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close this bookPrivate Sector Development in Low-Income Countries - Development in Practice (WB, 1996, 188 p.)
close this folderChapter 4-Building robust financial systems— difficult but pressing
View the document(introduction...)
View the documentWhat went wrong?
View the documentWhat has been done?
View the documentWhat remains to be done?
View the documentThe path for reform

What went wrong?

Interventionist policies of the past crippled the fledgling financial systems of many low-income countries, including most of those in Sub-Saharan Africa. Large budget deficits were monetized, and inflation followed. To keep nominal rates from rising, interest rates were controlled. But the resulting reduction in real rates reduced incentives for the formal banking system to intermediate savings. It also fostered capital flight and encouraged enterprises with access to credit to overborrow. Inefficient public enterprises grew at the expense of the more efficient private sector. Many commercial banks were nationalized. Credit was allocated by government decree. And banks lost their ability to screen and assess credit risks. Central barking and oversight withered to the detriment of the banking system. Bad loans accumulated, and the losses were periodically recognized and monetized—adding to the bouts of inflation and the unpredictability of the economic environment. This situation has left most low-income countries ill-equipped to generate the private supply response to structural reforms.