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Assessing Regional Integration in Africa III

Towards Monetary and Financial Integration in Africa

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This report finds that although there are some successes, African countries are still experiencing enormous difficulties in achieving the macroeconomic convergence criteria set by their RECs, such as targets on inflation, debt-to-GDP ratio, and deficit-to-GDP ratio. The assessment also indicates that despite some financial developments, African financial market activities remain shallow, with capital markets characterized by low capitalization and liquidity. The report also provides policymakers with recommendations on how to deepen monetary and financial integration on the continent and create an enabling macroeconomic environment for the continent.

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Theoretical perspectives of monetary integration

Instability in international monetary arrangements has been a fact of life for policy makers since the breakdown of the Bretton Woods agreements in the early 1970s.The 1980s in particular were characterized by an exceptional misalignment of the major currencies. The decade saw massive capital flight towards the United States and other industrialized countries from the developing world, particularly after the debt crises and the cutting-off of new loans. Macroeconomic policies improved in the majority of developing countries in the 1990s, but the expected growth benefits failed to materialize, at least to the extent that many observers had forecast. In addition, a series of financial crises severely depressed growth and worsened poverty (World Bank, 2005:95). The enormous costs of the financial crises in Asia, and in Argentina and Brazil in Latin America at the end of the 1990s/beginning of 2000s drove home the importance of stability.

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