Working Paper 178 - Holding Excess Foreign Reserves Versus Infrastructure Finance: What should Africa do?

Cédric Achille Mbeng Mezui () and Uche Duru
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Cédric Achille Mbeng Mezui: African Development Bank, Postal: 15 Avenue du Ghana P.O.Box 323-1002 Tunis-Belvedère, Tunisia, https://www.afdb.org/en/knowledge/publications

Working Paper Series from African Development Bank

Abstract: Financing infrastructure needs in Africa necessitates new thinking on financing mechanisms. This paper is a contribution to the debate on the use of excess foreign exchange reserves from different African countries as one of the funding sources for financing infrastructure. The study has: (i) extracted data on the foreign exchange reserve, debt and infrastructure needs of African countries from different IMF, World Bank and AfDB databases; (ii) estimated the adequacy level of foreign reserve for these countries based on two commonly used methodologies – the traditional metric method of import cover and the Wijnholds and Kapteyn (WK) method; (iii) then estimated the excess foreign reserve and the social cost of holding this excess based on comparison to other alternative investment opportunities such as investments in African infrastructure. Based on these estimations, the study has shown that: (i) African countries have held excess reserves in the range of $ 165.5 and $ 193.6 billion on average per year between 2000 and 2011. This is more than the infrastructure financing gap identified at $ 93 billion per year; and (ii) the social cost of holding these excess reserves amount to up to 1.65% in GDP terms on average. In addition, the study provides some suggestions on how central banks can innovate in their reserves management. A close collaboration between the central banks and the debt management offices on the alignment of foreign reserves and foreign debt is deemed crucial.

Date: 2013-07-24
New Economics Papers: this item is included in nep-afr
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