the context of fragile and undeveloped financial systems, particularly those burdened with excessive NPLs. Like past studies (Johnston, Darbar and Echeverria, 1997; Edwards, 2001; Klein, 2005 and Loayza and Ranciere, 2006-2007), a recent study (Saidane, 2010) shows that financial integration cannot be detached from the challenges of consolidating and privatizing weak banks, obtaining the necessary human resources, and improving governance.
To compete and develop, most North African countries must further consolidate their financial sectorsby improving financial infrastructure and strengthening financial institutions before launching financial integration (regional or global). Since banks account for about 85% of total financial sector assets, North African countries need to focus on banking consolidation. While reforms are essential across all North African countries, Algeria, Libya and Mauritania are likely to require a longer transition period than Tunisia, Morocco and Egypt before exposing their banks to foreign competition.
41 To contribute to safe cross-border flows of funds , the Bank may support the establishment of regional public credit
registries, property registries and will leverage its governance work and strategic partnership with other donors to support the development of the regional institutional framework, build institutional capacity and upgrade skills towards strengthening and regional enforcement of contract laws, improvement of the legal system on property rights, and collateral and land titling, which are essential pre-requisites to enhancing regional access to credit. To enhance efficiency of cross-border financial intermediation, the Bank will support regional payments system development by adopting RTGS technology and developing the regulatory frameworks to enable innovations and the application of modern technology in payments systems (such as mobile transfers).
Once banking consolidation is successfully on track, North African countries are encouraged to formally launch a regional financial integration initiative(Boulila, 2009),43focusing on: (i)
promoting capital market development with incentive policies for financial sector diversification, (ii) developing regional financial infrastructure, e.g. regional payment systems, to reduce cross-border transaction costs, and regional rating agencies against excessive credit risks, (iii) managing the risks associated with greater integration (enhanced volatility and contagion), (iv) removing impediments to cross-border activities by gradually lifting foreign exchange controls and (v) harmonizing rules and practices across the region towards a more open and stable regulatory regime and avoiding regulatory arbitrage.
To support the above strategy, the Bank should focus on the regional dimensions of national operations to pave the way for regional financial integration.This will require an instrument or fund to lend to regional activities by middle-income countries, similar to what exists for low-income countries. The Bank should therefore provide technical and financial assistance to make the long-delayed Maghreb Bank for investment and trade operational as soon as possible,44in addition to providing support to strengthen the capacity of Regional Institutions
such as the AMU Secretariat. Recommendations for Bank assistance to regional financial integration in North Africa over the next five years can be found in Table 3.
43 Capital Mobility in North Africa.
44 The Maghreb Bank could help strengthen the business environment, finance joint industrial and agricultural projects, and
undertake initiatives to boost trade and development. The establishment of the bank will become “one of the most important mechanisms in Maghreb co-operation in the field of finance, a main pillar of boosting economic integration and achieving joint development” (Chalghoum, 2010); and an "additional base for the investment and commercial finance capabilities of the [Arab Maghreb] Union countries” (Zulaytini, 2010).
Table 3. A List of Suggested Bank RFI assistance to North Africa
Source: Authors.
Area of Assistance
(Outputs) Description of Measures (Inputs and Activities)
Engaging in Trade Finance and FDI-Related Activities
• Support the Maghreb Bank of Investment and Trade by equity participation, Line of Credit, Letters of Guarantee and Direct Loans or Syndicated Loans;
• Establishing North African Trade Finance Registers in Collaboration with International Chamber of Commerce and the commercial banks that are actively engaged in trade financing in North African countries;
• Participating in the ICC and AsDB’ negotiation of reducing the capital adequacy requirement for trade finance lending in North Africa with the Basel Committee on Banking Supervision;
• Engaging in the flagship study on facilitating trade convergence through multilateral surveillance in North African countries in collaboration with the AMU Secretariat. • Putting in place new financing instruments for trade flows among the six North
African countries in collaboration with commercial banks active in trade-related activities;
• Facilitating the establishing of the common investment fund and the related institutional framework to enable intra-country investments in transferable securities by regulated institutional investors, particularly insurance companies, and pension funds in North African countries.
Engaging in Trade Finance and FDI-Related Activities
• Financing the modernization of the payment system with RTGS technology in Mauritania;
• Making settlement systems compatible with each other in North African countries; and
• Ensuring that the technical platforms are compatible and meet international stan dards in each country in respect of: (1) trading systems for financial instruments; (2) clearing systems; and (3) settlement/delivery systems
Harmonizing banking and financial regulation and supervisory frameworks
• Strengthening the ties between North African countries’ various control authorities (central banks, banking commissions and stock exchange authorities), particularly through the signing of agreements on cooperation, technical assistance, and the exchange of information;
• Sharing the experiences of financial sector supervision and regulation among the six North African Countries.
Stepping up cooperation and coordination
• Stimulating the creation of banks, financial institutions, stock exchanges and other Maghreb operators in the financial sectors of the North African countries; • Considering measures to enable Maghreb companies to be listed on other
Maghreb exchanges (double listing in Tunis and Morocco Stock Exchanges)
Putting in place a single portal on regulation
• Ensuring the information on this portal is exhaustive, reliable and up-to-date; • Establishing a contact point in each North African central bank to backup this
operation.
