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Introduction
Capital control refers to any measure taken by a government, central bank, or other regulatory body to limit the flow of foreign capital in and out of the domestic economy. These could include taxes, tariffs, legislation, volume restrictions, and market-based forces. Capital controls in the Economic Community of Central African States (CEMAC) are driven by uncertain economic growth and limited progress in fiscal reforms that have contributed to governments struggling to manage increased external debt burdens and interest payments.
High interest rates and growing capital outflows equally have adverse short-term effects that can encourage capital controls over time. However, exchange rate volatility does not affect trade except in the case of currency unions. Gopinath et al. (2015) and Bruno, Kim, and Shin (2018) point to the fact that international prices change slowly when currencies appreciate and quickly when they depreciate.
So a weaker currency immediately causes debt to become more expensive and prices to rise. This has a lasting effect on economies. Hence, demand for foreign currencies have ignited concerns on how best to prevent huge capital outflows.
A common theme is the failure during the past period of growth to undertake budgetary reforms to manage external balances and reduce debt distress prudently. Counterbalancing this consistent risk factor is the existence of an ongoing IMF program that enables central banks to ease liquidity pressures by accessing official lending rather than imposing capital controls. Membership to a Common Monetary Area (CMA), as with Cameroon in the CFA franc zone, is also a mitigating factor as members can access a reserve pool in times of financial distress.
However, CMAs are prone to implement bureaucratically inefficient and costly foreign-exchange regulations that prevent timely access to foreign currency. This policy brief looks at the rationale for capital controls in Cameroon, recent legislation regarding capital controls and policy recommendations to support a free and efficient flow of capital.
Policy Recommendations
- The new FX regulation does not allow the opportunity for any exclusions or exceptions for banks and commercial entities. This can negatively impact the operations and activities of companies, increase the cost of trade and business and ultimately reduce their competitiveness. Local and international companies need more tailored guidance from the Bank of Central African States (BEAC) and regulators.
- The terms and authorizations of approving a currency account inside and outside the CEMAC region are not clear. For example, it has not been outlined whether institutions benefitting from previous authorizations from Ministries of Finance may need to request new authorizations from the central bank rather than rely on local authorization. This is a priority as payment for commodities such as oil and gas usually occur in U.S. dollars and requires the creation of a bank account outside CEMAC member states.
- Finally, project revenues should not dictate whether a firm can open a foreign currency account in London or Paris. By focusing on the bankability and returns of projects, this could improve governance and prevent blue collar crimes. However, it could lead to long lead times that can make projects more expensive over the long run. The central bank should provide guidance and use other guarantees and demand better payment schedules to provide companies with more leeway in terms of FX payments.
