Interview: Tardy Kouassiblé
To what extent does exchange rate volatility risk affect the movement of funds, and what can be done to ensure financial stability?
TARDY KOUASSIBLÉ: Over the past four decades foreign capital flows have intensified, driven by financial liberalisation. This has helped to increase production, support domestic demand in the various countries in UEMOA and promote growth. Capital movements have also been reflected in the deepening of the financial system. The attractiveness of these flows is linked to improved economic fundamentals, such as macroeconomic stability and an expanding financial account, as well as a more favourable political climate.
However, the risk of exchange rate volatility is a factor that can promote or deter investment and potentially impact the flow of capital to the regional economy. The short-term profitability of assets may be higher when volatility rises, but so too are the losses, which can exacerbate inflation and threaten financial stability.
Although capital flows bring several benefits that can improve the economy, certain conditions remain essential to sustain this activity. These include the development of the financial system, improvements in the institutional framework, sound macroeconomic policy and trade openness. The policy rate and reserve requirements are additional tools to create a better understanding of financial movements.
How is the sector reacting to inflation risk related to supply tensions in the international market?
KOUASSIBLÉ: Inflation in the country increased slightly to 5.6%, compared to the authorised 3% ceiling in UEMOA. Several factors have contributed to this situation, such as the rising cost of maritime transport, the increase in oil prices on global markets and the security situation in the Sahel – the country’s primary source of agricultural commodities.
Various regulatory tools are available to keep inflation within an optimal range to promote growth without reducing the currency’s purchasing power. These measures include setting monetary policy such as tightening the money supply and raising interest rates to maintain a low, but not zero, inflation rate, and pursuing a fiscal and budgetary policy that aims to achieve an optimal balance between supply and demand. In Côte d’Ivoire, where the capital market is managed by the Central Bank of West African States, the decision was made to raise its two key policy rates, thereby opting for a reduction in liquidity in line with all other UEMOA member countries. The minimum bid rate for liquidity injection tenders rose from 2% to 2.25%, and the marginal lending rate increased from 4% to 4.25% between June 2020 and June 2022.
However, tightening the money supply to fight inflation implies that inflation is sustained by a surplus of liquidity, which could be described as monetary inflation. In this case, inflation in UEMOA is essentially linked to the rise in international commodity prices.
What role can capital markets play in helping the country achieve the objectives set out in the National Development Plan 2021-25?
KOUASSIBLÉ: Within the plan’s framework, 75% of investment has been delegated to the private sector. The question is how businesses will be able to seize financing opportunities through the capital markets. Companies must have adequate resources to finance such investment since the private sector is obligated to invest CFA44trn ($75.6bn) between 2021 and 2026 to aid in the country’s development.
Given the amount of capital to be raised and the complexity of the investment to be made, capital markets could look to tailored financing to achieve this objective. To address the unique requirements of particular projects, structured finance can be applied by customising the financing to the initiative. This could be realised through public-private partnerships, green bonds, project bonds, blue bonds and securitised debt.
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