In a quarter of the cases, which were mainly countries with limited real exchange rate depreciation, annual GDP growth fell by 3½ percentage points on average. 11 There are dangers too for surplus countries. Large foreign exchange inflows are not easy to sterilise. They tend to contribute to asset price bubbles and higher inflation which itself can undermine economic and financial stability. The effect of such inflows into China and oilexporting countries have been compounded recently by their exchange rates being pegged or managed against the falling dollar. This has contributed not just to the build up of reserves and SWFs but also to the build up of inflationary pressures within these countries. No one would blame EMEs for the current turmoil in Western financial markets. It has been generated at home by the widespread mispricing of financial assets; this has been most obvious among the assets based on the US housing market but it is not confined to that sector. However the way that the boom developed did owe a great deal to global imbalances. The “savings glut”, to quote Ben Bernanke 12, that developed in the oil exporting countries and China contributed to the fall in real long-term interest rates. 13 In the UK, for example, real long-term interest rates, measured by the difference between the nominal 10-year government bond yield and the annual rate of inflation, fell from around 3.9% in 1997 to 1.6% in 2005. A similar pattern was also evident in the US (Chart 6).
Ladies and gentlemen, Non-bank financial institutions are a significant component of the financial sector as their assets constitute a significant proportion of the total financial sector assets in most countries in the region. Similarly, microfinance institutions play a critical role in poverty alleviation and economic empowerment of marginalized communities in our region. As such these institutions are systemically important as they can exacerbate the fragility of the financial system particularly where there is lack of effective regulation. Over the past few years, we have seen a trend where these institutions have increased in numbers in our region; some have been established as part of financial conglomerates while others are on a standalone basis. Sadly, our supervisory and regulatory structures for this sector in the MEFMI region have remained rather incoherent and somewhat underdeveloped to handle the challenges that have been identified with this sector. The trend makes it more important than ever for supervisors in the region to get together and talk about matters of common interest. I am pleased to note that over the past few years, the region has taken a proactive stance towards promoting harmonisation of regulatory and supervisory frameworks and the integration of financial systems. Through MEFMI, SADC, COMESA, the East African Community (EAC) and the West African bloc, member central banks are working together to promote effective supervisory standards geared towards achieving long term goals of financial inclusion and financial stability.