Marrakech, MOROCCO – Maintaining financial sector stability is a crucial factor in achieving sustainable growth and inclusion. However, strengthening financial stability frameworks, especially in low-income or fragile and conflict-affected states, can be a challenging endeavour due to limited human resources and low initial capacity.
During a capacity development discussion on “Strengthening Financial Sector Stability in Fragile and Low-Income Countries” held at the Annual Meetings in Marrakech, Acting Bank Governor Ibrahim Stevens emphasized the potential efficiency and spill over effects on monetary policy of such exercises.
The International Monetary Fund’s (IMF) Financial Sector Stability Review (FSSR) offers a well-structured approach to designing financial sector reforms based on a thorough diagnostic of capacity gaps. Sierra Leone is a recipient country of FSSR, and during the panel discussion, the head of the Central Bank shed light on what they have accomplished through the Technical Assistance Roadmap.
FSSR recipient countries benefit from a well-prioritized package of technical assistance, often supported by resident technical advisors who work closely with the authorities. One significant outcome of the FSSR in Sierra Leone was addressing the challenge of excess liquidity in the banking system. The Acting Governor mentioned that there is a considerable amount of foreign currency deposits in the system, and this review allowed them to re-evaluate their regulatory framework. They have implemented changes that now require commercial banks to lend in foreign currency on a case-by-case basis, considering the associated risks.
When asked about what distinguishes the FSSR from other forms of technical assistance, he highlighted its detailed and well-structured nature. More importantly, the recipient country is actively involved in designing the Technical Assistance (TA) roadmap following diagnostic analysis. The diagnostic analysis is critical as it helps prioritize the capacity needs within the Central Bank and the broader financial system.
The FSSR is most effective when recipient countries are actively engaged in the development and design of the TA roadmap. The IMF has various instruments for delivering technical assistance, from short-term experts to regional Tax Administration Capacity Development technical assistance programs, such as Sierra Leone’s AFRITAX West 2 and the African training institute.
The Acting Governor emphasized the value of having a long-term advisor residing in the Central Bank, which can help maximize resources and contribute to long-term planning and capacity development.
Regarding the diagnostic done in Sierra Leone, two significant aspects emerged. First, it proved particularly helpful in developing their financial stability processes and risk-based supervision. Second, it improved buy-in from the management of the Central Bank and led to a substantial shift in their approach to banking examination, with all examinations now conducted from a purely risk-based standpoint.
In such cases, it is crucial to prioritize and sequence capacity building over an extended period and provide hands-on expert support. The event showcased how the IMF, with donor support through the Financial Sector Stability Fund, has helped authorities in The Gambia and Sierra Leone catalyze reforms in their financial stability frameworks. ZIJ/12/10/2023