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.
However, despite improvements in growth witnessed since 1999, significant reductions in poverty will not occur without a significant increase in growth rates to above 7% on a sustained basis. One of the ways in which growth can be scaled up is through the employment of the vast African resources for the development of the continent. Prior to the global financial and economic crisis, the African continent experienced a surge in investment flows in many sectors including mining, manufacturing, tourism, transport and construction. This inflow of foreign capital helped to finance the development registered in Africa over the past decade. The inflow of foreign capital coupled with high prices of commodities on the global market led to high international reserve accumulation in most commodity exporting countries, including those in Africa. However, following the global financial and economic crisis the accumulation of international reserves declined as commodity prices plunged and foreign capital inflows, both private and public slowed significantly or were reversed. This has had a negative impact on the availability of resources to finance Africa’s development. The challenge going forward is recovering, maintaining and sustaining the economic gains and macroeconomic stability that African countries experienced before the crisis hit. In view of the anticipated reduction in aid flows and foreign direct investment, African countries need to give domestic savings mobilisation as much attention as the other foreign sources of development finance.