Other actions
• Introducing regular meetings (at least once a year in the various capitals) between economic policymakers with the goal of sharing experiences, particularly on macroeconomic policy (monetary and budgetary policy, etc.); and
• Introducing mechanisms for cooperation between central banks in relation to the exchange of information on clients of the various banks for commercial purposes.
References
Ayed, J., (2009), Financial Integration in Africa, BMCE Group Strategy.
Ben Naceur, S. and Labidi, C., (2010), Middle East and North Africa Region: Financial Sector and Integration. Chapter in Finance: The Ultimate Resource. Bloomsbury. Available online on http://www.qfinance.com/contentFiles/QF02/g1xtn5q6/12/4/middle-east-and-north-africa- region-financial-sector-and-integration.pdf
Bhattacharya, R. and Wolde, H., (2010), “Constraints on Trade in the MENA Region,” IMF Working Paper. International Monetary Fund. Washington.
Boulila, G., (2009), “Capital Mobility in North Africa”, Proceedings of the African Economic Conference 2008, Tunis. Tunisia.
Edwards S., (2001), “Capital Mobility and Economic Performance: Are Emerging Economies Different? ” NBER Working Paper Series, No. 8076.
European Central Bank (2009), Monthly Bulletin, 10th Anniversary of the ECB, Frankfurt, Germany. International Monetary Fund (2010), Algeria: 2009 Article IV Consultation – Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Algeria, Country Report No. 10/57, March. Washington D.C.
International Monetary Fund (2010), Morocco: 2009 Article IV Consultation – Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Morocco, Country Report No 10/58, March. Washington D.C.
International Monetary Fund (2009), Tunisia: 2009 Article IV Consultation – Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Tunisia, Country Report No. 09/329, December. Washington D.C. International Monetary Fund (2009), Central African Republic: Financial System Stability Assessment, IMF Country Report No. 09/154, May. Washington D.C.
International Monetary Fund (2008), Islamic Republic of Mauritania: 2008 Article IV Consultation – Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion;
and Statement by the Executive Director for Mauritania, Country Report No. 08/231, July. Washington D.C.
International Monetary Fund (2007), The Socialist People's Libyan Arab Jamahiriya: 2006 Article IV Consultation – Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for The Socialist People's Libyan Arab Jamahiriya, Country Report No. 07/149, May. Washington D.C.
Johnston, B., Darbar S. and Echeverria C., (1997), “Sequencing Capital Account Liberalization: Lessons from the Experiences in Chile, Indonesia, Korea, and Thailand”. IMF Working Paper, No. 157. International Monetary Fund. Washington D.C.
Klein, M.W., (2005), “Capital Account Liberalization, Institutional Quality and Economic Growth: Theory and Evidence”, NBER Working Paper No. 11112.
Loayza, N. and Raddatz, C. E., (2007), “The Structural Determinants of External Vulnerability.”
The World Bank Economic Review,21 (3), 359-387.
Loayza, N. and Ranciere, R., (2006), “Financial Development, Financial Fragility, and Growth.”
Journal of Money, Credit and Banking N° 38, 1051-1076.
Loayza N. and Rancière, R., (2002), “Financial Development, Financial Fragility and Growth”, Central Bank of Chile Working Paper, No. 145.
Saidane, D., (2010), “Banking Services in Africa: The Regulatory and Institutional Dimension? Consolidation, Privatization, Human Resources and Good Governance”, UNCTAD.
Shanmugaratnam, T., (2006), Asian monetary integration: will it ever happen? IMF Multimedia Services Division.
Tahari, A., Brenner, P., De Vrijer, E., Moretti, Senhadji, A., Sensenbrenner, G. and Solé, J., (2007), Financial Sector Reforms and Prospects for Financial Integration in Maghreb Countries, International Monetary Fund, Washington D.C.
I
ntra-regional trade among the Maghreb countries is one of the lowest in the world. Considerable progress has been made over the past decade in reducing tariffs and in addressing logistical bottlenecks, particularly through investing in infrastructure. Nevertheless, trade facilitation processes and procedures remain inefficient, transport infrastructure remains in many respects unsuitable, logistics and transport services are inadequate, and customs processes are slow and costly. All of these constraints have severely hampered development in North Africa, and contributed to the region’s continuing dependence on primary commodities, tourisms, and workers’ remittances.There is considerable potential to improve trade facilitation and transportation through a regional approachinvolving customs cooperation and information exchange; harmonization and/or mutual recognition of regulations, procedures and standards; the coordination of transport infrastructure to ensure that it improves regional connectivity; and the exchange of technical information and experience in addressing bottlenecks to trade. However, regional cooperation have been hampered by the lack of a regional organization that encompasses all North African countries, integration with extra-regional partners, particularly Europe, and a lack of political commitment.
To assist the region to address the above challenges the Bank should focus its involvement in three areas;(i) logistics services, (ii) customs cooperation and harmonization and (iii) transport infrastructure. In addition, the Bank should intervene in the cross-cutting area of institutional capacity development.