When we allow for this the cost – in terms of the lost output of a permanent change to bank capital of +1% of assets – almost halves from just over 3% of annual GDP to about 1.7% Next I allow for less than 30% of investment in the economy to be financed by bank lending. PNFCs’ liabilities with banks are made up of direct loans from banks’, but also banks’ holding of corporate bonds and equities, issued by PNFCs. I assume that only PNFCs’ bank loans are affected by the increase in banks’ funding costs. Chart 5 illustrates that over the past year the share of bank loans in PNFCs financial liabilities has declined from close to 20% to close to its average over the past two decades of 16%. Allowing for this halves again the estimated cost of higher bank capital – which falls from around 1.7% to 0.8% of annual GDP. This estimate is based on the impact of higher cost of bank lending feeding through to a (Cobb-Douglas) production function, and that implies a high sensitivity of investment to the cost of funds (a unit elasticity of substitution between capital and labour). Bank of England research 11 suggests that this elasticity is probably substantially lower. If that elasticity is 0.4, which looks a central estimate, then the cost of higher bank capital (of 1% of assets) falls from 0.8% of GDP to around 0.3%. Table 1 shows the estimated costs of higher bank capital under various assumptions about the economic environment.
However, there is a risk that African countries could become the biggest casualties of a crisis they did not create. The impact is already severe and has dealt a huge shock to our continent while posing a great threat of reversal to the hard earned social and economic gains that most of our economies had achieved in the recent past. Ladies and Gentlemen, for more than a decade, most African countries had continued to register unprecedented economic growth rates averaging 5% and above. We saw a rise in income levels and a reduction in poverty among our peoples with improved education,  BIS Review 44/2009  1  health, water and infrastructure development. The continent also experienced a surge in investment flows in many sectors including mining, manufacturing, tourism, transport and construction. Progress in governance and accountability had also been noted in most African countries. Mr Chairman, allow me without pre-empting the deliberations to mention some problems the global financial crisis has created for most African economies. Commodity exporting countries have experienced a decline in their export receipts. This has been due to the decline in commodity prices reflecting the weak demand of such commodities arising from the scaled down output in industrialised and emerging market countries. The declining export earnings as well as changing investor sentiment toward investing in emerging markets, which has been reflected in the reversal of investment flows, have been exerting pressure on the exchange rates.